How To Invest Money: Choosing The Best Way To Invest For You
The Best Way To Invest Money: A Step-By-Step Guide
Everyone has a unique financial situation. The best way to invest depends on your personal preferences along with your current and future financial circumstances. It's important to have a detailed understanding of your income and expenses, assets and liabilities, responsibilities and goals when building a sound investing plan.
Here's a five-step process that can help you figure out how to invest your money right now:
- Identify your financial goals, timeframe and feelings about risk.
- Decide whether you want to take a "do-it-yourself" or "manage it for me" approach.
- Pick the type of investment account you'll use (401(k), IRA, taxable brokerage account, education investment account). Open an account.
What Kind Of Trades Do You Want To Execute?
Are you going to be the type of investor that knows what they want to do and just needs a platform that makes it easy and quick to execute trades, or do you want a broker with a broader range of resources to help you identify opportunities? What kind of securities are you focused on? Stocks, mutual funds, ETFs? If you are more advanced, do you also want to trade options, futures, and fixed-income securities? What about margin trading? Do you need access to conditional orders, extended-hours trading, and automated trading options?
The 80/20 Rule
The Pareto Principle is a helpful concept to keep in mind when starting a task that encompasses a vast amount of information, such as the topic "how to pick your investments." In many aspects of life and learning, 80% of the results come from 20% of the effort. This principle, named after economist Vilfredo Pareto, is often called the “80/20 rule.”
We’ll follow this rule and focus on the core ideas and measurements that represent the majority of sound investment practices.
Decide How Much To Invest
How much you should invest depends on your investment goal and when you need to reach it.
One common investment goal is retirement. If you have a retirement account at work, like a 401(k), and it offers matching dollars, your first investing milestone is easy: Contribute at least enough to that account to earn the full match. That's free money, and you don't want to miss out on it.
As a general rule of thumb, you want to aim to invest a total of 10% to 15% of your income each year for retirement — your employer match counts toward that goal. That might sound unrealistic now, but you can work your way up to it over time. (Calculate a more specific retirement goal with our retirement calculator.)
For other investing goals, consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments.