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How to Invest Money: A Beginner’s Guide to Growing Wealth
If you think you’re lost in the woods when it comes to investing, then don’t worry. I’ll help you out through, and at the end of this guide, you’ll learn how to invest money through the tips and explanations in this article.
Table Of Contents:
- Knowing The Core Tenets of How to Invest Money
- Understanding the Basic Investment Strategies
- Zooming In On The Tips
- Trying Advanced Investment Strategies
- Working with Professional Advisors
- FAQs
- Conclusion
Knowing The Core Tenets of How to Invest Money
But before we go into the definitions and basics of investment, let me tell you the three core tips if you want to know how to invest money, as this article will definitely mention them time and time again:
Set your investment goals: You don’t just invest money for the sake of having it. Often, you need a goal where you’ll use the money you gained. It may be for your retirement, a new house, or a college fund for your kid. Investment starts from this goal.
Research your options: There are a lot of things you can invest in. It can be stocks (individual stocks, growth stocks, etc.), bonds (bond funds, corporate bonds, etc.), and real estate. And depending on which one you choose, you’ll go through various risks and challenges. So, pick one that suits your risk tolerance and current financial stability for safer investments.
Diversify your portfolio: Aside from researching your options, diversifying your portfolio can help you reduce the risk of investment. Portfolio diversification means spreading your money across various market investments. Basically, don’t just go “all in” on one company, property, or investment—a must if you want to master how to invest money.
You can say that these are three core tenets of making investment. Having these covered can give you a higher fighting chance than the average amateur investor. And if you don’t understand these, the upcoming sections will touch on them and elaborate.
Understanding the Basic Investment Strategies
Excited to learn? Now, let’s begin by knowing the ropes of investing, and we’re going to start with the three basics before we get into the fundamental investment strategies:
Remember that the foundation of how to invest money is simple: you let your money work to generate returns annually.
Depending on your decisions, you can raise money or lose the returns that your money worked.
The duration of your investment and its profitability totally depends on you.
Sounds simple, right? Well, that’s just the foundation. Let’s proceed with the basic strategies you can use as you invest.
1. Taking Advantage Of Compound Interest
A simple method or strategy to earn profit from your investments is to take advantage of compound interest. Before I touch on it, let me highlight some basic definitions:
Principal: The money you invest.
Interest: A part of the money generated by the person or organization who held your principal.
Interest rate: The guaranteed percentage of the money you can get from the interest.
A simple example of earning compound interest is leaving high-yield savings accounts untouched. Often, money in savings accounts increases because the bank gives its due interest.
Say that the yearly interest rate in said savings account is 5%, and it has $100,000. In a year, the bank will add $5,000 ($100,000 multiplied by 5%) to that savings account.
To take advantage of compound interest, the account owner will just leave that $5,000 interest on the bank, resulting in $105,000 saved in the account. If a year passes again, that account will earn $5,250 through interest.
As you can see, the account owner didn’t do anything complicated or drastic, but they were able to gain more money. They just let the money grow on its own. That’s the power of compound interest—a good option if you’re aiming for long-term returns.
2. Mitigating Risk
All forms of investing involves risk including losing more than your principal. Also, there’s always a lingering chance that you may not profit—if not getting higher returns, and worse lose some of your investment.
And as the amount of money you invest and expect to gain goes up, the risk you face will go up as well.
Of course, you won’t want to lose your principal, so you need to learn how to mitigate and counter risks.
How? Actually, I’ve already told you at the beginning. Some of the best ways you can mitigate and counter risks are to set your investment goals, research your options, and diversify your options.
With investment goals, you get to align yourself with them. You get to stop yourself from taking massive risks if the reward is beyond your needs according to your investment goals.
Researching your options basically allows you to know the risks and how devastating they can be for you. And with diversifying options, you get to control how many risks you take, and let you have safety nets.
3. Utilizing Dollar-Cost Averaging (DCA)
Another basic yet good strategy you can employ is dollar-cost averaging.
Its concept is simple: regardless of how the market moves or trends change, you go into investing in an option at a fixed rate and interval.
On a typical option, like stocks or mutual funds, this strategy can even out your gains and losses while letting you accumulate your principal on the investment.
Of course, because of this strat’s nature, you won’t be able to gain big, especially if the market rates rise in your favor—unless you suddenly go for a lump-sum investment.
Nonetheless, it’s ideal for amateurs and investors who are uncomfortable with dealing with high-risk investments.
This strategy may require discipline and patience as it can be tempting to suddenly go aggressive when mutual funds or stock market conditions are good. Not to mention it would be ideal if you have a steady income stream for you to maintain this strategy.
Zooming In On The Tips
Now, let’s scratch more on one of the core tips on how to invest money, which I prefaced this guide a while ago.
1. Setting Your Investment Goals
It’s common knowledge that before you start investing, it’s crucial to define your financial objectives. These objectives are the reason why you want to learn how to invest money in the first place.
Are you planning to have a comfortable retirement? Do you want to secure your children’s education and health? Or do you want to have complete financial freedom after a few years?
While this process sounds cheesy, it’s what will drive you to invest. It can help you discipline yourself and prevent any impulse decisions that may ruin your strategies. It will truly influence you and can push you to success.
Unfortunately, just saying you need to have goals can be a bit vague. While I provided examples of the common financial goals, what are the other goals you can have to push you to invest?
Well, one way to know your goals is to categorize them into two: short term and long term.
For goals that can you can reach in one to three years, they can go into the short term goals. It might be as simple as going on a vacation or preparing an emergency fund for the family. When choosing an investment option for these goals, you can opt for stable and liquid investments as they’re considered safer options.
Meanwhile, if you have goals set for more than nine years or more, you may try to go for small but aggressive long-term investments like stocks and bonds.
2. Researching Your Options
As a new investor, here are the top options you have for investment:
Savings account: Very safe option but has the lowest returns. As mentioned, you can take advantage of compound interests with this one. I would recommend considering this as “storage” for your emergency fund.
Certificates of Deposit (CDs): These are very similar to savings accounts, but they have a much higher interest rate. The catch is that you can only withdraw the money according to the terms you signed on. You can still withdraw your money if you truly need it, but you’ll incur penalties.
Money market account: Another form of high-yield savings account, but with higher interest rates and strict terms. However, you can withdraw on your money market accounts without penalty on certain conditions. You can also use checks and debit cards to access this type of account. As of July 2024, the average interest rate for a money market account was 0.70%, according to the FDIC.
Bonds: Bonds are money you’ll lend to the government. You can also lend to a private company, which is known as corporate bond. Because they’re basically loans, bond issuers can demand or receive interest to gain money from the loan—hence, it’s technically a form of investment.
Stock market, Exchange-traded Funds (ETFs) or index funds: These funds provide instant diversification by investing in a broad range of stocks or bonds, often at a low cost. Steven Goldberg, a principal at the firm Tweddell Goldberg Wealth Management and longtime mutual funds columnist at Kiplinger.com, suggests that most individuals only need three index funds: a total U.S. stock market fund, a total international stock market fund, and a total bond market fund.
3. Creating a Diversified 
As I implied earlier, diversification is a key principle in learning how to invest money wisely. You can do so by spreading your investments across different asset options and classes.
With this strategy, you can potentially reduce risk and improve your overall returns. This is especially important if you want to build wealth over the long term.
Here’s a simple example of how you might allocate your investments:
| Asset Classes |
Conservative |
Moderate |
Aggressive |
|---|---|---|---|
|
Stocks |
30% |
60% |
80% |
|
Bonds |
50% |
30% |
15% |
|
Cash/Cash Equivalents |
20% |
10% |
5% |
To start safe—especially if you have a lower risk tolerance—consider bonds, and make them the larger portion of your portfolio. Meanwhile, for investors seeking more than just a quick buck and are good with high-stakes situations, a larger portion of stocks may be appropriate.
Trying Advanced Investment Strategies
Since you now know about the basics on how to invest money, it’s time to talk about the nitty-gritty of investment strategies! I’m not saying you should do them as soon as you can, but I believe that you need to be familiar with them as early as now!
1. Investment Automation
A very popular strategy right now is automation that many investment platforms offer online. Using such makes it easy to invest using a DCA strategy.
So how does it work? It takes money from your checking account and funnel it to your investment account—the amount depends on your setup. Easy, right?
Most importantly, this automation takes away the need for you to discipline yourself whenever you look at your investments. It even allows you to be “technically free” from the investment process, which can definitely save you from unnecessary stress.
2. Portfolio Rebalancing
As you continue to invest money, it’s important to regularly review and adjust your portfolio. Market fluctuations can cause your asset allocation to drift from your target percentages over time.
Thankfully, if you’re using a modern online platform to play stocks or bonds, most of them will provide you with analysis and reports. Thus, you can easily rebalance your portfolio if needed.
3. Annual Portfolio Review
Set aside time each year to review your investments and rebalance if necessary. This might involve selling some of your best-performing assets and buying more of the underperforming ones to maintain your desired asset allocation.
Additionally, your individual circumstances may have changed, resulting in the need for adjustments to your investment plan. It may also be helpful to meet with a financial professional annually to ensure your investments still align with your overall financial goals.
Working with Professional Advisors
While it’s possible to learn how to invest money on your own, many investors benefit from professional guidance. Financial advisors can help you develop a comprehensive investment strategy, navigate complex financial decisions, and stay on track with your goals.
If you decide to work with a financial advisor or money manager, look for someone who is a fiduciary, meaning they are legally obligated to act in your best interest.
Consider their credentials, experience, and fee structure before making a decision. A fee-only advisor, for example, is only compensated by the fees you pay for their services.
In contrast, a commission-based advisor earns commissions on the products they sell you, creating a potential conflict of interest. Make sure to understand how your advisor or money manager gets paid.
Disclaimer
The content on this website is intended solely as general advice. It has been compiled without consideration of your individual goals, financial circumstances, or needs. Prior to making any decisions based on the information, strategies, or products discussed here, it is recommended that you consult with your own financial advisor to ensure suitability based on your specific objectives, financial situation, and requirements.
FAQs
How much money do I need to start investing?
You can start investing with as little as $100 or even less. Many mutual funds and ETFs have low minimum investment requirements. Even some brokers offer fractional shares, allowing you to invest in expensive stocks with small amounts of money.
Don’t let the fear of not having enough money stop you from getting started. The most important thing is to simply start investing.
Is it safe to invest money in the stock market?
The stock market is volatile, but it’s generally safer than other options like crypto. To be honest, your risk in this depends on your decisions and the company you’d place your bet on.
For example, if you want a safe stock, go for popular companies like Google or Facebook. If you want a chance at hitting it big with a high risk, then find startup companies that have recently made their company public.
How can I invest money to make money fast?
While there are avenues where you can invest to make money fast, they’re rare, quick-lived, and often scammy. If you’re looking into making money through formal investment channels, it might take you a year or two before you can have decent returns.
What’s the best way to invest money for retirement?
For most people, a diversified portfolio of low-cost index funds or ETFs is an excellent step on how to invest money for retirement.
Also, consider using tax-advantaged accounts like 401(k)s and traditional IRAs to maximize your savings.
Additionally, if your employer offers a retirement plan with a company match, be sure to contribute enough to receive the full match, as this is essentially free money.
Conclusion
How to invest money is vital because investment can mean a lot of things to people. Some people see it as a way to make money. Some see it as a way to have fun—as if it’s like gambling. And there’s some people like us who wants to know how to invest money for a safer route of getting long term returns.
Regardless of how you see investment, be sure to learn as much as you can. Wherever you got your money from, I’m sure it’s hard-earned. And it will be depressing just to lose it in a sudden misinformed and impulsive decision when investing.
