How Can You Invest Money?

What Is Investing?

Investing usually refers to purchasing an asset with the goal of seeing that asset grow in value or generate ongoing income.

You’ll often hear “investing” in the context of buying stocks, bonds, ETFs or mutual funds, but there are a lot of ways people can “invest” — from buying real estate to putting money toward growing their business or even improving their job prospects through education.

Saving vs investing

Saving and investing are both ways you can set money aside for future goals, but there are some important differences to understand between the two.

Savings accounts could have less risk and more stable returns, but even with a high-yield savings account, the potential returns can be modest compared to many types of investment.

Savings accounts are generally easily accessible, typically have no fees or penalties for withdrawing money, and are insured by the FDIC (for banks) or NCUA (for credit unions) up to $250,000 per account owner per bank. A savings account can be a good way to set aside money for a vacation, a major purchase or other goals you expect to reach in five years or less.

Investing, on the other hand, typically has more growth potential, especially in the long term — but it also carries more risk.

Stocks or other assets can fluctuate significantly in value, even in the short term. And in contrast to how simple it is to withdraw money from a savings account, taking money out of investments can be more complicated. You may have to sell assets or even pay fees, depending on the type of investment or account.

That’s why investing is generally recommended for longer-term goals, like retirement. A longer time frame gives your investment time to grow and offsets some of the impact of the risks mentioned above.

Why Should You Invest?

Everyone will have their own unique motivations behind investing. Perhaps it’s a college fund for their kids or grandkids, a down payment for a dream home in 10 years or having a certain amount set aside in time for retirement.

But regardless of the motivation, there are good reasons to invest.  

First, investing can have a higher earning potential than savings alone, particularly in the long term. This can help you outpace the effects of inflation in the long run, which isn’t always the case with the interest rates of savings accounts. But again, this potential is offset with the risk of losing money. The classic rule is to not invest more money than you can afford to lose.

And speaking of the long run, investments can really benefit from compound returns. This is a similar concept to the compound interest you can accrue in a savings account. As your investment produces earnings, and those earnings are reinvested and start generating their own earnings, you can really start to build wealth over time.

Finally, certain types of investment accounts may come with tax benefits. Most people will encounter this with accounts meant for retirement, like their 401(k) or Individual Retirement Account (IRA) . There are a lot of variables for each specific account type and situation, but these benefits often mean reducing your taxable income today or making tax-free withdrawals in the future. Based on your current situation and expectations about retirement, these tax benefits could save you money with a little bit of planning and foresight.

Different Ways to Invest Money

There are many options for investing money and each one has pros, cons and other details worth noting.

Stocks

There’s a good chance that stocks are the first thing that come to mind when you think about investing. Stocks represent a share of ownership of a company and may go up in value if the company becomes more successful. They may also generate dividends, which are a payout of the company’s profit.

But stocks don’t always go up in value. If prices fall, you may wind up with an investment that’s worth less than what you initially paid. Stocks might go up, they might go down and they might do a bit of both over time. Stocks are a relatively volatile investment and come with a higher risk than some other investments or savings.

Bonds

A bond is a loan from you as an investor to a borrower like a governmental entity or a company. This loan is expected to be repaid, plus interest, after the term is up.

Bonds are considered less risky and volatile than stocks, but often have a lower return. That’s the trade-off: The most trusted borrowers may offer to pay back borrowed funds at lower interest rates, because they are less likely to fail to repay. Others may offer higher rates, but there may be more risk of defaulting.

Some bonds can even have tax advantages. For example, income earned from certain bonds offered by the US government may be exempt from state and local income taxes.

Mutual funds and exchange-traded funds (ETFs)

Mutual funds and ETFs are professionally managed investment products that pool money from multiple investors to purchase a selection of stocks, bonds or other assets.

When you invest in a mutual fund or ETF, you actually put your money into many different investments. This diversifies your assets and can lessen the overall impact if a specific asset dips in value.

Think of it like this: Let’s say you buy a single share of stock in a company — that’s a share of ownership in that company. But if you buy a single share in an ETF, it’s like owning fractions of shares in multiple companies.

These products often have specific goals or objectives, like focusing investments on a specific industry, matching the performance of the overall stock market, or gradually moving to more stable investments like bonds as you approach your retirement year.

Real estate

Real estate offers many ways to invest money, with varying levels of hands-on responsibilities, requirements and risks.

Owning one or more rental properties could bring in regular income, but comes with the costs and responsibilities of being a landlord. Hiring a property manager could help with much of the work, but also adds to the cost.

House flipping, where someone purchases a house, fixes it up and sells it for a profit, is another well-known real estate investment strategy. Knowing the local market well and having DIY skills can help with this approach, as it’s easy to underestimate how much time and resources it takes to flip a house.

Finally, Real Estate Investment Trusts (REITs) offer a relatively hands-off way to invest in real estate. There are a few different types, but REITs are generally companies that own income-generating real estate.

Investors can buy shares in an REIT and receive dividends from the income generated by its holdings. This offers an avenue to invest in real estate without owning or managing the property directly.

Retirement accounts

Retirement accounts, like a 401(k) or an IRA, are designed to help you save for your post-working years by offering a vehicle for your money to be invested and grow in the meantime.

They come in many forms and may offer benefits like employer contributions or tax advantages, while having different limitations like annual contribution limits. Some, like 401(k)s, are only offered by employers.

Depending on your tax concerns, income sources and other factors, it may be worth a deep dive to determine which type of retirement account is best for your goals.

Certificates of deposit

A certificate of deposit (CD) is a bank account that holds a fixed amount of money for a fixed amount of time, offering a fixed amount of interest earnings. After the term is up, you can withraw the money you invested, plus interest.

CDs are considered a safe investment and CDs bought through most banks are covered by FDIC insurance. However, your money is tied up in that CD until the fixed term ends. And while the fixed returns are guaranteed, they may be lower than with other investment options.

Alternative investments

There are many ways to invest money and there are always new ones popping up. By the time you finished writing out a truly complete list of them, it might already be out of date. That said, there are two kinds that pop up often enough to briefly cover.

Cryptocurrency (or just crypto) is a form of digital currency — something you’d use to pay or store funds virtually. But in the news headlines, it’s often discussed as an investment vehicle. Crypto’s investment risks include high volatility and a lack of recoverability if you lose credentials like account passwords or private keys.

Commodity investments generally refer to investing in raw materials like food or precious metals, but there are commodity investments that are more abstract, like futures contracts. Commodity investments come with their own risks, mainly due to various kinds of volatility and the speculative nature of futures contracts.

Because of the complexities of these and other alternative investments, it’s worth doing heavier research and vetting before engaging with them.

How Time Impacts Your Investments

Time is an incredibly powerful force when it comes to investing.

For example, the longer someone is invested in the stock market, the more time they’ve had to take advantage of compound returns. They’ve also had more time to ride out the stock market’s fluctuations.

Which brings us to another consideration when it comes time and investing: When do you need it by?

The amount of time you intend on holding an investment is called a time horizon and generally speaking, a longer time horizon means tolerating a bit more risk. For example:

• A short-term horizon (under five years) may see a focus on low-risk investments like CDs and bonds, since they can be easily liquidated after their term is up. 

• A medium-term horizon (up to around ten years) may involve a balanced mix of stock and bonds. 

• A long-term horizon (over ten years) could permit more of a focus on stocks, since there’d be more time for fluctuations to play out.

Doing Your Research

As with many big things in life, investing is best done when you know what you’re getting into. While we’ve already covered a lot here, there are a few more things to look out for:

First, are there any fees involved? And when do they apply? Even small fees can have an impact on your returns, so you may want to look into products like ETFs, which typically have lower costs.

Second, do you understand the risks? Each type of investment has pros and cons, including unique risks. Part of this is weighing how willing you are to ride the ups and downs of the market, or if ups and downs are even viable within your time horizon.

Sometimes, the risk may be  as simple as opportunity cost — you ended up earning less with your investment than you could have with a different investment. But then there are factors like market volatility or the risk of a borrower defaulting on a bond that could very much affect your returns.

Finally, did you compare your options? Shopping around for brokers, seeing if your bank offers investment products for account holders and speaking to a trusted financial advisor about your financial situation and overall goals can help you save time, money and work.

Bottom Line

Investing can be a scary word — but only if you let it be. Knowing what options are available, doing a bit of research and making the right choice for your personal circumstances can set you on a path of financial growth.