How To Invest Money: The Smart Way To Grow Your Money

You may be thinking to yourself – this is not the time to talk about investing.

You’re panicking about your job, that argument with your best friend, your cat behaving even more weirdly than usual – and don’t even get me started on your love life.

But really, there’s NO GOOD time to talk about investing. Ultimately, you have to be disciplined enough to hold onto the money you earn – to then take the next step in learning how to make your money grow.

And the best way to grow your money is by learning how to invest.

It’s as simple as that.

When you become an investor, you’ll be using your money to acquire things that offer the potential for profitable returns through one or more of the following:

• Interest and dividends from savings or dividend-paying stocks and bonds
• Cash flow from businesses or real estate
• Appreciation of value from a stock portfolio, real estate, or other assets

As you learn to become an investor, you will begin to devote your limited resources to the things with the largest potential for returns. That may be paying down debt, going back to school, or fixing up a two-family house.

Of course, it may also mean buying stocks and bonds, or at least mutual funds or exchange-traded funds.

Thanks to advances in technology, you can start to invest with as little as $5 a month and a smartphone. It’s our job to help you filter out the noise, learn the basics, and make good investment decisions from the start.

With no fees on accounts with low balances and easy automatic investing, Wealthfront is our top pick for the best all-around investment account. If you want to learn more about them, read our Wealthfront review.

So here are the basics of how to invest — wisely.

Why you should invest

Investing allows you to significantly grow your money over time thanks to the power of compound returns.

Compounding can be called the Eight Wonder of the World. Thanks to the power of compounding, a single penny could grow into millions of dollars, given enough time. You may not live that long, but consider the following examples.

Say you start investing when you’re 16…

As unrealistic as it may sound to start investing that young, say you got a small inheritance and you decided to invest it—if you put $5,000 in an account with an interest rate of 7% and contribute an extra $200 a month, after 30 years you’ll have a little over $284,000.

Using a more realistic example, say you start investing when you’re 22, right after graduation…

You start out just putting $50 a month into your 401k, with a 50% company match.

If you raise contributions by the same amount as any pay raises, you’ll have more than $1 million by age 65. That assumes annual raises of 3.5% and an 8.5% return on 401(k) investments.

While there are many factors to consider – a simple example like this demonstrates the power of compound interest if everything goes right.

So if you want to start saving now, you could even have a whole year’s salary saved by the time you’re 30…Take a look at the chart below to see how.

When should you invest?

Now that you know why you should invest, how about when to invest?

The answer to that is pretty simple. The right time is now.

Investing sounds more intimidating than it is. Yes, there’s always a potential risk for loss, but there’s an even bigger potential for serious gain.

Doing anything for the first time can be terrifying, especially when it involves your hard-earned cash. But here’s some advice for first-time investors.

Investing for the first time

Investing is like religion—people have some strong opinions and may even belong to one of many sects or schools of thought. Here are a few that come to mind:

• The Doomsday Preppers – these people are convinced our financial system will collapse, so they stick all their money in gold and real estate.
• The Gambling Day-Traders – these are most often the people you see in movies, with their desks or walls covered in monitors and TVs, watching every second of the day and seeing how the stock market changes.
• The Indexers – these are people who simply invest in everything in order to take advantage of the slow and steady increase in the overall value of the markets.

If you already belong strongly to one of the above camps, you may not find the investing resources on Money Under 30 useful. If, however, you have an open mind and are interested in learning simple strategies for successful lifelong investing — without any gimmicks—then read on.

If you’re on the fence about where and when you should invest, make sure you’re taking advantage of guaranteed interest rates.  High yield online savings accounts offer FDIC insurance (which means your money is insured by the federal government).

Chime 

Chime offers a solid interest rate – 0.50% APY and with no minimum balance required, no monthly fees or foreign transaction fees, and you’ll get fee-free overdraft up to $100. Plus if you sign up for direct deposit, you’ll get your paycheck up to two days early; Chime has become a gamechanger in the financial space.

Chime Disclosure – Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC.

Risk vs reward

It’s true: Investing involves risk. We’ve all heard stories about investors who lost half of their fortunes in the Great Depression or even more recently in the Great Recession. We’ve heard about the Bernie Madoffs of the world and investors who lost everything to a scam. Although you can never eliminate risk entirely, you can significantly reduce risk if you invest wisely.

The great thing about investing young, is you’re likely investing in longer-term investments—like your retirement account. These investments are less risky than quick-fix stock trading by people who really don’t understand what they’re doing.

While investing can be risky, it’s best to just deal with that risk, because not investing can cost you a lot more money than losing a little money on a bad investment.

We talked about compound interest above, and the key rule to that is — the sooner you start to save the more your money will earn over time. There’s a big difference between someone who started investing at 25 versus 35. You could be missing out on hundreds of thousands of dollars if you start saving later.

Read more: If You Still Don’t Believe In The Power Of Compound Interest, You Have To See This

What do you invest in?

Our philosophy is to keep investing as simple as possible

Create broad diversification through a mix of low-cost mutual funds and ETFs, while keeping it fun by holding individual stocks with up to 10% of your assets.

The most important factor in being a successful investor is not the stocks and funds you pick. Successful investing depends on:

1. Choosing proper asset allocation – the overall mix of bonds, stocks, and cash you hold in your portfolio.
2. Making and sticking with an automatic investment plan – this way you avoid making terrible, emotionally-charged decisions – like selling at the bottom of a market crash.

The investing information on Money Under 30 barely scratches the surface of all the knowledge out there about investing, but that’s OK. We’re not trying to train the next class of hedge fund generations so much as give the average person enough knowledge and confidence to begin investing on your own.

Mutual funds

A mutual fund is a type of professionally managed investment that pools your money with other investors. The fund’s managers then use the pooled money to buy securities for the group.

It’s best to start out investing in mutual funds or exchange-trade funds rather than individual stocks and bonds until you get your feet wet. These types of funds enable you to invest in a broad portfolio of stocks and bonds in one transaction rather than trading them all yourself.

They’re not only safer investments (because they’re diversified), but it’s often far less expensive to invest this way. You’ll either pay just one trading commission or nothing at all (in the event you buy a mutual fund directly from the fund company), as opposed to paying trading commissions to buy a dozen or more different stocks.

Although mutual funds can be purchased through any brokerage account, you’ll save money on trade commissions by buying funds directly through a mutual fund company like E*TRADE or You Invest.

Bonds

Whether it’s corporate, municipal or treasury, bonds are a great way to leverage your investment against the success of other entities.  Bonds are a debt security which raise capital for others.  They finance new companies, local projects and even the US Government.  While no investment is risk-free, government bonds (T-Bonds) are just about as close as you can get.

You might also want to consider investing in Worthy Bonds.  Worthy Bonds are $10 each, and offer a fixed rate of return of 5%.  Each bond has a 36-month term and interest is paid weekly.  Cash in the bond any-time you’d like (even before maturity) and you’ll never pay a penalty.

The money you invest in Worthy Bonds is used to fund American businesses and Worthy is very picky about which businesses to lend to.  They only invest in companies whose liquid assets far exceed the amount of the loan; making the risk low for a terrific 5% return.

Accredited and non-accredited investors are welcome and you can buy as many $10 bonds as you’d like.

Robo-advisors

If you are trying to really get started as a first-time investor, one option for you is to go the robo-advisor route. The easiest way to understand the nuts and bolts of robo-advisors is that they are financial advisors that use algorithms to provide you with the very best advice about financial investments.

Robo-advisors are extremely popular at this point because they make investing accessible for everyone. These easy-to-use apps are more convenient, more affordable, and they have lower investment minimums than standard financial advisors.

Plus there’s no investment broker and the costs are lower as compared to traditional management firms.

There are a bunch of great robo-advisors out there, but as is true with absolutely everything, not every robo-advisor is right for every investor.

So we’ve put together a list of our favorite robo-advisors and who they’re perfect for.

Betterment

With Betterment, there is no initial investment that you need to open up an account. There is an annual fee that is relatively low when comparing rob-advisor fees overall; the management of your entire account is only 0.25% each year.

You can invest in stocks and ETFs across thousands of companies both in the US and international markets. You’ll have a customized portfolio based on your preferences and risk tolerance, and your account is fully managed.

Wealthfront

Here’s the great part about Wealthfront: if you’ve got $500 to invest, you can open an account with Wealthfront. And until your investment reaches a grand total of $10,000, there are no fees that you’ll have to pay at all.

This means that if you’re a new investor, the deal may very well be exactly the best enticement to get started. And if you’ve invested $10,000 or more, Wealthfront’s fee is quite competitive at 0.25% a year. With a Wealthfront Cash Account, you can maximize your investments by having money automatically routed into your investment account once your budget goals are met. 

M1 Finance

If you’ve got $100, you can start investing with the M1 Finance which is a kind of combination of using a robo-advisor and a traditional brokerage, and the platform is super user-friendly.

M1 Finance makes it easy for new investors to get started because they are willing to chip in to help you buy stocks that may cost $200 even if you have $100. And there are no fees at all for either opening an account or trading.

Vanguard Digital Advisor®

Once you have $3,000 to invest, you can qualify to have your portfolio managed by one of the top names in investing. Vanguard Digital Advisor® designs a personal portfolio that matches your goals and risk tolerance. They’ll create a portfolio of ETFs, so you can reap the benefits of their low costs. The target annual net advisory fee is about 0.15% of your Digital Advisor balance – which if you have $5,000 invested – is about $7.50 a year. So Vanguard is definitely a low-cost advisor.

The easy-to-use Digital Advisor offers a helpful dashboard that makes investing a streamlined process. Built-in tools let you test out different investment amounts and see how even a change of $10 can impact your retirement savings. 

Stocks

If you decide you want to DIY and venture out and buy individual stocks, we recommend you take a slow and steady approach. Don’t put more than 10% of your portfolio in individual stocks until you get very comfortable with what you’re doing.

A great place to start is by reading about value investing, where we focus on heavy amounts of research and a “buy-and-hold” mentality.

It’s important not to be afraid of the stock market, it really is one of the best places to grow your money.

So, if you want to DIY your investing, there are a lot of great brokerages for you to consider. You can typically do everything without ever having to speak to a person, which is nice for some people.

One of our favorite online brokers is E*TRADE – a first-rate investment brokerage firm offering you the opportunity to invest in stocks, bonds, mutual funds, ETFs, as well as futures and FOREX trading.

Their pricing is excellent, charging $0 per trade along with $0.65 per contract and their trading platform is top-notch and they offer a ton of commission-free ETFs and mutual funds. Plus there is no minimum deposit required.

TD Ameritrade

For young investors, TD Ameritrade is an option because there no minimum investment whatsoever to even open up an account. So you don’t have to wait to get started.

TD Ameritrade has an impressive number of tools available to use to do research about strategic ways to invest. You can also access a whole array of third-party platforms for free that will help you stay updated about trading and investing.

Public

If you want to invest but not go it alone, Public offers a stock market social community of investors so you can tap into the collective wisdom of other investors to see what companies others are investing in and how those stocks are performing. Plus you can also improve your financial literacy by participating in Public’s group chats about investing, companies, and trends.

Public offers fractional sharing investing so you can buy any stock commission-free; whatever the share price is, you can own a slice of the stock with as little as $5.

Real estate

Real estate investing is one path to great earnings – even makes millions.

But what’s really changed is that you don’t have to be a millionaire to start investing in real estate.

Investing in real estate is a long-term investment that investors invest in for cash flow (the money you make from rental properties every month after all expenses are paid). Cash flow will also increase over time because rents will go up with inflation while your mortgage payments stay the same.

Like any investment, though, it’s important to know the risks. And consider if you have what it takes to be a landlord.

Roofstock

If you want to go the real estate route, check out Roofstock. Their motto is that you can build wealth through real estate. Indeed, they make the process of buying and selling homes easy. They even list homes that are already rented out so that you don’t need to go through the hassle of finding someone to cover the costs of your mortgage. Roofstock features all the current properties you can purchase – including the monthly rental income for each home, neighborhood ratings, and total yearly return you can expect.

But you don’t need to actually buy a home to get into the real estate market.

Fundrise

Another option you have available is investing through a crowdfunding company like Fundrise.  With Fundrise, you can start a portfolio with $500 minimum to invest in a diverse portfolio of U.S.-based real estate projects. For a real estate market traditionally available only to super-wealthy investors, Fundrise is allowing even beginning investors to tap in. And Fundrise offers a 90 day satisfaction period, which makes your investment even more stress-free if you decide that real estate is not the way you end up wanting to go.

Retirement accounts

An IRA provides certain tax advantages as an incentive to save for retirement. The downside is there are limits on how much you can contribute to the account each year and when you can withdraw the money.

401(k)

A 401(k) with an “employer match” might be the ultimate investing vehicle, period. That “match” is key, though – many employers will fund your account dollar for dollar, matching any contributions you make yourself.

If you’ve got most of your investment money in a 401(k) account, we recommend giving blooom a spin. They’re a robo-advisor that’s totally dedicated to managing 401(k)s – that is, unlike other robo-advisors, they won’t touch the money you have in an IRA or other retirement vehicles.

You can get a free 401(k) analysis with blooom, and if you decide to move ahead with them they’ll charge you a reasonable $10 a month to manage your account on an ongoing basis. Right now you can also get $15 off your first year of Blooom with code BLMSMART

Traditional IRA

With this type of account, your contributions may qualify for a deduction on your tax return. In addition, there’s the potential that your earnings can grow tax-deferred until the time you need to withdraw them at retirement age. The primary argument with a Traditional IRA (vs. a Roth IRA) is that most feel they’ll be in a lower tax bracket when they retire, so paying taxes on this money at stage will be cheaper than paying them when they’re earned (considering the up-front deduction).

Roth IRA

With a Roth IRA, your contributions are after-tax and the money can potentially grow tax-free while you save. The big benefit here is that withdrawals at retirement time are tax-free, assuming you meet the required conditions. This is my number-one recommended retirement account for most people.

Rollover IRA

This is an account that’s created by rolling over another account, such as a company-sponsored 401(k). For example, if you have a 401(k) with an employer who you leave, you can roll that money over into a Rollover IRA.

If you’re new to investing and want to begin putting money to work for the long-term, an IRA is where to start. Read more about the best places to open an IRA here.

DIY or get help with your investments?

It’s important to know when it’s best to have a financial advisor and when it’s best to opt for a different investing platform. If you’re looking for real financial advice and you have quite a bit of money to handle, a face-to-face advisor will be much better at explaining things to you than any electronic form of advisor.

Some people may choose to invest with a financial advisor because they want face-to-face interaction, professional advice, and don’t mind paying a premium for someone handling their money. Oftentimes, people with large sums of money to invest will hand it over to a financial advisor so they don’t have to do the work.

So how do you find a financial advisor? One way is with a company like Paladin that helps match you with qualified financial advisors to move you forward with your investment decisions. Most of the time, it’s the “not knowing what to do” that slows you down or stalls you from doing anything at all. So having a company like Paladin helps you to get to that person to figure out what to do on the investment front. The key, obviously, is not to be in a stand-still ever.

Another place to look for an advisor is through Facet Wealth. They’re an online financial planning firm that offers financial help for anywhere between $1,200-$6,000 each year.

Compared to other options, Facet Wealth is much more affordable. Plus, they charge no upfront fees to set up an account, and their advisors receive no commission, so you’ll definitely be in good hands.

Finding an advisor is relatively easy to do as long as you know the right questions to ask. If you’re a millennial and are looking for a financial advisor (although, make sure you really need one), here’s a roadmap of the best advisors for you.

Bottom-line advice

If you’re new to investing and can afford to begin putting money away for retirement, I recommend everybody begin investing with a Roth IRA.

If you already have a retirement account or need to invest money for another goal (like buying a home or starting a business), a regular brokerage account will do. Keep in mind that your capital gains – the money you earn when you sell a security for more than you paid for it – is taxable, as will be certain dividends you receive.

Next steps

These are the basics of investing—there’s plenty of directions you can take now that you know what you’re doing.

Vanguard Disclosure – For more information about Vanguard funds and ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. All investing is subject to risk, including the possible loss of the money you invest.

Vanguard Digital Advisor® services are provided by Vanguard Advisers, Inc. (“VAI”), a federally registered investment advisor. VAI is a subsidiary of VGI and an affiliate of VMC. Neither VAI nor its affiliates guarantee profits or protection from losses.

Vanguard Digital Advisor is an all-digital service that targets an annual net advisory fee of 0.15% across your enrolled accounts, although your actual fee will vary depending on the specific holdings in each enrolled account. To reach this target, Vanguard Digital Advisor starts with a 0.20% annual gross advisory fee to manage Vanguard Brokerage Accounts. However, we’ll credit you for the revenues that The Vanguard Group, Inc. (“VGI”), or its affiliates receive from the securities in your managed portfolio by Digital Advisor (i.e., at least that portion of the expense ratios of the Vanguard funds held in your portfolio that VGI or its affiliates receive). Your net advisory fee can also vary by enrolled account type. The combined annual cost of Vanguard Digital Advisor’s annual net advisory fee plus the expense ratios charged by the Vanguard funds in your managed portfolio will be 0.20% for Vanguard Brokerage Accounts. For more information, please review Form CRS and the Vanguard Digital Advisor brochure.

Vanguard Marketing Corporation, Distributor of the Vanguard Funds.