How to Decide Where to Invest

Invest to meet your goals.
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No matter how much or how little money you have, learning how to invest for the future is critical. If you are like most people, you have both short-term and long-term goals, and you need to invest properly to meet each of those objectives. Whether your goals include the purchase of a first home, buying a new car, creating an emergency fund or starting a retirement plan, the way you invest can have a big impact on your future.

Step 1

Make a list of your investment goals, both long-term and short-term goals. Write down each of your goals and the number of years you can afford to keep the money invested to meet that goal. Short-term goals might include saving up money for the down payment on a starter home, while longer term goals could include saving for retirement or building a college fund for your children.

Step 2

Separate your long-term goals from your short-term goals. Money that you expect to need within the next five years should be invested for safety and capital preservation rather than growth. That means investing that money in things like certificates of deposit, savings accounts and money market accounts. If you have a short-term goal in mind you cannot afford to take any risk with your money.

Step 3

Consider bonds, bond funds and dividend paying stocks if you need current income rather than capital appreciation. If you need to supplement your income, you can do so with the dividends from bonds, bond funds and stocks that pay a steady dividend.

Step 4

Choose index funds for your long-term investment goals. Stocks are primarily long-term investments, so never invest any money you expect to need within the next five years. But if you can afford to keep the money invested for the long term, stocks can be a good choice. Choosing index funds over actively managed ones is a smart move as well, since the vast majority of managed mutual funds have failed to outperform the indexes. A study published by Money Magazine found this to be true, and pointed out that index funds also have much lower costs than actively managed ones.

Step 5

Build an emergency fund as soon as you start working. Having at least three to six months worth of living expenses in a safe investment like a savings account can protect you if you lose your job or suffer an unexpected expense.

Step 6

Invest as much as you can afford in tax-deferred plans like a 401k or IRA. These plans can lower your current taxes while allowing you to grow your money for decades. Since the money is only taxed when it is withdrawn, you can control the amount of taxes you pay by controlling the amount you take out when you retire.

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