You’ve paid the bills and contributed to your savings account, and you still have some money to spare. Now may be the time to start investing in mutual funds, exchange-traded funds (ETF) or individual stocks and bonds. Adding investments to your financial strategy could help you pursue important longer-term goals like buying a house, paying for your kids’ education or retirement. This guide can help you learn how to invest.

While saving is important for building an emergency fund or covering short-term goals like a vacation or down payment on a car, investing has the potential to help you achieve longer-term goals. Over time, investing has historically produced higher returns and has been more likely to outpace inflation than saving.

Most people are able to pursue multiple goals at once, which means you don’t have to choose between saving and investing. Consider investing a small amount initially—as little as $50 a month. “If you delay working toward longer-term goals until you have your entire emergency fund or you’ve paid off all of your high-interest debt, you could miss out on important opportunities for potential growth,” says Chris Vale, Senior Vice President, Consumer Investments at Bank of America.

Keep in mind, there is no assurance you will earn a higher or any return on your investments. Unlike with a savings account or certificate of deposit (CD), you can lose your principal. The potential rewards are greater, but so are the risks. The amount of risk you take is up to you.

You’ve probably heard about the power of compounding—how your investment earnings can grow exponentially over time as you reinvest them. It’s a good reason to start investing as soon as possible, even if you’re only contributing a small amount. Consider these hypothetical examples:

Let’s say you start investing $50 a month when you’re 20 years old and earn an annual return of 7 percent. By the time you’re 60, your $24,000 of contributions could return nearly $120,000.

What happens if you wait until you’re 30 to start? Your income will likely be higher, so you contribute $100 a month. By time you’re 60, you will have contributed more—$36,000—but your return will be less—$113,000—because your money has had less time to grow.

Likewise, waiting until you’re 40 and investing $200 a month for 20 years results in an even smaller return—$98,000—even though your total contributions are double the 20-year-old’s.

Before you begin investing, you should have a clear idea of your objectives, timetable and ability to tolerate risk. These factors will help you pick investments that are right for you. It’s important to remember that economic and market conditions beyond your control can negatively affect the value of stocks, bonds, mutual fund, ETFs and other investments. Consider your personal reactions when investments rise or fall in value.

You may be able to reduce risk by holding a mix of stocks, bonds and cash. This is called asset allocation, and it helps because returns of the three major asset categories usually do not move up and down at the same time. The amount you invest in each category depends on how much time you have before you need the money and how much risk you’re willing to take.

It’s also a good practice to hold a variety of investments within each asset category. This is called diversification. For example, in your portfolio’s stock portion, you may want companies that are different sizes and from different industries. One way to diversify is to invest in mutual funds or ETFs, rather than in individual stocks.

Your first investment depends on your risk tolerance and when you need the money. For example, retirement is a common investment goal. Younger investors may want their portfolios weighted to stocks because they have more time to recover from any market downturns, while investors closer to retirement age may want more of their money in bonds and cash. For many beginning investors, mutual funds or ETFs that mirror the overall market may be a good place to start. You might also consider lifestyle or target-date funds made up of a mix of stocks, bonds and cash that reflect your age, risk tolerance or time horizon.

Once you’re ready to invest, the next step is choosing how to do it. Today there are more ways to invest than ever before, and you can have as much—or as little—involvement in the process as you’d like. Consider these approaches:

• Self-directed options
  You make your own trades online through a brokerage account. This is the most direct approach with the lowest fees, although it requires more time to research, monitor and rebalance your investments. Many brokerage firms offer free trades and no account minimums. Make sure you understand whether you are being charged a commission or fee before placing a trade. Picking your own investments may seem confusing at first, but brokerage firms and financial websites have resources to help you.


• Managed account on an online investing service
  If you’d like more help in finding the proper mix of investments for you, you may want to consider an online investing program designed to match your investments to your personal needs and situation. Here, too, there are a range of offerings that greatly simplify things. In most cases, you provide information about your age, how much you have to invest, when you need the money and how much risk you can tolerate. Then computer algorithms (also known as robo-advisors) or human portfolio managers create a portfolio tailored to your goals, typically for a fee. Beyond choosing your initial investments, these programs can help rebalance your portfolio as market conditions and your needs change.


• Work with an advisor
  Some investors choose to work with personal financial advisors who help them select investments that fit their needs. Most advisors require a higher level of assets than you’re likely to have when you’re just starting out and will generally charge more in fees than an online program, so this may be an option for later, as your portfolio grows.