INVESTING YOUR MONEY

Investing is a powerful way to grow your wealth and secure your financial future, but with so many options, it can be difficult to know where to start.

This page breaks down the different types of investments into two sections. The first provides quick, essential facts about common investment options like savings accounts, 401(k)s, IRAs, CDs, and the stock market. The second offers a more extensive summary, explaining how each investment type works, its risks and benefits, and how to use it effectively based on your financial goals.

Whether you're looking for a simple breakdown or a deeper understanding, this guide has you covered.

PDF versions of both sections are available for download at the bottom of the page.

CORE FACTS

Savings Account – A safe and easily accessible place to store money, earning minimal interest. Best for emergency funds or short-term savings with no risk of loss.
401(k) – An employer-sponsored retirement plan that allows tax-deferred growth, often with employer matching. Ideal for long-term retirement savings but has restrictions on early withdrawals.
IRA / Roth IRA – Individual retirement accounts offering tax advantages. Traditional IRAs defer taxes until withdrawal, while Roth IRAs require taxes upfront but allow tax-free withdrawals later. Great for long-term retirement savings.
Stocks – Buying shares of a company gives you ownership and the potential for high returns but comes with high risk due to market volatility. Suitable for long-term investors willing to handle fluctuations.
Bonds – Lending money to a company or government in exchange for interest payments. Generally safer than stocks but offers lower returns. Used for stability and income generation.
Mutual Funds – A professionally managed pool of investments, providing diversification. Less risky than individual stocks but still subject to market changes. Good for investors who prefer professional management.
Exchange-Traded Funds (ETFs) – Similar to mutual funds but traded like stocks. Offers diversification with lower fees and more flexibility. Ideal for cost-conscious investors seeking diversification.
Real Estate – Investing in property to generate rental income or long-term appreciation. Requires significant capital but provides tangible assets and potential steady income. Real Estate Investment Trusts (REITs) offer a hands-off alternative.
Certificates of Deposit (CDs) – Fixed-term deposits offering guaranteed returns with minimal risk. Best for those seeking safe, predictable returns without immediate access to funds.
Peer-to-Peer Lending (P2P) – Lending money to individuals or businesses via online platforms in exchange for interest. Offers higher returns but comes with significant risk due to borrower defaults.
Commodities – Investing in physical goods like gold, oil, or agricultural products. Prices fluctuate based on global demand and supply. Used for inflation protection and diversification but carries high volatility.

Extensive Summary

You’ve finally made some money and want to invest it, but don’t know how or where. Investing your money can be confusing and overwhelming, especially with so many options and terms that might be unfamiliar.

However, learning the basics can help you grow your wealth, save for retirement, and achieve your financial goals. One key is understanding the different types of investments and what they mean. Let’s break down the most common different options you have when investing, but in a way that’s easy to understand and helps you decide which steps to take next in preserving and growing your wealth.

1. Savings Account

What is it? A safe place to store your money, but where it only earns a very small amount of interest.
How it works: You deposit money into a bank account and receive interest for keeping it there. The interest rate is usually very low, so it’s not great for growing wealth over time, but it’s a good place for emergency funds or short-term goals.
Risk Level: Low. Your money is protected by the bank and insured up to $250,000 by the FDIC (Federal Deposit Insurance Corporation—a U.S. government agency that protects your deposits if the bank fails).
How easy to pull out money: Very Easy. You can access your money anytime without penalties.
Why people invest in it: Most people use savings accounts for storing emergency funds or saving for short-term goals like a vacation or a down payment on a car.
Where to learn more: Visit your local bank or credit union, or check out online banks for savings account options.

2. 401(k)

What is it? A retirement savings plan offered by employers.
How it works: You contribute a portion of your paycheck before taxes, and employers may match a percentage of your contributions. Those funds are invested and grow tax-deferred, meaning you don’t pay taxes on the money until you withdraw it in retirement.
Risk Level: Varies. Depends on how the money is invested, which you can decide with your 401(k) provider.
How easy to pull out money: Hard. Penalties and taxes apply for early withdrawal before age 59 ½, though loans or hardship withdrawals (early withdrawals allowed under specific circumstances like medical expenses or avoiding eviction) may be possible.
Why people invest in it: People invest in 401(k) plans because they offer tax advantages and, in many cases, employer matching, which helps grow your retirement savings.
Where to learn more: Contact your HR department or visit retirement plan providers like Vanguard, Fidelity, or T. Rowe Price.

3. Individual Retirement Account (IRA) / Roth IRA

What is it? A retirement account that anyone can open without needing an employer. Unlike a 401(k), which is offered through your workplace, you can set up an IRA or Roth IRA (a type of IRA where you pay taxes upfront but don’t owe taxes when you withdraw in retirement) on your own.
How it works: In a traditional IRA, contributions are tax-deferred (you don’t pay taxes on the money until you withdraw it in retirement). In a Roth IRA (named after Senator William Roth, who helped establish it), contributions are taxed upfront, but withdrawals are tax-free in retirement, meaning you don’t owe taxes on the money you take out in the future.
Risk Level: Varies. Depends on how the money is invested, which you can decide with your IRA provider.
How easy to pull out money: Hard. Penalties and taxes apply for early withdrawals from a traditional IRA. Roth IRAs allow you to withdraw contributions without penalty, but there are other restrictions on withdrawing such as having to had been open for over 5 years and age requirements.
Why people invest in it: Many choose IRAs for retirement savings because of their tax advantages and the flexibility to choose your own investments.
Where to learn more: Visit online brokers like Charles Schwab, Fidelity, or consult a financial advisor.

4. Stocks

What is it? Owning a small part of a company.
How it works: You buy shares (pieces of ownership) of a company. If the company does well, the value of your stock increases, allowing you to sell at a profit. However, if the company struggles, the value of your stock can decrease, meaning you could lose money. You can purchase stocks through online brokerage platforms like Robinhood, E*TRADE, or larger firms like Fidelity and Charles Schwab.
Risk Level: High. Stock prices can be volatile and unpredictable, meaning their value can change quickly.
How easy to pull out money: Easy. Stocks can be sold at any time, but you might sell at a loss if the market is down.
Why people invest in it: People invest in stocks for the potential of higher returns over the long term. Stocks typically offer higher returns than other types of investments, but they also come with higher risk.
Where to learn more: Check out stock trading platforms like Robinhood, E*TRADE, or speak with a financial advisor.

5. Bonds

What is it? A loan you give to a company or government.
How it works: When you buy a bond, you’re essentially lending money to the issuer (such as a company or the government). In return, they agree to pay you interest at regular intervals and return your principal (the amount you loaned) when the bond reaches its maturity date (the end of the loan period). You can buy bonds through platforms like TreasuryDirect for government bonds, or from financial institutions such as Vanguard, Fidelity, and Charles Schwab for corporate bonds.
Risk Level: Low to Moderate. Generally safer than stocks, but there’s still some risk, particularly with corporate bonds.
How easy to pull out money: Moderate. You can sell bonds before maturity, but if interest rates have risen, meaning newer bonds are offering better returns, your older bond becomes less attractive to buyers. As a result, you might have to sell your bond for less than what you originally paid for it.
Why people invest in it: Bonds are often used to balance and diversify a portfolio, providing a stable, reliable income, especially for those nearing or in retirement who want lower risk.
Where to learn more: Visit government bond websites like www.treasurydirect.gov for U.S. bonds, or explore corporate bond options through platforms like Vanguard or Fidelity.

6. Mutual Funds

What is it? A pool of money from many investors used to buy a diversified portfolio (a mix of different investments) of stocks, bonds, or other assets.
How it works: A professional manager takes the pooled money and invests it in a variety of assets, such as stocks and bonds. This helps diversify (spread out) the risk, as your money is invested in multiple companies or bonds rather than just one. Mutual funds can be purchased through major financial institutions like Vanguard, Fidelity, and Charles Schwab.
Risk Level: Moderate. Less risky than individual stocks, but still subject to market fluctuations.
How easy to pull out money: Moderate. You can sell mutual fund shares, but there may be fees, and trades are executed at the end of the trading day, not immediately like stocks.
Why people invest in it: Mutual funds are popular for people who want diversification without having to manage their own portfolio. They’re managed by professionals, which can be appealing for those who don’t have the time or expertise to actively manage their investments.
Where to learn more: Mutual funds are offered by most major financial institutions like Vanguard, Fidelity, and Charles Schwab.

7. Exchange-Traded Funds (ETFs)

What is it? A collection of stocks, bonds, or other assets that is traded on a stock exchange, like an individual stock.
How it works: An ETF holds a collection of investments, such as stocks or bonds, similar to a mutual fund, but it can be bought and sold throughout the day on the stock market, just like a stock. ETFs usually have lower fees than mutual funds and offer diversification (spreading your investments across different companies or assets). You can purchase ETFs through platforms like Vanguard, Fidelity, Robinhood, and Charles Schwab.
Risk Level: Moderate. ETFs are less risky than individual stocks because they hold a diversified mix of assets, but they still follow the market, meaning prices can fluctuate.
How easy to pull out money: Easy. ETFs can be bought or sold anytime the stock market is open, giving you flexibility similar to trading individual stocks.
Why people invest in it: ETFs are popular because they offer diversification, low fees, and the ability to trade like a stock. They are ideal for people who want the flexibility of trading but also the safety of spreading out their investments across multiple assets.
Where to learn more: You can explore ETFs on platforms like Vanguard, Fidelity, Robinhood, and Charles Schwab.

8. Real Estate

What is it? Investing in property, such as houses, apartments, or commercial buildings, with the goal of earning rental income or selling it for a profit.
How it works: You can invest in real estate directly by purchasing property and making money by either renting it out to tenants or selling it for more than you originally paid after it appreciates (increases in value). Another option is to invest in REITs (Real Estate Investment Trusts), which are companies that own, operate, or finance income-producing real estate. REITs allow you to invest in real estate without directly owning property, and they are traded on stock exchanges like stocks. You can purchase REITs through platforms like Vanguard, Robinhood, Fidelity, or any brokerage that offers stock trading.
Risk Level: Moderate to High. The real estate market can fluctuate, and property values can rise or fall based on market conditions.
How easy to pull out money: Hard. Selling physical property can take time, and it may not sell for a profit, depending on the market. Investing in REITs, however, is easier since they are traded like stocks, allowing you to buy and sell more quickly.
Why people invest in it: People invest in real estate for long-term appreciation and to generate rental income. It's something you can physically own and can provide steady income, but it requires significant upfront capital and ongoing management. REITs offer a way to invest in real estate without the hassle of managing properties.
Where to learn more: You can invest directly in real estate by purchasing property or explore REITs through stock market platforms like Vanguard, Robinhood, Fidelity, or consult with a real estate agent.

9. Certificates of Deposit (CDs)

What is it? A type of savings product that pays you a fixed interest rate in exchange for agreeing to leave your money deposited for a set period of time.
How it works: You deposit money into a CD account for a specific term (ranging from a few months to several years), and the bank pays you a guaranteed interest rate for that time. You cannot withdraw the money until the term ends (known as maturity) without paying a penalty. CDs typically offer higher interest rates than regular savings accounts, but the money is locked up for the agreed-upon term.
Risk Level: Low. Your money is insured by the FDIC up to $250,000, meaning it’s safe even if the bank fails.
How easy to pull out money: Hard. You cannot access your money until the CD term ends without facing penalties for early withdrawal.
Why people invest in it: People invest in CDs when they want a guaranteed return on their money with little risk. CDs are ideal for people who don’t need immediate access to their money and want a stable, safe way to earn interest.
Where to learn more: You can open CDs through your local bank, credit union, or online banks like Ally, Capital One, or Discover.

10. Peer-to-Peer Lending (P2P)

What is it? Lending money directly to individuals or small businesses through online platforms, bypassing traditional banks.
How it works: Through platforms like LendingClub or Prosper, you can lend money to borrowers who seek loans for personal or business reasons. In return, you earn interest on the amount loaned. However, there is a risk that the borrower may not repay the loan, leading to a loss of your investment. P2P platforms usually assess the risk level of each borrower and provide details to help lenders make informed decisions.
Risk Level: High. There’s a significant risk of borrowers defaulting on their loans, meaning they may not repay you.
How easy to pull out money: Hard. Once you lend the money, it’s tied up until the borrower repays it, and there’s no guarantee of early repayment.
Why people invest in it: People invest in P2P lending for the potential of higher returns compared to traditional savings or bonds. However, it comes with more risk, as the chances of default can be higher.
Where to learn more: Platforms like LendingClub, Prosper, and Funding Circle are popular places to get started with peer-to-peer lending.

11. Commodities

What is it? Physical goods like gold, oil, or agricultural products (such as wheat or corn) that you can invest in.
How it works: You can invest in commodities by buying the actual goods themselves or ETFs (Exchange-Traded Funds) that track commodity prices. The value of commodities can change based on supply and demand. For example, if there’s a shortage of oil, the price of oil might go up.
Risk Level: High. Commodity prices can be very unpredictable because they depend on factors like weather, political events, or global supply.
How easy to pull out money: Moderate. If you own a commodity-based ETF, you can sell it like a stock. However, if you are holding physical goods, it can be harder and more complex to sell.
Why people invest in it: People invest in commodities to protect against inflation (when prices rise over time) or as a way to diversify their investments. Some investors also see commodities as a way to profit when markets are unstable or uncertain.
Where to learn more: You can explore commodity ETFs or futures on investment platforms like Vanguard, Fidelity, or through brokers that offer commodities trading.

INVESTING YOUR MONEY

CORE FACTS

Extensive Summary

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