How to Invest Money: A Beginner's Guide to Growing Your Wealth the Smart Way

Figuring out how to invest money so it will grow your wealth for you can be a real challenge.

And I'm sure you've realized there is no shortage of information available online. Unfortunately, there are also a lot of contradictory opinions. It all comes down to what's right for you.

I put together this post to give you everything you need to know in one place. So, if you're a beginner who wants to start investing money in order to reach your financial goals, this is for you.

Here’s what you’ll learn in this beginner’s guide to smart investing:

• Ask yourself the two key questions every new investor faces

• Decide what kind of help or guidance fits your investing style

• Figure out how much money to invest based on your personal financial situation and goals

• Understand your risk tolerance so you can invest with confidence

• Get a closer look at the main types of investments: stocks, bonds, mutual funds, ETFs, commodities, and retirement accounts

• Build a diversified portfolio that matches your goals and risk level

• Learn the Rule #1 approach to finding, evaluating, and investing in wonderful companies

• Stay focused on long-term wealth and keep learning as you go

Let’s dive deeper into each of these strategies and set you up for financial success.

Investing Money for Beginners

There are two important questions to ask yourself when you're just getting started with investing.

• How much help do you want?

• How much money do you have to invest?

This will help you clarify what that amount is for you, no matter your budget.

Step 1: Determine How Much Help You Want

When you invest, you can choose to receive help in a number of ways. Many people don't want to take the time to learn how to invest on their own, so they entrust their money to a financial advisor or a mutual fund manager.

The downside to both of these options is that they will charge you a fee based on a percentage of your overall investment to manage those funds.

For a slightly lower fee, you could opt to use a robo-advisor. A robo-advisor manages your money using a computer algorithm. This type of management has gained popularity because it is less expensive than paying a financial advisor, but still allows you to be hands-off.

However, the robotic algorithm chooses investments based on the Modern Portfolio Theory (MPT), which won't allow your investments to produce great returns or even beat the market in the long-term. In 2025, robo-advisors like Betterment and Wealthfront continue to grow in popularity, with assets under management surpassing $1.5 trillion. However, while they offer low fees and convenience, they don't allow you to make the most of undervalued opportunities. You'll miss the benefits of a DIY approach using Rule #1 principles.

The last option may take longer, but it also produces the best results. You can learn this stuff on your own and, more importantly, do it yourself. This is the option I recommend.

It can be tempting for beginner investors to want to reach out to a “professional” because there are a lot of investing myths that purposely discourage people from thinking they can do it themselves.

But I want to encourage you: you CAN absolutely learn to invest on your own.

I'll prepare you in this post with a solid foundation to move forward and make smart investing decisions—without the help of a financial advisor, robo or not.

Step 2: Figure Out How Much You Want to Invest

The next step is to figure out how much money you want to invest. The dollar amount you invest is up to you, and it's different for everyone.

To give you a good gauge of how much you should invest, though, I've answered a few common questions about saving vs. investing, what portion of your money you should invest, how often, and if you can get started with just a little.

How Much of My Money Should Be Invested?

It doesn't matter how much or how little money you have. It's always a good idea to invest as much as you responsibly can. If you start investing in your 20s, you can invest as little as a few thousand dollars a year. If you do, you will be well on your way to preparing for retirement. It may sound like a lot, but as an example: $3,000 over the course of the year is just $250 per month.

A good practice is to set aside a portion of every paycheck to invest, after removing what you need to live, such as housing expenses and food. When you establish this habit early, you will have more money to invest both now and in the future, and you will be ready to invest when the time is right.

How Much Should I Invest Per Month?

While some people preach that making consistent monthly investments is the best way to invest in stocks and “time the market”, this couldn't be farther from the truth. If you do this, you will be paying way more for a company's stock than you should, and doing so more often than not.

Be patient.

If you invest in the stock market, the right time to invest is not “anytime” but rather when the companies you want to invest in reach a price that allows you to buy them at an incredible discount. And let me tell you, this will not happen every month. So, hold onto your cash and wait until the time is right.

Is It Better To Save Money or Invest It?

Now, while you want to be patient for the right price, I want to make one thing clear. Saving money is a good practice, but leaving your money in a savings account long-term will only hurt your finances. Your money is actually losing value thanks to inflation and mediocre interest rates that can't keep up with it.

When you invest your savings, though, and do so wisely, you can grow your wealth significantly over time.

So, instead of dedicating money to “saving” with every paycheck, dedicate it to “investing”. It is, of course, a good idea to have a small portion of money set aside in an easily accessible account for emergencies.

Once you have an amount in your emergency account that you feel comfortable with, put everything else into investing.

Can You Invest in Stocks with Little Money?

Yes! You absolutely can invest in stocks with little money. In fact, I recommend beginners start small and go from there. When you invest small to start, you will get good practice, learn your true risk tolerance, and get more comfortable with your investment strategy. Plus, even small sums of money can be turned into fortunes over time if you choose the right investments, thanks to the power of compound interest.

If you only have $500 to invest and want to know how to use it best, check out these small investment ideas.

What's the key to making money by investing money?

It's not about how much money you have to invest, how high your income is, or how much help you get along the way. The key to making money with investing is investing for the long term.

Short-Term Investments vs. Long-Term Investments

Short-term investors make money by trading in and out of stocks over a short period of time rather than buying and holding them for several years. While you certainly can make money doing this, the problem is that no matter how skilled at trading you become, there will always be a big element of luck involved. For beginner investors, especially, short-term trading comes down almost entirely to luck, and you can easily lose as much or more than you profit.

Although some people experience success from short-term trades, this isn't the type of investing that benefits most people, and this isn't the type of investing I teach. Investing shouldn't be used as a get-rich-quick scheme or a gambling game, but rather as a way to consistently grow the wealth you already have over the long term. With long-term investing, you are able to minimize your risk and negate the sometimes-crushing effects of short-term volatility and price drops. This involves letting your money compound in the stock market over 10 and 20 years.

I get it. Growing your wealth over a few decades doesn't sound all that glamorous, but trust me, long-term investing, the Rule #1 way, is how people retire rich.

Before you move forward and decide exactly where to put your money, there’s one more important factor to consider: your personal risk tolerance. Let’s break down what that means and why it matters for your investment strategy.

What is Risk Tolerance?

Risk tolerance is simply your ability to handle uncertainty and potential loss without losing sleep at night. It’s about knowing how much of a roller coaster you can stomach when it comes to your investments.

Some people are comfortable seeing their portfolio value swing up and down. Others prefer a smoother ride. Both approaches are completely normal.

Why It Matters for Investment Decisions

Your risk tolerance plays a huge role in every investment decision you make. It affects your asset allocation, how much you put into stocks, bonds, or other securities. It also guides whether you want a diversified portfolio or if you’d rather focus on a few companies you know well.

If you don’t match your investments to your comfort level, you might end up making choices that put your financial security at risk. For example, you might sell during a downturn out of fear, or miss out on growth because you played it too safe.

Example Scenarios: Age, Job Security, and Family Situation

Let me give you a couple of real-life scenarios. If you’re in your 20s, have a stable job, and no dependents, you have your greatest asset on your side: time. You can afford to take more risks and create a portfolio with more stocks or growth-focused funds.

On the other hand, there are others approaching retirement age, supporting a family, and protecting their emergency fund. If you're a part of these groups, you may want to contribute more to stable investments like bonds or high-yield savings accounts. The right approach depends on your specific situation and your financial goals.

No matter where you are in life, the key is to be honest with yourself. Assess your goals, your age, your financial situation, and how you react when things don’t go as planned. That’s how you develop a smart investing strategy that fits your life and builds long-term financial security.

Step 3: Determine Where to Invest Your Money

Figure out the level of help you have decided to take or not to take, and the amount of money you want to invest. Now, it's time to decide where to invest your money for the long term.

When you start looking at your options, you’ll see there are quite a few different types of investments out there. Each one serves a different purpose in your overall asset allocation. All these can help you build a diversified portfolio that matches your specific situation and financial goals.

Let’s take a closer look at these investment choices so you can make the best decision for your future.

1. The Stock Market

The most common and arguably most beneficial place for an investor to put their money is into the stock market.

When you buy a stock, you will then own a small portion of the company you bought into. When the company profits, they may pay you a portion of those profits in dividends based on how many shares of stock you own.

When the value of the company grows over time, so does the price of the shares you own, meaning that you can sell them at a later date for a profit.

Index Investing

Index investing is another way of investing in the stock market, but instead of buying a stock in an individual company, you purchase stock in a stock market index, which tracks a number of the largest companies in the stock market.

Over the past 90 years, the S&P 500 – which is an index of the 500 biggest companies in the US and a pretty good reflection of the overall stock market – has delivered an average annual return of 9.8%.

This means that if all you did was take your money and purchase stock in the S&P 500 with no time spent researching and choosing individual stocks, you could still expect to make 3-4 times more than if you invested in bonds and upwards of 10 times more what you would earn putting your money in a savings account (more on these type of investments later).

According to the 2023 Morningstar U.S. Market Index Return Report, the average return for the S&P 500 over the last 20 years (2003–2023) is approximately 9.8% annually, consistent with historical trends. However, this includes significant drawdowns and periods of volatility. That's why Rule #1 focuses on buying companies with a margin of safety even more important.

401K

Investing in a 401(k) is another way to invest in the stock market too. It's simply a vehicle to invest in the stock market provided by your employer for retirement. The real value of a 401(k), though, comes if your employer is willing to match a portion of your contributions.

A “match” is essentially free money that doubles the money you put into your 401(k) account and essentially doubles your investment regardless of what the market does. It is certainly something you should take advantage of if you have the opportunity available.

Your employer typically only matches up to a certain amount. So, once you've reached the maximum amount of money that your employer is willing to match for the year, invest the rest of the money you want to on your own so you have more control over where you invest it.

There are other investment options, beyond the stock market, too…

2. Investment Bonds

Investment bonds are one of the lesser-understood types of investments. Here's how they work:

When you purchase a bond, you are essentially loaning money to either a company or the government (for US investors, this is typically the US government, though you can buy foreign bonds as well). The government or company selling you the bond will then pay you interest on the “loan” over the duration of the bond's life cycle.

Bonds are typically considered ‘less risky' than stocks. However, their potential for returns is much lower as well.

3. Mutual Funds

Rather than buying a single stock, mutual funds, similar to index funds, enable you to buy a basket of stocks in one purchase. Mutual funds are a way to pool your money with thousands of other investors.

A professional manager takes that money and invests in a diversified mix of assets. This can include stocks, bonds, and sometimes other securities. Many investors choose mutual funds because they want diversification without having to research every company themselves.

One of the basics to remember with mutual funds is that you pay a management fee. This fee can eat into your returns, especially over time. Most mutual fund managers do not beat the market, and that is something to keep in mind as you explore your options.

Always take a closer look at the fund’s fees and performance history before you invest. Mutual funds can be a benefit for those who want to build wealth steadily and do not have the time to manage every detail.

4. ETFs (Exchange Traded Funds)

Exchange traded funds, or ETFs, are similar to mutual funds. They let you invest in a basket of assets, but you buy and sell them on the stock market, just like individual stocks. ETFs often track indexes or specific market sectors. They are known for low fees and instant diversification.

ETFs can help you create a diversified portfolio quickly and cost-effectively. They give you the flexibility to react to changing market conditions and are a smart investing tool for both beginners and experienced investors. Many investors use ETFs to gain exposure to different parts of the market without having to pick individual stocks.

5. Physical Commodities

Commodities include things like gold, silver, oil, and agricultural products. You actually own the physical asset, which can act as a safeguard during tough market conditions. They can help protect your portfolio from inflation and global events that might impact other assets.

Prices can swing quite a bit, so it is important to understand the risks before you invest. For most people, commodities are best used as a small part of a diversified investment plan.

6. IRAs and Employer-Sponsored Retirement Plans

Individual Retirement Accounts, or IRAs, give you tax advantages and access to a wide range of investment options. There are two main types. The first type is a Traditional IRA, where you pay taxes when you take the money out in retirement. The second is a Roth IRA, where you pay taxes up front, and your money grows tax-free.

If your employer offers a retirement plan like a 401(k), make sure you contribute enough to get the full matching contribution. That is free money and a real boost to your retirement funds. Once you receive the full match, you can look at IRAs or other accounts to continue building your retirement savings.

7. Savings Accounts

You are probably most familiar with savings accounts, but you shouldn't really think of these as a way to invest your money. Putting your money into a savings account and allowing it to collect interest is, by far, the least risky way but also probably the worst way to invest your money if you want to see a return on your investment. By that definition, putting all your money into a savings account is actually a bad investment.

In 2024, the average U.S. savings account interest rate hovered around 0.47%, while inflation reached as high as 3.4%, according to the U.S. Bureau of Labor Statistics. That means your cash could be losing value every year it sits in a traditional savings account.

As is usually the case, low risk means low returns. The risk when putting your money into a savings account is negligible, and typically, there are little to no returns. As I mentioned above, putting your money into a savings account is only hurting you, because you won't make enough from interest to even cover the cost of inflation.

While not ideal for long-term investing, high-yield savings accounts (offering around 4.5–5% as of early 2025) can be useful as a short-term cash holding while you wait for the right Rule #1 buying opportunity.

Still, savings accounts do play a positive role in investing. They allow you to stockpile a risk-free sum of cash that you can use to purchase other investments or use in emergencies. This means you don't have to touch your other investments.

What Are The Safest Investments for Beginners?

Many of the investment options I listed above are completely safe and foolproof investments for beginners. For example, you can put your money in U.S. Treasury bonds and be almost guaranteed to earn 2-3% annual returns on your investment

The problem is that 2-3% returns are not nearly enough for most people to reach their investing goals or retirement savings. Now, to me, that's not safe.

To actually build enough wealth to retire comfortably, you have to seek out higher returns. The good news is, there is a way to invest your money safely AND achieve high returns. It's called Rule #1 investing.

While there is always some investment risk, you can learn to reduce your investment risk and increase your returns if you follow this investing strategy.

What Investments Give the Best Return?

If the purpose of investing is to grow your wealth over time, you should prioritize the type of investment that gives you the best return, right?

Among the various types of investments, the stock market is the place to invest to get the best returns.

When you learn Rule #1 investing, you can achieve average annual returns upwards of 15%. Rule #1 Investing is a stock market investing strategy focused on buying wonderful companies on sale.

A wonderful company is one that will continue to grow as the years go by, surviving whatever challenges the market may throw at them along the way. If you are able to find these companies to invest in, you can certainly get the best returns on your investments.

You don't just have to invest in singular stocks, though. Putting some of your money into a stock market index fund is also a good practice.

If you are more risk-averse or only ready to dip your toe into the stock market at this point, that's OK too. But keep in mind: nothing will grow your money quite like investing in the stock market can.

What's the Best Way to Invest Money?

Clearly, the best way to ensure good, if not great, returns on your money is to learn to invest (on your own!) the Rule #1 way and put your money into wonderful companies in the stock market.

You may be wondering, “but, Phil, what about those other types of investments? Shouldn't I put some of my money in those too?” and I get why you're asking this.

There's a lot of talk in the financial community about “diversification”, which simply means investing your money in a variety of ways in order to provide a safety net should one investment go South.

The thing is, you don't need to diversify if you know how to invest and understand what you are investing in.

As Warren Buffett famously said,

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

Rule #1 investors don't diversify for the sake of safety. They concentrate on a few wonderful businesses they understand deeply and buy them at a discount.

By taking the time to research and learn about the companies you are investing in, you are providing your own safety net, because you won't invest in any company that doesn't meet the standards for a wonderful company, as we define it in Rule #1 Investing.

That is key.

Of the investment options available, investing in the stock market is the option that offers the most potential for reward. But you can't blindly put your money in stocks chosen at random and expect to achieve great returns.

In order to successfully invest in the stock market, you have to use a system and a strategy.

How To Invest Money in Stocks

The system and strategy I recommend is Rule #1 investing. This is how to invest in stocksthe right way.

Rule #1 Investing is a process for finding wonderful companies to invest in at a price that makes them attractive.

I've thrown around the phrase “wonderful company” quite a bit already, and if you're familiar with Rule #1 Investing you know what I'm talking about, but here's a quick refresher:

A wonderful company is one that has trustworthy management, a track record of growth, and a leg up on the competition. Most importantly for you, the investor: it's a company that you understand.

Here's a brief overview of the four characteristics that every company has to have in order to be considered “wonderful”:

Management

One important factor to consider when analyzing the investment potential of a company is its management.

Companies live and die by the people who are running them, and you need to make sure that any company you invest in is managed by executives who are honest, talented, and determined.

Before you invest in a company, take the time to thoroughly familiarize yourself with its management, and make sure that you trust them to grow the company going forward.

Meaning

If you are going to invest in a company, it needs to have some sort of personal meaning to you.

There are a couple of reasons why this is important. For one, you are more likely to understand companies that have meaning to you. In other words, you know what the company does, how it works, and how it makes money.

Understanding a company means that you will be better able to analyze the future of the company and make more accurate decisions when investing in it.

Investing in a company that has meaning to you and that you believe in also makes you more likely to research the company and stay on top of what is happening with it. In the end, that understanding is a big part of being a successful investor.

Moat

When a company has a moat, it means that it is difficult for competitors to come in and carve away a portion of that company's market share. The moat protects it from being outrun by competition.

A moat could be a proprietary product or software, an impenetrable brand, customer loyalty, or majority control over the market.

Margin of Safety

The Margin of Safety is a measure of how “on sale” a company's stock price is compared to the true value of the company.

You need to be able to determine the value of a company. From that value, you can then determine a “buy price”. The difference between the two is the margin of safety. The goal is to find wonderful companies for 50% off their actual value. This allows you to purchase a company when it is undervalued at a price that all but guarantees a great return on your investment.

By using our margin of safety calculator, you can determine whether a company's stock price is on sale relative to the true value of the company.

Stock Trading Courses for Beginners

Do you have a better grasp on how to invest your money?

A good investor never stops learning. Learning more about investing will give you the best possible chance at succeeding as an investor and reaching your goals.

If you'd like to learn more about how this strategy can help grow your wealth and shape your future, I invite you to join me for myFree Investing Webinar.

Our Investing Workshops are designed for beginner investors and will teach you important things you need to know about the stock market, how to choose quality companies, when to buy and when to sell, and much more.

They are designed to thoroughly walk you through the Rule #1 process of investing one step at a time, teaching you investment strategies and how to apply them in a much more efficient way than the bombardment of sometimes confusing and contradicting information you will be able to find online. Our coaches were once exactly where you are today. We have built a community of investors passionate about helping you achieve your investment goals.

Final Thoughts on How to Invest Money

Investing your money wisely doesn't have to be complicated, but it does require intention, education, and a long-term mindset. Whether you're starting with just a few hundred dollars or planning how to grow a larger portfolio, the most important thing is to begin with a strategy that aligns with your financial goals.

The Rule #1 Investing strategy gives you a clear and proven path:

✅ Find wonderful companies

✅ Wait for them to go on sale

✅ Invest with a margin of safety

✅ Let your money compound over time

Unlike short-term trading or relying on advisors and robo-investors, Rule #1 puts you in control—equipping you to make confident decisions that build wealth over time.

So if you're serious about learning how to invest money the smart way, start by educating yourself, thinking long term, and using a system that works.

Disclaimer

Investing involves risk. Past performance does not guarantee future results. This article is for informational purposes only and does not provide legal or tax advice. Please consult your tax advisor or registered broker-dealer for personalized guidance.