What Is the Best Way to Invest Money to Make Money?

The best way to invest money to make money is to diversify your investments among a variety of securities at different risk levels. Some of your investment money should be in aggressive stocks, so your money grows over the long run. Another part of your investment money should be in conservative securities, to provide stability in the event of a market downturn. The percentages of each depend on your time frame and risk tolerance.

History

The best way to invest money to make money when the economy is good is to invest in an index fund. These are mutual funds that reflect the stock market as a whole. Instead of focusing on one or two stocks that could disappoint you, index funds invest in hundreds. This insulates you from bad performance of a few companies while taking advantage of bull markets when there is rapid growth. Index funds historically outperform a majority of actively managed funds. Since they are not actively managed, they have much lower fees. This contributes to your gains.

Prevention/Solution

Unfortunately, the stock market does not always go up. To prevent yourself from going broke in an economic downturn, focus on interest and dividends. In bear markets, stocks tend to decrease in value. However, many also pay dividends. These are portions of the profits that are shared with investors. Concentrating on companies that pay high dividends allows you to wait out the market downturn while still getting paid. Bonds, certificates of deposit and money-market accounts pay interest. They are good places to keep money for a few months or years while you are waiting for market turbulence to settle down. It is important to remember that dividends and interest are considered income, and will be taxed at the end of the year.

Considerations

In good economic times and bad, parents must consider saving for their children's college education. The best way to invest money to make money for college is with a 529 plan. They are sponsored by the states and offer tax breaks for college savings. All the growth is tax-free, as long as it is spent on educational expenses. This can add up to thousands of extra dollars when the kids go to college. 529 money can be invested any way parents want. It can be aggressive with stocks when the children are young, but should shift to more conservative investments like bonds and CDs as they become teenagers.

Time Frame

The investment goal with the longest time frame is retirement. The best way to invest money to make money for retirement is with an employer-sponsored 401k plan. You tell your employers how much to take out of every paycheck and they put it in a retirement savings plan for you. Since this happens before your money is taxed, more cash goes into your account than if you had invested another way. Some employers also contribute free money to your 401k. This is a bonus on top of a bonus. Invest the funds anyway you want. A date-targeted fund automatically redistributes holdings from aggressive to conservative as retirement age approaches.

Benefits

Some employers do not offer 401k plans. In this case, the best way to invest money to make money for retirement is with an Individual Retirement Account. There are two types of IRAs, and each provides different kinds of benefits. Traditional IRAs offer a tax deduction for qualified contributions and defers taxes until you retire. Roth IRAs offer no tax breaks on contributions, but are tax-free when distributions are taken in retirement. Both save you money on taxes and increase your investment. As with a 401k, you decide how to invest IRA money. Choose a date-targeted fund that automatically redistributes assets to more conservative investments as you approach retirement age.