Investing isn’t just for stock market gurus and wealthy people. It’s an important part of your financial journey and essential for building long-term wealth.

Fortunately, you don’t need lots of money to start investing. But you will need to understand the basics to develop a plan and stick to it over time.

How to invest your money

Everyone’s financial situation is different. How you invest will depend on your unique circumstances and the financial goals you’re striving to achieve. Before you dive in, make sure you have a good picture of your financial life and understand your income level, what you own and what you owe, as well as what your expenses look like.

Once you’ve got those basics down, you’re ready to start the investing process. Here are some tips for how to invest your money right now.

1. Identify your goals

Before you start investing, you’ll want to spend some time thinking about both your short- and long-term investment goals. The time frame for the goals will help determine which investments are best suited for you.

Goals can vary from one person to the next. What’s a short-term goal for some, might be a long-term goal for others. Generally speaking, short-term goals are for things you expect to reach in the next three years or less, while long-term goals would probably be for things that are at least three years away, and likely longer.

You’ll want to be more conservative when investing for short-term goals than you are with long-term goals because you don’t have as much time before you need the money. On the other hand, long-term goals allow for greater risk-taking because you have more time to make up for any losses.

2. Choose your investment strategy

There are a couple different layers of choosing your investment approach and both revolve around how involved you’d like to be in managing your investments. 

First, you’ll need to decide whether to go with a financial advisor (traditional or robo) or take care of things yourself. If you decide to manage your own portfolio, you’ll also need to decide whether to choose individual investments (active) or select broad funds that track indexes (passive).

Let’s take a closer look at those options:

  • Traditional financial advisor: A traditional advisor will help guide you through the investing process, helping you to set goals, determine your risk tolerance and identify an investment plan. You’ll probably check in a few times each year to make sure you’re on track, but otherwise you won’t have to worry about much. The downside is that traditional advisor fees can be around 1 percent of your total assets, which eats into your returns over time. Some of the best financial advisors charge less than that, however.
  • Robo-advisor: A robo-advisor offers another solution and by automating much of the process, usually keeps the fees well below that of traditional advisors. You’ll answer a series of questions to identify goals and risk tolerance, but after that your portfolio will be built using the robo-advisor’s algorithms. You may also get features like automatic rebalancing and tax-loss harvesting.
  • Active: If you choose to go your own route, you’ll need to decide whether you’d like to try to identify individual investments that will outperform the rest of the market, or take a passive approach and match the overall market returns. While an active approach is enticing, it’s difficult to outperform the market over time. You need to spend a lot of time following stocks and other types of investments, as well as become highly educated in the markets.
  • Passive: A passive approach will make sense for most people and it involves investing in funds that track broad market indexes such as the S&P 500. This approach helps to minimize fees, ensuring that more of the market’s returns go to you instead of fund managers. You also won’t have to worry about tracking your portfolio’s daily moves. Index funds are as close to a “set-it-and-forget-it” approach as there is in investing.

3. Pick an investment account 

In order to invest, you’ll need an investment account to make transactions. There are several different types of investment accounts, but most people will be covered by just a few. Some have tax advantages that come with certain rules, while taxable accounts are more straightforward. Most of these accounts can be opened for free with online brokers such as Schwab, Fidelity or E-Trade.

Here are some of the most common investing accounts.

  • 401(k): Many people have 401(k) retirement accounts through their jobs. These accounts allow you to make contributions straight from your paycheck and the money is invested regularly in different funds. Your employer might even offer a matching contribution, which you should maximize before investing in other accounts.
  • Traditional IRA: An IRA is another type of retirement account, but it comes with more investment options than a 401(k) plan. In traditional IRAs, contributions are tax-deductible but you’ll pay taxes on distributions during retirement. You’ll pay a penalty if you withdraw the money before retirement age.
  • Roth IRA: Roth IRAs are similar to traditional IRAs, but contributions are made with after-tax dollars, which means you won’t get a tax deduction now, but you won’t pay taxes on distributions during retirement. Financial experts say that a Roth IRA is one of the best investment accounts to have because it creates a tax-free pool of money for you to use during retirement.
  • Brokerage account (taxable): You can contribute as much as you’d like to a brokerage account and can access the money whenever you want. But you will pay taxes on any capital gains you generate. Brokerage accounts are good for long-term goals that may not be as far away as retirement.
  • Education savings account: These accounts are designed to help you save for education expenses. A 529 plan is a popular account used to save for college and allows your money to grow tax-deferred and be withdrawn tax-free as long as it’s used for qualified expenses. Coverdell ESAs also provide tax benefits and can be used for college, elementary or secondary education expenses.

4. Select investments that match your goals and risk tolerance

Once you’ve opened an account with an online broker or robo-advisor, it’s time to start investing. You’ll want to choose investments that align with your chosen investment goals, making sure you understand the risk profile of each investment.

Here are some of the most popular investments to choose from:

  • Stocks: Stocks represent an ownership stake in a publicly traded company and you make money over time based on the success of that company. Stock prices can be quite volatile, so they’re best for long-term goals like retirement. They have great potential for growth, but are quite risky over the short-term.
  • Mutual funds and ETFs: These funds allow you to invest in a basket of securities such as stocks or bonds. Spreading the risk across a greater number of investments lowers the risk of the portfolio and offers you diversification with the purchase of a single fund. Mutual funds and ETFs have a lot in common, but ETFs trade throughout the day like stocks, while mutual funds only trade at the end of the day based on the net asset value, or NAV.
  • Bonds: Bonds are debt securities that allow governments and companies to borrow money to finance their operations or certain projects. Investors receive interest payments on their bonds and receive their principal at the bond’s maturity date. Bonds are considered less risky than stocks because they tend to be less volatile and are higher in the capital structure, which means they get paid before stockholders.
  • Real estate: Investing in real estate can provide diversification benefits to your portfolio by adding an asset outside of stocks and bonds. While you could purchase a home or rental property, you can also invest in real estate funds or real estate investment trusts (REITs).

As you’re building your portfolio, you’ll want to keep diversification in mind so that you don’t get too much exposure to a single investment. When you’re young and your goals are far off, your portfolio will likely be skewed towards growth-oriented investments such as stocks and funds that invest in stocks. As you get closer to your goals, the portfolio’s allocation should shift toward less risky assets such as fixed-income securities. Consider using target-date funds, which shift the fund’s allocation automatically as you get closer to the fund’s goal date.

Bottom line

Investing can be confusing if you don’t know where to start. Everyone’s circumstances are different, which means what’s right for you may not be right for someone else. Take the time to evaluate your goals and choose what works best for you. Investing is the best way to build long-term wealth and achieve your financial goals.

Note: Dori Zinn contributed to a previous version of this story.