Where your cash goes depends on your timeline and how much risk you can handle

Investing cash means moving money from a savings account or checking account into something that has the potential to grow — stocks, bonds, mutual funds, exchange-traded funds (ETFs), or real estate. The first decision is not which investment to pick, but how long you can leave the money untouched. If you need it within a year, most of it should stay in cash. If you will not touch it for five years or longer, you have room to take on more risk in exchange for higher potential returns.

The second decision is how much of a loss you could tolerate without losing sleep. A stock portfolio can drop 20 or 30 percent in a bad year. A bond fund typically moves less. Cash in a savings account moves almost not at all. There is no right answer — only the answer that fits your situation and your temperament.

Key Takeaways

  • Money you will need within one year should stay in a high-yield savings account or money market fund, not in stocks or bonds.
  • Opening a brokerage account at a firm like Fidelity, Vanguard, or Charles Schwab takes 10 to 15 minutes online and requires a Social Security number and bank account to link.
  • A diversified portfolio for a long-term investor typically holds a mix of stock index funds and bond index funds rather than individual stocks.
  • Your first investment does not have to be large — most brokerages accept deposits of any size, and many target-date funds or robo-advisors will build a portfolio automatically based on your age and risk tolerance.

Decide how long your money can stay invested

Your time horizon — how many years until you need the cash — is the single biggest factor in what you should buy. Money earmarked for a down payment in two years should not go into stocks, because a market downturn could force you to sell at a loss right when you need the cash. Money you will not touch for 20 years can weather short-term losses because you have time to recover.

A common rule of thumb is to keep one year of expenses in cash or cash equivalents (savings accounts, money market funds, short-term CDs). Everything beyond that can be invested according to your risk tolerance and timeline. If you have an emergency fund of three to six months of expenses already set aside, you are in a position to invest the rest.

Open a brokerage account

To buy stocks, bonds, mutual funds, or ETFs, you need a brokerage account — a holding place for your investments and cash. Major brokerages include Fidelity, Vanguard, Charles Schwab, E*TRADE, and TD Ameritrade. Each one offers online account opening that takes 10 to 15 minutes. You will need your Social Security number, a government-issued ID, and a bank account to link for deposits and withdrawals.

There is no monthly fee at most brokerages, and no minimum deposit required to open an account. Some firms have minimum amounts to open certain types of accounts (for example, a managed account might require $25,000), but a standard brokerage account is free to open with any amount. Once your account is open and linked to your bank, you can transfer money in and begin investing.

Understand the difference between stocks, bonds, and funds

A stock is a small piece of ownership in a company. When you buy Apple stock, you own a fraction of Apple. Stock prices move up and down based on how the market values the company. Over long periods, stocks have historically returned about 10 percent per year on average, but that average includes years with gains of 30 percent and years with losses of 20 percent or more.

A bond is a loan you make to a government or company. When you buy a bond, you are owed a fixed interest payment and your principal back at a set date. Bonds are less volatile than stocks — they do not swing up and down as much — but they also typically return less over time. A bond fund holds many bonds and pays you the interest they generate.

A mutual fund or exchange-traded fund (ETF) is a basket of stocks or bonds managed by a professional or built to track an index. An index fund tracks a market index like the S&P 500 (500 large U.S. companies) or the total U.S. stock market. Index funds have low fees because they do not require a manager to pick stocks — they just hold what the index holds. For most investors starting out, index funds are simpler and cheaper than picking individual stocks.

Choose between active management and index investing

An actively managed fund has a manager who picks which stocks or bonds to buy, trying to beat the market. These funds charge higher fees — often 0.5 to 1.5 percent of your money per year — to pay for that management. Research shows that most active managers do not beat the market after fees, especially over long periods.

An index fund simply holds all the stocks or bonds in a market index and charges a small fee to do so — often 0.03 to 0.20 percent per year. Because the fund does not try to beat the market, it just matches it, and the low fees mean more of your money stays invested and growing. For a new investor with a long time horizon, starting with a simple portfolio of two or three index funds is a proven approach.

Build a simple starter portfolio

A basic diversified portfolio for someone with a 10-year or longer time horizon might look like this: 70 percent in a total U.S. stock market index fund, 20 percent in an international stock index fund, and 10 percent in a bond index fund. The exact percentages depend on your age, risk tolerance, and goals, but this mix gives you exposure to many companies across the U.S. and the world, plus some stability from bonds.

If you do not want to build a portfolio yourself, a target-date fund does it for you. You pick the fund that matches the year you plan to retire or need the money (for example, a 2050 target-date fund if you plan to retire around 2050). The fund automatically holds a mix of stocks and bonds that shifts to become more conservative as that date approaches. Vanguard, Fidelity, and other brokerages all offer target-date funds with low fees.

Another option is a robo-advisor — an automated service that builds and rebalances a portfolio for you based on your age and risk tolerance. Betterment, Wealthfront, and Vanguard Personal Advisor Services all offer this. Robo-advisors typically charge 0.25 to 0.50 percent per year and are useful if you want a hands-off approach.

Make your first deposit and set up regular investing

Once your brokerage account is open and linked to your bank, transfer money in. You can invest it all at once, or you can set up automatic monthly deposits — a practice called dollar-cost averaging. Investing the same amount every month, regardless of whether the market is up or down, removes the pressure of trying to time the market and builds the habit of regular saving.

After your money is in the account, place an order to buy the funds you have chosen. Most brokerages let you set up automatic purchases — for example, buying $500 of a total stock market index fund every month. There are no transaction fees at most brokerages, so you can buy or sell without worrying about commissions eating into your returns.

Frequently Asked Questions

How much money do I need to start investing?

Most brokerages have no minimum deposit to open an account. You can start with $100, $500, or any amount. Some target-date funds or mutual funds have minimums of $1,000 or $3,000, but many brokerages waive these minimums if you set up automatic monthly deposits.

Should I invest all my cash at once or spread it out over time?

Both approaches work over long periods. Investing a lump sum immediately means your money starts growing right away. Spreading deposits over several months (dollar-cost averaging) reduces the risk of investing everything right before a market drop. For most people, the difference is small compared to the benefit of investing regularly.

What is the difference between a brokerage account and a retirement account?

A regular brokerage account has no contribution limits and no tax advantages — you pay taxes on gains and dividends each year. A retirement account like a 401(k) or IRA has contribution limits but offers tax breaks: you may deduct contributions, or the account grows tax-free until retirement. For cash you do not plan to retire with, a regular brokerage account is the right choice.

Can I lose all my money investing in index funds?

Extremely unlikely. An index fund holds hundreds or thousands of companies. For all of them to go to zero, the entire economy would have to collapse. Individual stocks can go to zero; diversified index funds almost never do. The bigger risk is a temporary loss — your fund might drop 30 percent in a bad year, but historically it has always recovered over time.

How often should I check my investments?

Once or twice a year is enough. Checking daily or weekly often leads to panic selling during downturns. If you have set up automatic deposits and your portfolio is diversified, you can largely ignore short-term market swings and focus on whether your life circumstances have changed.