After paying your bills and covering all your living expenses, you should be left with disposable income that can earn you a decent return. Depending on your goals, you can stash this money in a savings account that offers a higher APY, or consider putting it into a high-yield savings account (HYSA), certificate of deposit, or money market account.
After saving for your needs, you may have some extra cash that can earn a return through investing. There are a lot of ways to invest your money, from traditional stocks and mutual funds to real estate and non-financial assets like cryptocurrency and non-fungible tokens (NFTs). Generally speaking, you want to steer the majority of your savings into investments that aren’t correlated to how the stock market performs. This can help diversify your portfolio and minimize risk.
When you invest your money, diversifying your portfolio helps protect it against market fluctuations. Diversifying your investments also reduces the risk that your investment will perform poorly when a single holding declines. For example, if you invested in one company that works in the energy industry, a fall in the price of oil would likely hurt all companies in that sector.
You can diversify your investments through mutual funds or exchange-traded funds that bundle stocks together, rather than betting on a single stock. You can also invest in government or corporate bonds and alternative investments, which aren’t tied to the performance of the stock market.
There are a number of ways to invest your money, but the best options for you depend on your financial goals and tolerance for risk. For example, if you want to maximize long-term returns, investing in stocks, mutual funds and IRAs may be your best bets.
But you should always consider how much time you have before you’ll need access to that investment money. If you plan to use your investments for a short-term goal, such as next month’s rent, you should stick the money somewhere safe like a savings or checking account.