Best Ways to Invest Money

Whether you're planning to fund your retirement, buy a home or simply make money in the stock market, investing is the most effective way to grow your wealth.

But the best ways to invest money depend on your investment goals, risk tolerance and time horizon. Use SmartAsset's free tool to find the right investments for you.

1. Stocks

Stocks are a good way to invest money, and they typically have much better long-term returns than savings accounts or bonds. Since 1926, large stocks have averaged 10% a year in annual gains – more than double the average for bonds and nearly three times that of savings accounts.

Stocks also offer investors the ability to diversify their portfolios by investing in multiple companies, industries and kinds of stock. This can help to mitigate the risk of any one company crashing or performing poorly.

There are a number of ways to invest in stocks, including buying shares directly from companies, or by investing in mutual funds. However, it’s important to remember that stock investing requires time and knowledge to be successful.

2. Bonds

If you’re looking to invest in a broad range of assets that can help you diversify your portfolio, bonds are one option. Bonds are a type of debt instrument issued by governments and corporations.

They pay interest on a fixed amount of money over time and can be used to offset the volatility of stock market performance. They also support your broader investment objectives, such as capital preservation or income generation.

However, they do carry a few risks that you should consider before investing in them. These include credit risk, liquidity risk and inflation risk.

3. Short-term investments

If you need money in a year or less, short-term investments are usually your best bet. They provide a relatively safe place to park your cash without losing value due to inflation.

They also offer a higher interest rate than you would get from a savings account. But keep in mind that these aren't necessarily risk-free, so you should understand what you're getting into before making a decision.

Short-term investments include high-yield savings accounts, certificates of deposit (CDs), and money market funds. They aren't as risky as stocks or bonds, but they typically offer lower returns than long-term investments.

4. High-yield savings accounts

High-yield savings accounts offer better interest rates than traditional savings accounts and are often the best way to invest money for short-term goals. They also tend to be less volatile than other investment options.

These types of accounts also are FDIC-insured, and they usually come with other benefits such as free checks and ATM access. However, it’s important to remember that they can be harder to access than checking accounts, and you typically are limited to six withdrawals or transfers a month.

The best way to find the right high-yield savings account for you is to shop around and compare rates, fees, and other perks. You should also consider the annual percentage yield (APY) and how often interest compounds.

5. Real estate

Investing in real estate is one of the best ways to build wealth and protect your money from inflation. It also provides a reliable source of passive income, especially when combined with other investment options.

Buying and selling residential and commercial properties can be lucrative investments, but they also require time and patience. It’s also important to research the market before investing.

Investors who are looking for a long-term, low-risk option can look into investing in publicly traded real estate investment trusts (REITs). REITs pay attractive dividends and often offer tax advantages. They also allow investors to diversify their portfolios with REIT index funds, which are available in ETF and mutual fund formats.