- 1). Write down a list of your financial goals. These goals could be anything, from a comfortable retirement to the purchase of a new car or the down payment on a first home. Create a list of everything you need to save for and separate those goals into short-term and long-term categories. Money that you can afford to keep invested for more than five years is suitable for stock market investing, while money you expect to need within five years should be kept in safe investments like bank certificates of deposit and money market accounts.
- 2). Assess your tolerance for risk by watching the stock market for a few weeks to a few months. If the short term movements of the stock market alarm you, it might be best to limit your exposure to stocks, at least until you are more comfortable with those movements. If you have a low risk tolerance and the market takes a dive, you might be tempted to sell at the bottom, locking in your paper losses and making them into real losses.
- 3). Review the choices you have in your company sponsored retirement plan. Contact your human resources department to get information about the funds offered in the firm's 401k or 403b plan. Investing in a 401k or 403b plan is a particularly good choice, since the money you invest is not taxed until you make withdrawals in retirement. That means you can accumulate money over time and allow it to grow tax deferred. You only pay taxes on the money when you take it out of the account after you retire.
- 4). Contact several banks in your area and pick up rate sheets that show the interest rates on their deposit accounts, money market funds and certificates of deposit. Also check interest rates of local and online banks at sites like BankRate.com. Choose the best mix of fixed-income investments for your short-term money. Certificates of deposit tend to pay more than money market funds or savings accounts. But you need to keep your money tied up for the term of the CD, so you will need to balance the convenience of ready access to your money against the higher interest rate you could earn.
- 5). Contact several large low-cost mutual fund companies and request prospectuses for their index funds. Unlike managed mutual funds, which try to beat the market by buying and selling stocks, index funds simply buy and hold all the stocks in a given index, like the Standard & Poor's 500. Studies like one published in "Money" magazine have found that index funds consistently outperform managed funds over time, and they do so at a lower cost as well. But while it is true that most managed funds fail to beat the market, a few do produce consistently great returns over long periods of time. Using resources like Morningstar and the quarterly review of mutual funds published in Barron's can help you find those superstar funds and boost your performance.
Source...