How to Make an Investment Plan in 5 Steps

Lyle Daly
Natalie Taylor, CFP®, BFA™
How to Make an Investment Plan in 5 Steps

Investing is one of the most effective ways to build wealth and reach your financial goals. To be successful at it, you need an investment plan. Otherwise, you could run into problems, such as choosing investments that aren’t the best fit. Whether you’re just starting a family or you’re dreaming of retiring early, a plan is your first step

In this guide, you’ll learn how to make an investment plan that works for you.

1. Start With Your Goal

The best way to invest depends on the goal you’re trying to accomplish. An investment plan for retirement will be much different than a plan for saving for a home. To start:

  • Be clear about your goals. For example, you may be investing for retirement, to build college savings for your kids, or to buy a home.

  • Calculate how much money you need. If you don’t know the exact amount, use an estimate.

  • Set a timeline based on when you’ll need to use the money.

College can cost as much as $50,000 per year. See our article: How Much to Save for College

2. Choose the Right Account

You can invest in several types of accounts. Some offer tax advantages, so use those first whenever you can. Each of the accounts below let you buy and sell many different types of investments, including stocks, bonds, and investment funds. Here are the best investment accounts to choose depending on your investment plan.

For Retirement: 401(k) and IRA

401(k)s and individual retirement accounts (IRAs) are two of the most popular retirement savings options. Since these are retirement plans, you must wait until age 59 1/2 to withdraw from them, to avoid a penalty. IRA investments and 401(k) investments also have contribution limits.

A 401(k) is an employer-sponsored retirement plan where contributions come directly out of your paycheck. There are two types of 401(k) plans. With a traditional 401(k), contributions are tax-deductible and withdrawals are taxed as income. With a Roth 401(k), contributions aren’t tax-deductible, but withdrawals are tax-free.

An IRA is an account you open by yourself, not through an employer. Once again, there are two types, traditional IRAs and Roth IRAs, with similar tax rules to 401(k)s.

For College Savings: 529 Plan

A 529 plan is a savings investment plan to cover educational costs for the beneficiary. There are no federal tax savings on contributions, but many states offer tax deductions or tax credits. Withdrawals are tax-free as long as you use the funds for qualified educational expenses.

For Flexibility: Brokerage Account

A brokerage account is a general investment account, set up with or without a personal financial advisor. Unlike 401(k)s, IRAs, and 529s, brokerage accounts aren’t tax-advantaged. Deposits to your brokerage account aren’t tax-deductible, and you’ll pay capital gains taxes on investments you sell for a profit.

The advantage with brokerage accounts is that there are no restrictions on using your funds. There’s no age minimum for withdrawals, like there is with retirement plans. That makes brokerage accounts the best option when you need flexibility. For example, if you plan to retire early, it makes sense to have at least some investments in a brokerage account so you can access them without a penalty.

3. Decide on Your Investing Schedule

Your investing schedule dictates how much and how often you invest. If you have a large amount of money saved, you’ll also need to decide if you want to invest it all at once or go with dollar-cost averaging (DCA). This is a technique where you invest a consistent amount on a fixed schedule.

Let’s say you have $10,000 saved. You could invest that $10,000 all at once. Or, you could take the DCA approach and invest $1,000 per week, $2,000 per month, or whatever schedule works for you.

A DCA investment plan can provide peace of mind, especially in a volatile market. If you invest a large amount all at once, it can be stressful if the market drops. It’s easier to stomach these ups and downs when you only invest a portion of your money at a time.

For long-term investing, DCA is a good approach because you can regularly contribute a portion of your income. If possible, set up automatic deposits. Many investment accounts offer this feature, which makes it easy to stay on your investing schedule.

Pro Tip: Don’t try to time the market by waiting until the right moment to start investing. It’s practically impossible to predict market movements, and this strategy can backfire if you miss out on the market’s best days. What’s important is getting into the habit of investing, not investing at the perfect moment.

4. Select Your Investments

There’s a massive number of investment vehicles available, including stocks, bonds, investment funds, and real estate, to name a few. The key to selecting the right ones for your investment plan is finding the ones that grow your money efficiently and let you access it when you need it.

Stock market investments (mutual funds, ETFs, and individual stocks) are almost always recommended only if you won’t need the money for five years or longer. However, the only way you’ll see a near-certain upside is if you wait 10+ years before you use the money.

We’ve listed a few of the best investment options below.

For Long-Term Growth: Index Funds and ETFs

Index funds and exchange-traded funds (ETFs) are simple ways to invest in a large, diversified group of stocks. Index funds aim to track the performance of a stock market index. For example, there are index funds based on the whole U.S. stock market, and S&P 500 index funds that own the 500 largest companies. ETFs are investment funds traded on exchanges, just like stocks.

There’s overlap between index funds and ETFs. Many ETFs track stock market indexes, making them index funds. However, there are also actively managed ETFs with fund managers who make stock picks.

Both ETFs and index funds are good investment plan vehicles for long-term goals with timelines of five years or longer. Make sure to check the expense ratio (annual fee) for any index fund or ETF you consider. Ideally, this should be under 0.5%.

Pro Tip: Before you start investing, take a look at your finances to see if paying down debt is a better starting point. See our article: Should I Pay Off Debt Or Put Money In Savings?

Target Date Funds

A target date fund builds a portfolio optimized for a certain year, such as your retirement year. For example, if you invest in a target date 2050 fund, it will manage your portfolio based on that year. When the year is decades away, the fund will put most of your money in stocks. It will gradually adjust the asset allocation to less volatile investments, such as bonds, as it gets closer to 2050.

This is a useful type of investment if you want to take a hands-off approach to investing. They’re often used for retirement planning.

Age-Based Plans

An age-based investment plan builds a portfolio based on the beneficiary’s age. Asset allocation is more heavily weighted toward stocks when the beneficiary is younger to maximize growth. As the beneficiary gets older, asset allocation shifts to bonds and cash equivalents to reduce volatility.

These savings plans are similar to target date funds in that they let you take a “set it and forget it” approach to investing. They’re often used for college savings.

Fixed-Income Investments

Fixed-income investments pay a set amount. They don’t have the growth potential of other investments, such as stocks or real estate, but they’re low risk. That makes them a good choice for goals with a timeline of less than five years, when you can’t afford the risk of more volatile assets.

Bonds are a popular fixed-income investment. A bond is effectively an IOU, and by buying a bond, you lend money to the bond issuer. The bond issuer pays you interest and repays you in full on the bond’s maturity date.

Certificates of deposit (CDs) are another useful option. A CD is a financial product that lasts for a fixed term with a fixed interest rate. You can open one through a bank or credit union, and the only requirement is that you keep your money deposited for the entire term.

Note that CDs are FDIC insured while bonds are not, and their trustworthiness depends on the creditworthiness of the company or entity issuing the bond.

Pro Tip: In today’s high-interest climate, high-yield savings accounts can often offer comparable rates to CDs.

5. Determine Your Asset Allocation

Asset allocation refers to the mix of assets in your portfolio. There are two factors that matter most in determining the right asset allocation for your investment plan:

  • Time horizon: The more time you have, the more growth-oriented you can be with your portfolio. That means you can have more money in stocks and other somewhat volatile investments. If the market drops, you’ll have time to recover.

  • Risk tolerance: Some investors have more risk tolerance than others. If stability is more important to you than maximizing growth, you may want to keep more of your money in fixed-income investments.

Let’s say you’re investing for retirement 30 years down the road, and you don’t mind volatility. You may want to go with an asset allocation of 90% stocks, 10% bonds, or even 100% stocks. On the other hand, if you’re retiring in five years, a more conservative asset allocation of 70:30 or 60:40 stocks to bonds is a better choice.

Building a Successful Investment Plan

Now you know how to create an investment plan from start to finish. First, define your goal. Then choose an appropriate account, figure out your investing schedule, select investments, and determine your asset allocation.

After you’ve done all that and you’re following the investment plan, it’s important to track it and adjust as needed. Monarch Money makes it easy to track your portfolio’s performance.

Lyle Daly Personal Finance Writer
Natalie Taylor, CFP®, BFA™ Head of Financial Advice at Monarch

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