“It takes a little work to know what a good investment is, but it’s worth the effort. I’m still a little hesitant because of what I don’t know. But, I’m willing to learn. I want to be brave and take the next step — it would be amazing to one day know that I’m investing in something that’s worth it.” ~ Neisha

Maybe you have a lucky friend or family member who took the only $10,000 they had, bought a hot tech stock, then cashed out with double their money. That’s a gambler, not an investor. It’s critical to know the difference. Gamblers rely on luck and chance — which means most of them eventually lose, if they keep playing.

Investors put their cash only into things they understand, that have been proven to work time and again. They rarely hit the jackpot, but they also won’t go bust. And if you look at history, they usually make money.

Gamblers rely on luck and chance. Investors focus on simple, proven options they understand.

How to make sure you invest and don’t gamble

Many of us avoid or put off investing because it seems too complicated. But investing early is the best strategy for building long-term wealth and having enough money to retire comfortably or pay for college. The good news is successful investing can be incredibly simple if you’re okay with the slow-and-steady approach. It's only when you make snap judgments that it becomes more complicated and risky. Stable, patient trading is how most successful investors have gotten wealthy.

Investing begins with learning a little about your options and making simple, effective choices.

Do this in five basic steps:

• Learn your options.

Listening to financial T.V. or radio shows, you’d think you have thousands of investments to sift through to find the right ones. True, there are thousands out there, but most of your money is likely to end up in two places: stocks and bonds. The way you own stocks and bonds is by investing in a mutual fund. Once you learn the basics of these things, you’ll be 90% of the way to savvy, successful investing.

• See also: Stocks, Bonds, Mutual Funds

• Set an investment timeline and pick investments that match.

It’s good to have a goal before investing. Your goal will help you figure out what to invest in. Do you want to save for a down payment on a house or help pay for your kids’ college? Are you saving for a new car or do you just want to build wealth for the future? Write down your investment goals and a timeline. If you want to buy a house in 5 years, that’s a short-term goal. If you’re saving to build wealth, your timeline could be 20-40 years (even longer, if you’re planning for retirement). Different time frames mean different investment types.

• See also: Investment planning, Investment accounts

Take your time when figuring these things out. The talking heads on T.V. make it sound like you need to be moving your money around every day, responding to every piece of news that comes out. It’s a myth, and if anything those snap decisions are just, plain wrong. Investment is a long-term commitment. Learning how to match investments with your goals will give you better returns.

• Minimize your investment costs.

There are always fees and expenses associated with investing, but there’s a huge range. The higher the costs, the less likely you are to benefit from your investment. What good is making an extra 2% per year if the investment has 2.2% in fees and costs? Before you buy any investment, understand what the fees and expenses are and look for options with low or no added fees.

• Start with index mutual funds.

Index mutual funds are an easy, low-cost way to own investments — both stocks and bonds. They don’t try to pick the hot investment of the day. Instead, they own own hundreds or thousands of investments in specific categories. Instead of trying to pick a hot stock being promoted by some guy on T.V., pick an investment category that fits your time frame and buy a stable, manageable index fund in that category. It sounds simple, but over the long-term periods that you’ll be investing (possibly your whole life), the index-fund approach is likely to do better than most other options.

• Automate everything and check in at least once a year.

Automating your transfers little by little into your investment account is a good savings habit and a good investing habit. It keeps your money flowing in through the ups and downs of the markets, instead of every now and again as a lump sum. This approach, called dollar-cost averaging, reduces your risk of buying at a bad time or missing out on gains because you waited too long.

When you get your monthly statements (by e-mail or mail), review how much you invested, where your money is invested and what your investments are worth now. Once or twice a year, check in with all your investments and do any or all of the following:

• Adjust how much you’re contributing.
• If you changed your goals, change your investment mix to match them.
• If the market changes, rebalance your investments to make sure they still match your goals. As your investments shift in value and performance, you’ll want to shift your money around, too.
• Make sure the investments you’ve chosen are still doing what you expected them to and that their costs haven’t changed. If you focus on index funds, you shouldn’t have to focus on this too much.
• Update your account information — name, e-mail address, address, password, etc.
• Resist the temptation to buy the investment fad of the month, or that hot tip from the guy at work, which usually ends badly.

As your investments grow to the point where the taxes from them are noticeable or if you simply don’t want the responsibility of doing all this yourself, consider working with a financial professional.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Revisit this essential during these Life Events

These life events are great chances for you to look at your investments and make sure you’re on track to building wealth for your goals:

• Big purchases
• Getting married
• Starting a family
• Saving for education

Next up: Protect yourself

You've mastered this lesson, so now it's time to learn about protecting yourself.