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When Bitcoin launched in 2009, it was the only digital currency of its kind. By 2011, though, new types of cryptocurrency began to emerge as competitors adopted the blockchain technology Bitcoin was built on to launch their own platforms and currencies. Suddenly, the race to create more crypto was on.

Read on to learn more about the seven main types of cryptocurrency, from proof-of-work to proof-of-stake cryptocurrencies, to utility tokens, stablecoins, and more.

Understanding the Cryptocurrency Landscape: More Than Just Bitcoin

Bitcoin (BTC) may be the most recognized cryptocurrency, but it is one of thousands. It’s difficult to pin down an exact number for how many cryptocurrencies exist, since new coins continue to be developed while others become obsolete.

By some counts, close to 55 million unique cryptocurrencies have been created over time, with more on the way. While cryptocurrencies have been largely unregulated for much of their history, that’s been changing in recent years. A regulatory framework has begun to take shape as the Securities and Exchange Commission (SEC), U.S. Congress, and other agencies in the U.S. and abroad have passed crypto-related regulations and laws.

What Is Cryptocurrency and Why Do Different Types Exist?

Cryptocurrency is a type of digital asset that’s created, validated, and exchanged through the blockchain, without the need for any type of central clearing intermediary. Transactions are publicly viewable on the blockchain, but the identities of those exchanging cryptocurrencies are not transparent (though not always untraceable), adding to its appeal for some.

Why are there so many different types of cryptocurrency? Innovation, a push towards decentralized finance, and increased market interest all play a part.

Developers have created different types of cryptocurrencies largely to support and expand the capabilities of blockchain networks. Cryptocurrencies such as Bitcoin and Litecoin were developed to support peer-to-peer payments, for example, while others, such as Ethereum and Solana, were designed to support blockchain-based decentralized apps (dApps).

Utility tokens were developed to provide access to services or functionalities on a blockchain network — governance tokens, for instance, allow users to vote on decisions being made by a certain network.

Blockchain technology is also being actively explored in areas outside of finance, such as healthcare, supply chain management, real estate, and art.

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The Fundamental Difference: Coins vs Tokens

Although some people use the terms crypto, coins, and tokens interchangeably, they’re not the same. To gain a basic understanding of cryptocurrency, it’s important to understand how these terms differ from one another.

Cryptocurrency may broadly refer to coins or tokens, but the two have different meanings:

•   Coins: Crypto coins are native to their own blockchain network, and provide a means of exchange. They’re strings of computer code that can represent an asset, concept, or project — whether tangible, virtual, or digital — intended for various uses and with varying valuations. Examples include Bitcoin and Ethereum.

•   Tokens: Tokens are programmable assets that are created on an existing blockchain network, and allow users to access certain services or features. They are often distributed via airdrops, staking rewards, and private sales.

While crypto coins operate on their own independent blockchain and offer a broader medium of exchange for that network, tokens are built on top of an existing blockchain and have any number of uses, such as representing an asset — a stake in a precious metal, for example — or facilitating a transaction on the blockchain. Both could potentially be bought or sold through a crypto exchange.

Crypto coins are created, tracked, and verified by their native blockchain network and essentially power the blockchain by serving as payment for the transactions that create and secure new blocks. While crypto coins are fundamentally different from traditional fiat currencies (like the dollar, euro, or yen), they also have some similarities, since both are designed to be a medium of exchange and a unit of value.

Tokens are designed to be used as part of a software application, such as granting access to an app, verifying identity, or tracking products moving through a supply chain. They can represent units of value, too, including for real-world items, like real estate, points, or commodities. They can also represent digital art — as with non-fungible tokens (NFTs). There have even been experiments using NFTs to represent physical assets, such as real-life art and real estate.

Numerous crypto coins and tokens have been introduced at a rapid pace since Bitcoin was launched in 2009, and while this can drive innovation, it’s important to remember that cryptocurrencies come with high risk, as well, such as from scammers counterfeiting tokens or from the high level of volatility these assets experience.

Type 1: Proof of Work (PoW) Cryptocurrencies – The Originals

Proof of work is the original framework Bitcoin was built upon, and it represents the mechanism by which new blocks are added to the blockchain. In a proof of work system, “miners” compete to solve complex mathematical puzzles and earn cryptocurrency.

What Is Proof of Work?

Proof of work is a consensus mechanism, which is a standard that governs how cryptocurrency transactions are validated and information is added to a blockchain network. It allows crypto miners to compete for an opportunity to add a block to the blockchain, and receive a reward for their efforts.

With proof of work, crypto miners use powerful computer systems to race to solve a cryptographic hashing puzzle. The winner creates a new block containing transaction information, which is verified by the network nodes before being added to the chain.

The rewards earned by winning miners are typically a certain number of newly minted coins.

Examples of PoW Coins

Proof of work coins are represented by some of the most well-known types of cryptocurrency. Some of the most popular PoW coins by market cap include:

•   Bitcoin (BTC)

•   Dogecoin (DOGE)

•   Bitcoin Cash (BCH)

•   Litecoin (LTC)

•   Ethereum Classic (ETC)

Bitcoin is the largest PoW coin with a market cap of $1.3 trillion, as of July 2026. There are currently just over 20 million Bitcoins in existence, out of a maximum hard cap of 21 million. The last Bitcoin is expected to be mined sometime in 2140.

Type 2: Proof of Stake (PoS) Cryptocurrencies – The Evolution

Proof of stake cryptocurrencies were developed as an alternative to proof of work coins, which are viewed as having scalability limitations given the vast amounts of power required to mine them. A proof of stake system relies on crypto staking, rather than mining, but it serves a similar function.

What Is Proof of Stake?

Proof of stake is a consensus mechanism that’s used to reward participants who validate transactions that are added to the blockchain.

Here’s how it works:

•   Stakers agree to lock away some of their cryptocurrency on a blockchain network through a process called staking.

•   The blockchain network can use the holdings to create a new block and validate transactions.

•   The staker with the largest “stake” has a higher probability of being chosen to validate transactions.

•   Validated transactions earn the staker a reward; stakers who violate protocols, however, could face a penalty.

Proof of stake requires much less computing power than proof of work, reducing strain on the energy grid. It allows stakers an opportunity to potentially earn passive income while holding cryptocurrency. However, stakers face the risk that their coins could lose value while they’re locked up for staking.

Examples of PoS Coins

Compared to Bitcoin, proof of stake coins claim a smaller share of the market. However, the numbers are growing, and these coins represent some of the biggest movers in terms of market cap:

•   Ethereum (ETH)

•   Solana (SOL)

•   Cardano (ADA)

•   Toncoin (TON)

•   Algorand (ALGO)

Ethereum has the largest market cap overall of these, at approximately $296 billion as of August 30, 2026.

Type 3: Utility Tokens – The Keys to a Network

Utility tokens, or user tokens, are a type of cryptocurrency that serves a specific purpose inside a decentralized network. They’re built on an existing blockchain and grant their holders access to distinct functions, features, or services.

What Are Utility Tokens?

A utility token is a digital asset that grants holders access to a certain product or service for a given cryptocurrency. They’re typically developed using smart contracts and may be programmed for a range of uses, such as to access storage space or to bring external data onto a blockchain network. Or, as with a governance token, they may give holders the option to vote on changes to a blockchain network.

More broadly, utility tokens can help encourage participation in and support of the crypto ecosystem they were designed for. They may serve as a loyalty bonus, for example, provide access to exclusive features, or other incentives for interacting with the network, all of which may help foster the growth of that crypto community.

Unlike other types of tokens that may confer a stake in an asset or a physical entity, utility tokens serve primarily as a key to various features offered by a cryptocurrency.

Examples of Utility Tokens

Utility tokens are designed with specific use-cases in mind. Their value is typically measured more in terms of what they allow you to do, versus what value they represent.

Here are some examples of utility tokens:

•   Ether (ETH): Ether is the native token of Ethereum, which is the second-largest blockchain network. Ether is used to pay the Ethereum “gas fee” required to process transactions on the blockchain. Given its reach, however, it’s sometimes seen as a currency (having a store of value) in its own right.

•   Chainlink (LINK): Chainlink is a decentralized oracle network that acts as a bridge between smart contracts and real-world data. Tokens are used to pay for data services and incentivize the production of accurate data feeds.

•   Basic Attention Token (BAT): BAT is an Ethereum-based utility token used within the privacy-focused Brave browser ecosystem. Users earn BAT by opting into ads; they can use their tokens to tip content creators, cash out, or unlock premium content and digital rewards.

•   Golem (GLM): Golem is a decentralized supercomputer that lets users rent their computing power to others. Tokens are used to pay for services through the platform.

•   The Sandbox (SAND): SAND is the utility token for the community-driven blockchain gaming platform, The Sandbox. Players can earn SAND and use it to purchase virtual assets, access exclusive interactions, and take part in governance, among other things.

Type 4: Stablecoins – The Price Stability Anchor

Stablecoins are digital assets whose value is tied or “pegged” to another asset, typically the U.S. dollar. Unlike Bitcoin and other cryptocurrencies, which can be highly volatile speculative assets, stablecoins are designed to maintain a relatively stable value, pegging their value to traditional currencies to facilitate digital payments and transfers with less price volatility than many other crypto assets.¹

What Are Stablecoins?

The regulatory landscape for stablecoins is quickly evolving globally, highlighted by the passing of the US. Genius Act in July 2025, which targets payment stablecoin issuers and introduces strong consumer protections.² This parallels the European Union’s Markets in Crypto-Assets (MiCA) regulation, which rolled out its foundational stablecoin rules in 2024.³ Under MiCA, stablecoin issuers face rigid requirements, such as mandating that a significant portion of reserves be held as cash deposits in EU credit institutions rather than solely in U.S. government debt. Consequently, major issuers like Tether (USDT) — which maintains the vast majority of its reserves in U.S. Treasurys — have faced delisting from regulated European platforms due to noncompliance.

As the industry shifts, there are still risks to be aware of, such as a stablecoin losing its peg value, technology or operational risks, or the potential for scams or fraud.

Common uses for stablecoins include:

•   Paying for goods and services

•   Making cross-border payments

•   Offering potential protection against price instability in cryptocurrency markets

Crypto users may use stablecoins to buy other cryptocurrencies in lieu of cash, and more payment processors are allowing the use of these coins to pay for transactions online.

Examples of Stablecoins

Stablecoins represent a growing share of the total cryptocurrency market. Some of the most well-known stablecoins by market cap include:

•   Tether (USDT)

•   USDC (USDC)

•   USDS (USDS)

•   Dai (DAI)

•   PayPal USD (PYUSD)

The total market cap of stablecoins was approximately $309.88 billion as of July 2026. With a few exceptions, stablecoins have a relatively low price point compared to other types of cryptocurrency. For stablecoins, this low price point is by design rather than market dynamics.

Type 5: DeFi Service Providers – The Future of Finance

DeFi service providers represent a subset of the cryptocurrency landscape. They operate on decentralized, blockchain-based frameworks in order to offer services that allow individuals to conduct transactions directly. For example, a DeFi coin is similar to a physical coin in that it transfers value, but it does so without going through a central intermediary.

What Is Decentralized Finance (DeFi)?

Decentralized finance, or DeFi, describes financial services that are executed through the blockchain. By allowing for direct, peer-to-peer transactions, DeFi advocates note that it could help reduce barriers to entry for those who traditionally have a harder time accessing financial services, and allow for potentially faster, cheaper transactions.

Some of the top providers building out the decentralized finance landscape are developing decentralized peer-to-peer exchanges, borrowing and lending protocols, data services through decentralized oracle networks (DONs), and stablecoins, which may help provide a bridge between blockchain systems and traditional assets.

Most, though not all, DeFi protocols and applications are built on Ethereum. DeFi tokens can be used to access services and goods through decentralized apps. Though DeFi tokens represent a smaller share of the cryptocurrency market, their popularity is growing.

DeFi, of course, is in its early stages, and while the blockchain technology itself helps to safeguard information, the other apps, systems, and entities that interact with the network could pose risks. It’s important to be cautious when considering options, especially as crypto regulations continue to develop.

Examples of DeFi Tokens

Here are some of the largest DeFi tokens by market cap:

•   Hyperliquid (HYPE)

•   Decimal (DEL)

•   Chainlink (LINK)

•   Stellar (XLM)

•   Dai (DAI)

As of July 2026, the total DeFi crypto market capitalization sits at approximately $61 billion. It’s essential to distinguish between DeFi tokens and DeFi coins. The difference, again, between tokens and coins is how they relate to the blockchain.

Type 6: Privacy Coins – The Anonymous Transactions

Privacy coins offer anonymity by obscuring certain details about their users. These coins can be sent and received anonymously, without disclosing the location of the parties involved in the transaction.

What Are Privacy Coins?

Privacy coins enable the secure transfer of cryptocurrency without revealing either its origin or destination. This is a key departure from the more public nature of transactions conducted on the blockchain. Public blockchains were designed with the idea that information be transparent and immutable, allowing participants to view and validate the data. With Bitcoin, for example, Bitcoin users can access transaction data (though not identity information) through public Bitcoin addresses used to make payments.

A privacy coin blocks certain information from view through the use of different strategies, including:

•   Protocols that generate stealth addresses

•   Mixing of transactions to make the routing of coins more difficult to trace

•   Tools that allow for the validation of transactions without requiring the disclosure of any identifying information

Privacy coins aren’t accessible in every country or crypto market. Some countries have banned them outright, while others have taken steps to remove some of the secrecy surrounding them.

For example, recent anti-money laundering regulations passed by the European Union will, starting in 2027, ban financial and credit institutions as well as crypto-asset service providers from managing cryptocurrencies that offer anonymous accounts.

Examples of Privacy Coins

The market for privacy coins is smaller than other types of cryptocurrencies, and your ability to buy them may depend on where you live. Examples of popular privacy coins include:

•   Monero (XMR)

•   Zcash (ZEC)

•   Beldex (BDX)

•   Decred (DCR)

•   Dash (DASH)

As of July 2027, the privacy coin market is valued at approximately $15 billion. A glance at pricing charts shows that privacy coins have the potential to be exceptionally volatile.

Type 7: Meme Coins – The High Risk, High Reward Speculation

Meme coins are a type of cryptocurrency whose popularity is driven by memes or trends.

What Are Meme Coins?

Meme coins are coins that gain attention because they align with a trend or newsworthy event. Any coin can become a meme coin if someone or something pushes it into the spotlight. Some of the most popular meme coins can develop cult-like followings, which can help drive demand.

Compared to other types of cryptocurrency, meme coins tend to be more volatile because their value is often tied to their popularity. A coin that’s hot today may not be tomorrow, and its value could quickly fizzle if the trend dies down, or the meme that the coin is associated with loses popularity.

Examples of Meme Coins

Meme coins can sometimes be some of the most recognizable cryptocurrencies if they grab the attention of the broader population. Examples of popular meme coins include:

•   Dogecoin (DOGE)

•   Shiba Inu (SHIB)

•   Pepe (PEPE)

•   Pudgy Penguins (PENGU)

•   Bonk (BONK)

Meme coins often have lower prices than other cryptocurrencies. As of July 2026, meme coins had a market cap of $34.7 billion.

The Critical Impact of Tax Treatment

The IRS treats cryptocurrency and other digital assets as property, meaning that any gains you generate from them are taxable. If you have digital asset transactions during the year, you’re required to report them on your tax return.⁴

The sale of digital assets, including cryptocurrency, can trigger capital gains if you sell at a profit, or capital losses if you sell for less than the original purchase price. Selling off crypto assets after seeing huge gains in value could significantly increase your tax liability for the year.

You may be able to offset gains with losses through a process known as tax loss harvesting. That can reduce what you owe in federal taxes for the current year.

Income earned through cryptocurrency activities, such as from mining rewards, is considered ordinary income. Depending on your circumstances, the tax rules applying to your digital assets could get complicated. This is not financial, legal, or tax advice so you may want to talk to a certified public accountant (CPA) or another tax professional about how crypto assets could affect your overall tax picture.

The Takeaway

Cryptocurrencies are digital assets built on distributed ledger networks, generally guided by the principle of decentralization. However, they are not a uniform asset class. They vary by consensus mechanism — such as proof of work and proof of stake — and by functional design, including stablecoins, utility tokens, and decentralized finance (DeFi) governance tokens.

Because different cryptocurrencies serve distinct goals, functionalities, and markets, they carry vastly different risk profiles. Understanding these differences can help you better evaluate how specific digital assets align with your risk tolerance and broader financial goals.

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FAQ

How many types of cryptocurrencies are there?

Broadly speaking, cryptocurrencies can be grouped into coins and tokens. Beyond those two main types, there are millions of different types of crypto being exchanged, with new currencies entering the market regularly.

What is the most common type of cryptocurrency?

Bitcoin is the most common and widely recognized cryptocurrency. Launched in 2009 by an anonymous developer or group of developers named Satoshi Nakamoto, it was the first decentralized digital currency. It remains the largest cryptocurrency by market capitalization and serves as the benchmark for the entire digital asset industry.

What is the difference between a coin and a token?

The main difference between a coin and a token is their relationship to the blockchain. Coins are the native digital currency of their blockchain, while tokens sit on top of an existing blockchain. Tokens are often associated with digital currencies, but they can also represent other digital assets, like NFTs, or something intangible, like voting rights.

Are NFTs a type of cryptocurrency?

NFTs or non-fungible tokens are not a type of cryptocurrency, but they share space with crypto on the blockchain. An NFT represents ownership of a unique digital or physical asset, such as a drawing, image, or piece of artwork.

SOCRYP-Q326-009

When it comes to investing, most people start with the question of ‘What’: e.g., What should I invest in? But an important place to start is with the ‘Why’: Why do you want to invest in the first place? Why are you building an investment portfolio?

That’s because setting up your investment strategy will be guided by your financial goals. Your goals help determine other key aspects of your strategy, including your time horizon (how long will it take to reach a certain goal), your risk tolerance, and which securities might meet your aims.

Goal-setting is sometimes an overlooked first step in building a sound investment strategy, but it provides an important structure to guide you forward.

What Is the Primary Goal of Investing?

Even without a clear purpose, there are many reasons to invest, such as aiming to accumulate wealth or outpace inflation. The portfolio that’s appropriate for you will depend on your objectives and time horizon, which means you can’t plan your portfolio unless you know what you want to invest towards, how much you want to invest, and when you’d like to use that money.

Think of building an investment strategy as a top-down approach. Start with the big picture idea of what you want to accomplish. Then, hone in on the strategy that makes the most sense given those goals.

Should you buy stocks or bonds? Should your money be held in cash? Or, should you do something else entirely?

Recommended: Stock Market Basics for Beginners

How to Define Your Investing Goals

First, you may want to consider these three common goals: Creating an emergency fund, paying off debt, and saving for retirement.

Setting up an emergency fund and saving for retirement are sometimes referred to as “bookend goals,” because they are primary short-term and long-term financial goals.

In the middle, so to say, is the goal of paying down any debts you might have. Technically, this may not seem like a traditional “investment,” but it is in the sense that once you’re debt free you can put that money toward other goals.

1. Build an Emergency Fund

Your emergency fund is a lump sum that you can easily access should an emergency arise — for example, if you get laid off or face unexpected health costs.

In most cases, an emergency fund isn’t invested in the stock market — it’s money that’s typically put in a savings account or similar deposit account. As part of a financial plan, an emergency fund is a shorter-term goal that’s generally intended to be lower risk. Unlike insured deposit accounts, investments may lose value, including the principal originally invested, and they’re not insured against bank failure by the Federal Deposit Insurance Corporation (FDIC).

That’s why setting up an emergency fund that is fairly liquid (i.e., accessible), and not invested in high-risk securities is an important consideration when determining your investing budget.

The common recommendation is that this fund should be three to six times your monthly household expenditures, depending on how risk-averse and well-insured you are.

Consider Asking Yourself:

•   How much do I spend each month?

•   How much of that is necessary spending, and how much is discretionary?

•   How many months’ expenses would I like to have saved?

•   Do I have dependents or others that depend on my income?

•   What’s my target emergency fund?

2. Pay Off High-Interest Debt

High-interest debt is a consideration when investing, because it’s possible that interest you’re charged could be more than the potential return you may earn from investments in the stock market. This is one tactic that’s common to most debt payoff strategies.

Over the long term, eliminating high-interest debt such as credit card debt is a low-risk way to improve your financial situation. If you have outstanding balances on several cards, one debt payoff strategy (called the debt avalanche method) is to start by paying down the card that charges the highest interest rate. Once that’s paid off, look at the other money you owe, such as layaway plans and auto loans, and pay them off in the order of the highest-interest loan first.

The money you owe on your home — the mortgage — may deserve separate consideration, as interest payments come with special tax treatment.

3. Fund Your Retirement Accounts

Retirement may be your largest long-term financial goal, and even if it feels far away, it’s helpful to start saving early. Why? The earlier you start saving for retirement, the more time your money has to work for you.

Consider Asking Yourself:

•   At what age do you want to retire? You can start getting your Social Security retirement benefits as early as age 62. But you can claim “full retirement benefits” only when you reach your full retirement age, which for those born in 1960 or later is age 67. If you wait until age 70 to file for Social Security, your benefit amount will increase.

•   How much money do you need to live on each year (in today’s dollars)?

•   How long do you expect to live? Statistically, those born in the 1980s have a life expectancy of 77-82 years, but to be safe, you may want to plan to cover the expenses of a longer life.

•   What do you currently have saved for this goal? You may want to use a retirement calculator to see if you’re on track.

There are also tax-advantaged plans to help you invest for these important goals, such as 401(k)s, 403(b)s, IRAs and Roth IRAs. They each have their own advantages, for instance consider the benefits of Roth vs. traditional IRAs.

Common Short- and Long-Term Investment Goals

How you prioritize your financial goals — from your emergency fund to your retirement investments is more personal. For example, do you want to invest toward buying a home? Start a family? Funding a college education? Launch a business? Many of the above?

Any goal you can think of is on the table. You may want to be specific — exactly how much money you need to achieve each goal, and by when. The more specific you are, the better the chances are that you might reach that target. And when the time comes to use that money, you’ll have already given yourself permission and can enjoy it.

Consider Asking Yourself:

•   What is your goal?

•   When do you need the money?

•   How much do you need?

•   How much can you invest each month?

•   What obstacles may come up?

Matching Investment Goals to Time Horizons

As you’ve seen in the exercises above, each of your goals has a specific time horizon. This is an important aspect of your investment strategy: Generally speaking, the longer the time horizon, the more comfortable an investor may be taking on greater risk. Longer investment periods give you more time to potentially recover from the higher volatility that may accompany assets with higher growth potential. This is one area where an investment calculator can help.

When making a decision about how to build a portfolio, you may want to keep in mind that risk and reward are two sides of the same coin. You cannot have one without the other.

There is no such thing as an investment that is high reward with no risk. Often, risk comes in the form of volatility, which is how much the price of an investment type fluctuates. Although these fluctuations are often temporary, it can take months or even years for an asset’s performance to reach its historical average.

How much risk you’re willing to take will also depend on whether you’re making short-term vs. long-term investments.

Short-Term Goals (Less Than 3 Years)

For goals like: Setting up an emergency fund, travel, buying a new car.

A good rule of thumb is to keep any money you need within the next three years “liquid,” or available as soon as you need it. For example, the whole point of having emergency cash is to have access to that money in the event of a crisis, without worry or friction.

Additionally, it’s unlikely that you’ll want to subject money designated for the short term to the volatility of investments like the stock market. The biggest risk you take with short-term money is losing any of it at all, so you’ll probably want to keep it in cash or cash equivalents.

Depending on your risk tolerance, you might consider investing some money for short-term goals in a conservative portfolio that has the potential to pay a higher yield than a savings account, but may offer a lower risk of losing money. If you go this route, you may want to remain flexible about when and how you tap into those investments.

You may elect to keep this cash in an interest-bearing savings account where you may earn interest on your cash savings. You may even find it helpful to open multiple savings accounts, giving them distinct names, in order to keep track of your various goals.

Medium-Term Goals (3 to 10 Years)

These are goals such as: a home purchase, starting a family, planning a trip, returning to school. With a time horizon of three to 10 years, you may be willing to take on additional risk with your money, to give it a greater chance to grow. For these types of goals, you could potentially choose a moderate or moderately conservative portfolio, with a combination of cash, fixed-income investments like bonds, and some stocks.

More than likely, you’ll hold these assets in an investment account, which is sometimes also called a brokerage account.

For goals where you’re investing money for the mid-term, it generally does not make sense to use a retirement account like a 401(k) or a traditional IRA, where you could be penalized for pulling the money out before retirement.

Recommended: What Is Dollar-Cost Averaging?

Long-Term Goals (10+ Years)

The shorter-term goals in this category include a child’s college savings, or a second home. With a time horizon of 10-20 years, some investors may consider investing in a higher allocation of stocks and bonds. Investments for goals with a pre-retirement timeline should be held in an investment or brokerage account.

For a child’s college tuition, some might consider using a 529 Plan which provides some tax benefits to those that are saving for the purpose of higher education.

For longer-term goals, like financial independence, you may have decades to weather the ups and downs of the market and economic cycles. In this scenario, some investors may focus on aggressive growth early on, and then shift to a more conservative investment allocation over time. This may mean starting with a majority of a portfolio in the stock market or other high-risk, high-reward investments.

To save for retirement, you may want to consider investing in an online IRA, a 401(k) plan, or some other retirement-specific account. Retirement accounts have benefits when it comes to taxes, such as deferment on paying taxes until you withdraw from your 401k, or the ability to withdraw contributions from your Roth IRA early without penalties.

4 Tips for Achieving Your Investment Goals

Creating a plan to help you work toward your financial goals can seem daunting. But like any big challenge, you can take it on by using four simple steps: use the S.M.A.R.T. goal framework; understand your risk tolerance; diversify your portfolio, and then review and adjust regularly.

By taking these steps, one at a time, you can begin active and immediate progress towards your goals, whatever they may be.

Use the SMART Goal Framework

The first step in reaching your goals is to know what they are, as precisely as possible. To better understand your financial goals, one technique that may be helpful is the S.M.A.R.T. framework:

•   Specific: Be clear  about what you want to achieve, such as exactly what you want to invest for.

•   Measurable: Assign real numbers to your goals. Measurable goals allow you to track your progress and monitor your success.

•   Achievable: Setting unrealistic expectations can lead to frustration and disappointment. Ensure your goals are realistic for your income and expenses.

•   Relevant: Make sure your goals align with your overall financial plan and your life priorities.

•   Time-based: You can achieve your goal within a reasonable timeframe.

Understand Your Risk Tolerance

Regardless of what you’re investing for, it’s important to understand your personal level of risk tolerance. This is the level of risk you’re willing to take on to achieve your financial goals, and your risk tolerance will change based on your time horizon, and emotional risk capacity, and whether you’re focused on preserving capital, as opposed to maximizing potential returns.

Diversifying your investments by goal into different risk buckets can help you align your risk tolerance with your personal goals and timelines. One way to quickly diversify your investments is to invest in ETFs.

There’s no one product, however, that can manage risk for you. The first step is to understand how much risk you’re willing to take on. This risk tolerance quiz can also help you understand your own personal risk tolerance.

Diversify Your Portfolio

It’s also important to diversify the investments in your portfolio. Portfolio diversification is a process that involves spreading investments across different asset classes, industries, sectors, and locations around the globe. It is important for investors because it can potentially help manage risk, though it can’t entirely eliminate risk.

The exact mix of domestic stocks, international stocks, bonds and other fixed-income assets, and cash or cash equivalents will depend on your risk tolerance, and the goals you’re investing for. You will also have to decide how involved you want to be in managing your portfolio, as this will help you decide between active vs. passive investing.

Review and Adjust Regularly

Once you’ve diversified your portfolio to suit your needs, the next step is typically to adjust the asset mix periodically, a process called portfolio rebalancing — realigning a portfolio’s holdings to match your desired asset allocation.

Over time the different asset classes in your portfolio will likely have different returns, changing how much you hold of each. One stock or fund might have such high returns it eventually grows to be a more significant portion of the portfolio than you planned for. Rebalancing helps you keep your portfolio where you set it. You may also want to rebalance your portfolio if your goals change.

What’s Next?

Once you’ve outlined your goals, you’ve completed the first step toward investing your money.

Next, you can learn more about the investment options that are available to you. This will aid you in building a portfolio or setting up an automated investing program that will help you achieve your goals.

One place to start is exploring the different asset classes and their respective risk and reward profiles. If you are going to be invested in something, it’s helpful to know what to expect. Proper expectations may make you a more successful long-term investor.

Investing isn’t just for the wealthy; it’s for anyone who wants to achieve their financial goals. There are low-cost, simple, and effective investing options that are accessible to investors of all sizes.

Before you invest, you may want to spend some time thinking about what you’re investing for. Naming your goals will help guide you towards an appropriate investment portfolio. As a bonus, thinking deeply about goals may just help you to find the motivation to stick with them.

The Takeaway

Before investing, it’s important to define your financial goals and build a strategy to meet them. In this way, your goals can help you define an investing strategy that helps you target your long-term goals In the short term, that might begin with an emergency fund, with intermediate goals like buying a home or going on a vacation or paying for college, and longer term goals like retirement.

For shorter term goals, more conservative investments, like bonds, may make sense, while longer term goals may lend themselves more aggressive, growth-oriented assets, like stocks. Once your strategy and portfolio is set, you may want to use an automatic investment plan, or you may want to be more hands on and periodically review and rebalance your portfolio to ensure it remains aligned with your goals as they evolve.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

FAQ

How do I prioritize my investment goals?

Prioritizing your investment goals is a multi-step process. First, determine your financial priorities — you might start with housing, living expenses, emergency savings, and paying off high-interest debt. After that, set your investment goals, such as increasing your personal wealth, retirement planning, buying a home, paying for a child’s education, taking a trip, or starting a business.

What is a good first investment goal?

One investing goal is to start an emergency fund. This is money you can easily access if a crisis arises — for example, such as a layoff or an unexpected health emergency. The common recommendation is to keep three to six times your monthly household expenditures in this fund, depending on how risk-averse and well-insured you are.

How often should I review my investing goals?

Whenever your life situation changes, it makes sense to review your goals to make sure they still suit your circumstances. But even without those changes, the consensus among financial planners is that you should check at least once per year and probably once per quarter.

Can my investment goals change over time?

Your goals will necessarily change over time — a new job, a new child, a new passion will necessarily change the things you’re investing for. A successful investing approach likely involves some careful discernment about what matters and then choosing a strategy to help meet your goals.

What’s the difference between saving and investing?

Savings may grow with time, but typically this is not money you want to risk. Also, you want to access your savings easily if you have to. Investments may deliver higher returns, but come with the risk that you can lose some or all of your money. Over time, the rewards of investing often compensates investors for that risk, however.

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If you’re lucky enough to find yourself in possession of a bundle of cash that isn’t immediately needed to pay bills, you have some thinking to do. How to use that money? Whether it came your way via a work bonus, an inheritance, or an unexpected refund, you have the opportunity to put it to work for you in a variety of ways.

Instead of going on a shopping spree, you could deploy the funds to improve your financial situation and build wealth. Options include paying down debt, contributing to retirement goals, and beyond. Read on to learn the full story.

Before You Start: Make a Plan for Your Extra Cash

At some point, you may find some extra cash heading your way and wonder what to do with the spare money. Perhaps you get a bonus for wrangling a complicated project at work. Or you didn’t realize that you’d overpaid your taxes one year. Or maybe an inheritance comes your way.

When funds turn up that you weren’t expecting, it can be tempting to go shopping or book a last-minute vacation. But you might instead look at the money as a means to enrich your financial standing. (Or use most of it that way, and go shopping with a small amount of it.)

A windfall can be a once-in-a-blue-moon opportunity to pay off debt or plump up your emergency fund. It can help you boost your retirement savings or kick your savings for a future goal into high gear.

Yes, it takes discipline to put that money to work, but doing so can have a long-term positive impact on your finances and help with better money management.

Step 1: Build Your Financial Safety Net With an Emergency Fund

If your emergency fund is low (or nonexistent), you might use your new windfall of extra cash to build it up.

Having an emergency fund gives you a financial cushion, along with the sense of security that comes with knowing you can handle a financial set-back (such as a job loss, medical expenses, or costly car or home repair) without hardship.

Having this buffer can also help you avoid having to rely on credit cards for an unexpected expense and then falling into a negative spiral of high interest debt.

How Much to Save in an Emergency Fund

A general rule of thumb is to keep three to six months’ worth of monthly expenses in cash as an emergency fund. If, however, you are, say, the sole breadwinner in a family, you may want to aim higher. You might want to look at different scenarios using an emergency fund calculator.

Consider keeping your emergency fund in a separate high-yield savings account, such as a money market account, online saving account, or a checking and savings account. These options typically offer higher interest rates than a standard savings account, yet allow you to access the money when you need it.

id=”step-2-pay-down-high-interest-debt-like-credit-cards”>Step 2: Pay Down High-Interest Debt Like Credit Cards

If you carry any credit card or other high-interest debt, you might want to use your windfall to jumpstart a strategic debt payoff plan. While mortgage loans and car loans tend to offer lower interest rates since they’re secured by collateral, the same can’t be said of unsecured debts, such as credit card balances. Credit card debt can be especially hard to pay off, given that the current average interest rate is over 20%.

Strategies for Paying Down Debt

Here are two popular options for paying down debt:

•   The avalanche method involves ranking your debts by interest rate. You then put any extra money you have towards paying off the debt with the highest interest rate (while continuing to pay the minimum on other debts). After the balance with the highest interest rate has been completely paid off, you move on to the next highest interest-rate balance (again, putting as much money as you can toward it), and then move down the list until your debt is repaid.

•   With the snowball method, you focus on paying off your smallest debt first (while paying the minimum on your other debts). Once that balance is paid off, you take the funds you had previously allocated to your smallest debt and put them toward the next-smallest balance. This cycle repeats until all of your debt is repaid.

Using your extra cash to pay off debt has added benefits. You may build your credit score as your credit utilization ratio (the amount of available credit you’ve used vs. your credit limit) goes down.

In addition, once you clear your debt, you won’t have to budget for debt payments anymore, which is essentially getting extra cash all over again.

Step 3: Boost Your Retirement Savings

Here’s another idea for what to do with extra money. Rather than let it sit in your checking account, you might use it to grow your retirement accounts. There are a couple of options to consider here.

401(k) and Employer Match

Does your employer offer a 401(k) with matching contributions? If so, this can be a powerful tool to help you save for retirement.

Not only does a 401(k) help lower your taxes (since this money comes out of your salary before taxes are deducted), your employer’s matching contributions are essentially free money and can provide a nice boost to your retirement savings.

If you’re not currently taking full advantage of matching funds, you may want to adjust your contributions to help ensure you’re making the most of this benefit. And if a windfall comes your way, you may want to deposit it right into your account.

Start or Fund an IRA

What do you do if you don’t have a company plan or you’ve hit your contribution limit there? You might consider using your new influx of cash to open up (or add to) an individual retirement account (IRA).

While retirement may feel a long way off, starting early can be a smart idea, thanks to the magic of compound earnings (that’s when the money you invest earns interest/dividends, those earnings then get reinvested and also grow).

There is also a possible immediate financial benefit to investing in an IRA: Just as with a 401(k), your IRA contributions can possibly reduce your taxable income, which means that any money you put in this year can lower your tax bill for this year.

You’ll want to keep in mind, however, that the federal government places limitations on how much you can contribute each year to retirement funds.

Recommended: IRA vs. 401(k): What’s the Difference?

Step 4: Invest Beyond Retirement With a Brokerage Account

A little windfall can offer a nice opportunity to buy investments that can possibly help you create additional wealth over time.

For long-term financial goals (outside of retirement), you might consider opening up a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and funds like mutual funds and exchange-traded funds (ETFs).

A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA but is much more flexible in terms of when the money can be accessed.

Though all investments come with some risk, generally the longer you keep your money invested, the better your odds of overcoming any down markets. Your investment gains can also grow exponentially over time as your earnings are compounded. Worth noting: Past performance doesn’t guarantee future return, and while your money may be insured against broker-dealer insolvency, it is not insured against loss.

While investing can seem intimidating, a financial planner can be a helpful resource to help you create an investment strategy that takes into consideration your goals and risk tolerance.

Step 5: Save for Major Life Goals

Still wondering what to do with extra money? If you already have a solid emergency fund and your retirement account is growing nicely, you may want to think about what large purchases you are hoping to make in the next few years. That could be buying a new car, or accruing a down payment for a home. A savings goal calculator can help you determine how much to save and for how long to reach your goal.

A lump sum of cash can be a great way to jumpstart saving for your goal or, if you’re already saving, to quickly beef up this fund.

Save for a Down Payment on a House

Owning one’s own home is a classic part of the American dream. To save for a down payment, you may want to open a dedicated high-yield savings account after researching which has the best interest rates and terms. Then, you could set up automatic transfers into it from your checking account after your paycheck is direct-deposited.

While saving a 20% or more down payment will help you avoid private mortgage insurance (PMI), that amount isn’t always possible. Some mortgages are available with 3% to 5% down, and first-time buyer assistance programs can provide extra help. Set a realistic timeline for saving; an online down payment calculator can help you do the math.

Save for a Child’s Education With a 529 Plan

If you have some extra money, you might consider putting it toward your child’s future education expenses. A 529 college savings plan is worth considering: It’s a tax-advantaged savings tool for education which allows earnings to grow tax-free. Withdrawals for qualified education expenses are also tax-free, offering a money-smart way to save for future schooling.

Step 6: Invest in Yourself Through Education or New Skills

Another option for extra money is to invest in yourself through education and new skills. This can turbocharge your career trajectory and earning potential. Depending on your particular interests, budget, and profession, you could go back to school for a degree, take an online course, attend workshops, or obtain certificates in different skill areas. Doing so can help you explore new horizons or deepen your competencies in an area you are already pursuing.

You can add money to a savings Vault account to earn interest as you research options and determine the best path forward.

The Takeaway

Wondering what to do with a lump sum of extra money is a good problem to have. Some options you might want to consider include: setting up an emergency fund, paying down high-interest debt, or putting the money into your retirement fund or another type of long-term investment.

If you are looking for a place to bank your funds for a future goal, compare account features, such as the annual percentage yield (APY) offered and fees assessed.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Should I pay off debt or invest my extra money first?

When deciding whether to pay off debt or invest extra money, it’s usually wise to pay off high-interest debt such as credit cards) first. Then, if you only have low-interest debt (say, a mortgage), investing can be a good step because investment returns can be greater than the debt’s interest rate.

What should I do if I only have an extra $100 a month?

If you have an extra $100 a month, it can be a smart move to build an emergency fund, pay off high-interest debt (like credit cards), or invest in, say, a Roth IRA to build your wealth.

Where is the best place to keep my emergency fund?

Many people find that a high-yield checking account is a good place to keep their emergency fund. This keeps your money liquid, meaning you can access it when needed, while also earning some interest.

How much of my extra money should I enjoy versus save?

It’s important to strike a balance between enjoying your money and saving it. You might try the 50/30/20 budget rule, which allocates 50% of take-home pay to essentials, 30% to wants (things you enjoy), and 20% to savings and additional debt payments.

What is the difference between saving and investing?

Saving is setting money aside money securely and accessibly, often to achieve short-term goals. Investing involves using money for long-term growth in such assets as stocks and bonds but with a higher level of risk.

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There are a ton of investment strategies and ideas out there, and it can be difficult to figure out which one might be right for you. Simple strategies, particularly for beginners, include utilizing asset allocation, diversification, rebalancing, and buy-and-hold tactics.

With that in mind, investing is a powerful tool that allows you to put your money to work to help you reach future financial goals. But if you’re new to investing, you may be asking yourself what investment strategies should you pursue? Here are some strategies to help you get started.

5 Popular Investment Strategies for Beginners

There are many investment strategies for beginners to consider. Here are some that can help you get started.

1. Asset Allocation

Asset allocation refers to proportioning out different types of investments across your portfolio.

Once you’ve opened an investment account and you begin to build your portfolio, asset allocation is an important strategy to consider to help you balance potential risk and rewards. A typical portfolio might divide its assets among three main asset classes: stocks, bonds, and cash. Each asset class has its own risk and return profile, behaving a little bit differently under different market circumstances.

For example, stocks tend to offer higher gains, but they are also more volatile, presenting increased potential for losses. Bonds are generally considered to be less risky than stocks, while cash is typically more stable.

The proportion of each asset class you hold will depend on your goals, time horizon, and risk tolerance. Your goal is how much you aim to save. Your time horizon is the length of time you have before reaching your goals. And your risk tolerance is how much risk you’re willing to take to achieve your goals.

Your asset allocation can shift over time. For example, someone in their 30s saving for retirement has a long time horizon and may have a higher risk tolerance. As a result their portfolio may contain mostly stocks. As that person grows older and nears retirement, their portfolio may shift to contain more bonds and cash, which are typically less risky and less likely to lose value in the short-term.

2. Diversification

Another way to help manage risk in your portfolio is through diversification, which is building a portfolio with a mix of investments across assets to avoid putting all your eggs in one basket.

Here’s how it works: Imagine you had a portfolio consisting of stock from one company. If that stock does poorly your entire portfolio suffers.

Now imagine a portfolio consisting of many stocks, from companies of all sizes and sectors. Not only that, it also holds other investments, including bonds. If one stock suffers, it will have a much smaller effect on your overall portfolio, spreading out the risk of holding any one investment.

Start investing with up to $1,000 in stock.

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3. Rebalancing

Rebalancing involves shifting around your portfolio’s holdings to make sure it aligns with your broader strategy and goals.

Your portfolio can change over time, shifting your assets allocation and diversification. For example, if there is a bull market and stocks outperform, you may discover that you now hold a greater portion of your portfolio in stocks than you had intended.

At this point, investors typically rebalance their portfolio to bring it back in line with their goals, time horizon, and risk tolerance. In the example above, an investor may decide to sell some stock or buy more bonds, for instance.

4. Buy-and-hold Strategy for Investing

Market fluctuations are a natural part of the market cycle. However, investors may get nervous and be tempted to sell when prices drop. When they do, investors might lock in their losses and miss out on subsequent market rebounds.

Investors practicing buy-and-hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so may help curb the tendency to panic sell, and it might also help minimize fees associated with trading.

Buy and hold might also affect an investor’s taxes. Holding a long-term investment vs. short-term one can make a big difference in terms of how much an individual pays in taxes.

If you profit from an investment after owning it for at least a year, it’s a long-term capital gain. Less than that is short-term. Capital gains tax rates can change, but generally, longer-term investments are taxed at a lower rate than short-term ones.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

5. Dollar-Cost Averaging

Dollar-cost averaging is a strategy in which individuals invest on a regular basis by making fixed investments on a regular schedule regardless of market prices.

For example, say an investor wants to invest $1,000 every quarter in an exchange-traded fund (ETF) that tracks the S&P 500. Each quarter, the price of that fund will likely vary — sometimes it will be up, sometimes it will be down. The amount of money the individual invests remains the same, so they are buying fewer shares when prices are high, and more shares when prices are low.

This strategy may help individuals avoid emotional investing. It’s also straightforward and can help investors stick to a plan, rather than trying to time the market.

The Takeaway

There are many different strategies and tactics that investors can use, and some are likely more beginner-friendly than others. Those could include asset allocation, diversification, rebalancing, and buying-and-holding strategies.

Investing is an ongoing process. Your life, goals, and financial needs will all change as your circumstances do. For example, may you get a raise at work, get married and have a child, or decide to retire early. Factors like these will change how much money you need to save and how you invest. Monitor your portfolio and make adjustments as needed.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

Is rebalancing the same as diversification?

Rebalancing and diversification are not the same, though they’re similar. They can be used in tandem to manage investment risk, but the main difference is that rebalancing involves periodically adjusting investments to align them with your goals, while diversification involves spreading investment across asset types to manage risk.

What does a buy-and-hold strategy entail?

A buy-and-hold strategy is more or less what it sounds like: Buying investments, and holding onto them for a long period of time, despite short-term ups and downs in the market.

What is dollar-cost averaging?

Dollar-cost averaging is an investment strategy in which individuals invest a fixed amount on a regular schedule, regardless of market prices. This can help investors avoid timing the market, and over time can enable them to buy more investment shares when prices are low and fewer when prices are high.