The return-on-investment (ROI) formula shows how well your investments are performing. This is represented through the following formula:

ROI = (current value – cost of investment/cost of investment) x 100

For example, say the current value of a stock you bought is $1,200 (present value), and you purchased it for $1,000 (cost of investment). When plugged into the formula, you'll get an ROI of 20%. This means your investments earned you 20% more.

One important reason you should invest is to outpace inflation. Your dollar may not be worth the same today as it will be in several years. For example, say you buy a pair of shoes for $100 today; it may cost $130 in the next 10 years. Investing can help you grow your money to keep up with rising costs.

Investing is also an effective way to build your retirement fund. As you age, you may need or want to stop working. A well-funded retirement account ensures you can live comfortably without working for income. According to Prudential data, the average couple needs to save $1,712,717 to maintain their current lifestyle for 20 years. A retirement calculator can help you figure out how much you need to save for retirement and whether you’re on track.

Finally, investments earn you passive income. All you have to do is contribute to your investment account and monitor it regularly. As a result, your money grows even in your sleep—and who doesn’t want that?

Ideally, you want to invest 10% to 15% of your income. If that isn't possible, invest as much as you can. Starting early is key to benefiting from compounding growth. As you earn more, contribute more to your investment account so it grows faster.

There are two types of goals: long-term goals and short-term goals.

Long-term goals have a timeline of more than five years, like saving for retirement or a house. You’ll want to keep your savings in investments that produce high returns over a long period of time. Examples of long-term investment accounts include:

• Stocks
• Bonds
• Mutual funds
•  Real estate

Short-term goals have a timeline of five years or less, like saving for a wedding or building an emergency fund. Short-term goals are best invested in a low-risk account that you can easily access. Examples of short-term investments include:

• High-yield savings accounts
• Certificates of deposit (CDs)
• Money market accounts

A 401(k) is a great place to start investing. Employers offer 401(k)s to incentivize retirement savings. They have tax benefits, lowering the taxes you pay. And if you're lucky, your 401(k) will come with an employer match. With this feature, your company will match every dollar or partial dollar of your contribution up to a percentage of your salary. Consider contributing up to the percentage match to maximize this benefit.

It's worth noting that 401(k)s have limits to how much you can invest. Also, if you withdraw before the age of 59½, you’ll face a hefty tax penalty. Here are other plans to consider:

• Individual retirement accounts (IRAs) — Like a 401(k), this account gives you tax benefits, but it also has contribution limits and early withdrawal penalties. Consider an IRA if your job doesn’t offer 401(k)s, or if your 401(k) is maxed out.
• Taxable accounts — This type of account allows you to buy and sell investments whenever you want. But, you’ll have to pay taxes on capital gains, including earnings, interest, and dividends.
• 529 plans — This investment plan gives you tax benefits for future education savings, but if used for nonqualified expenses (expenses not directly related to education), you’ll have to pay a penalty tax.
  
  

Before putting your money in any accounts, think about your risk tolerance. Factors that influence risk tolerance include your timeline, goals, age, portfolio size, and comfort level with losses. You can be an aggressive, moderate, or conservative investor.

For example, younger investors saving for retirement have a longer time frame. So they have more time to recover from losses in the market. As a result, an aggressive approach may offer them higher returns. On the flip side, investors nearing retirement may want to preserve their savings. A conservative approach may be attractive, as it offers stable returns while minimizing losses.