How to Invest in Your 20s: 7 Tips to Get Started
Investing as a young adult is one of the most important things you can do to prepare for your future. You may think you need a lot of money to start investing, but it’s easier than ever to start investing small. Once you’ve set up your investment accounts, you’ll be well on your way to saving for goals like retirement, buying a home, or even future travel plans.
But before you dive headfirst into the market, it’s important to prioritize paying off any high-yield debt that could be weighing on your finances, and then building up an emergency fund with savings that could cover at least three to six months’ expenses.
Once that’s done, you can start investing quickly, even if you’re starting small. Developing a consistent approach to saving and investing will help you stick to your plan over time.
How to start investing in your 20s
Money invested in your 20s can pay dividends for decades, making it a great time to invest in long-term goals. Here are some tips to get you started.
1. Set your investment goals
Before you jump in, you should think about the goals you want to achieve with your investment.
“Ultimately, it’s about looking at all the experiences you want to have throughout your life and then prioritizing those things,” says Claire Gallant, financial planner at Commas in Cincinnati. “Some people might want to travel every year or buy a car in two years and retire too [age] 65. It’s about creating the investment plan to make sure these things are possible.”
The accounts you use for short-term goals like travel are different than the ones you open for long-term retirement goals.
You should also understand your own risk tolerance, which means thinking about how you will react when an investment performs poorly. Your 20s can be a great time to take investment risks as you have a long time to recoup losses. Focusing on riskier assets like stocks for long-term goals will likely make a lot of sense if you’re able to start early.
Once you’ve outlined a set of goals and created a plan, you can delve into specific accounts.
2. Contribution to an employer-sponsored retirement plan
People in their 20s who start investing through an employer-funded, tax-advantaged retirement plan can benefit from decades of compounding. Most often, this plan comes in the form of a 401(k).
A 401(k) allows you to invest money on a pre-tax basis (up to $22,500 in 2023 for those under age 50) that grows tax-deferred until it’s withdrawn in retirement. Many employers also offer a Roth 401(k) option that allows employees to make after-tax contributions that grow tax-free, and you don’t pay taxes when you withdraw money in retirement.
Many companies also match employee contributions up to a certain percentage.
“You always want to contribute enough to at least get this match, because otherwise you just have more or less free money,” says Gallant.
However, the match may come with a vesting schedule, which means you have to stay at your place of work for a certain amount of time before you receive the full amount. Some employers allow you to keep 20 percent of your salary after one year of employment, with that number steadily increasing until you get 100 percent after five years.
Even if you can’t max out your 401(k) right away, starting small can make a big difference over time. Develop a plan to increase contributions as your career advances and your income grows higher.
Bankrate’s 401(k) calculator can help you figure out how much you need to contribute to your 401(k) to build enough money for retirement.
3. Open an Individual Retirement Account (IRA)
Another way to continue your long-term investment strategy is with an Individual Retirement Account, or IRA.
There are two main IRA options: traditional and Roth. Contributions to a traditional IRA are similar to a 401(k) in that they are received on a pre-tax basis and are not taxed until paid out. Roth IRA contributions, on the other hand, accrue post-tax, and qualifying distributions are tax-free deductible.
Investors under the age of 50 are allowed to contribute up to $6,000 to IRAs in 2022, but that number will increase to $6,500 in 2023.
Experts generally recommend a Roth IRA over a traditional IRA for 20-year-olds because they’re more likely to be in a lower tax bracket than at retirement age.
“We always love the Roth option,” says Gallant. “As young people earn more and more money, their tax bracket will increase. They pay into these funds today at the lowest tax rate so they can withdraw the money tax-free when they retire.”
Ross Menke, a board-certified financial planner at Mariner Wealth Advisors in Sioux Falls, South Dakota, advises investors of all ages to consider their personal circumstances before making a decision. “It all depends on when you want to pay the tax and when it’s most convenient for you based on your personal circumstances,” he says.
4. Find a broker or robo advisor that suits your needs
For longer-term goals that aren’t necessarily related to retirement, like a down payment on a future home or your child’s college costs, brokerage accounts are a good option.
And with the rise of online brokers like Fidelity and Schwab, and robo-advisors like Betterment and Wealthfront, they’re more accessible than ever to young people who might be starting out on a small budget.
These companies offer low fees, reasonable minimums, and educational resources for new investors, and your investments can often be made simply through an app on your phone. Betterment, for example, only charges 0.25 percent of your wealth each year with no minimum balance, or 0.4 percent for their premium plan, which requires a minimum of $100,000 in your account.
Many robo advisors simplify the process as much as possible. Provide a bit of information about your goals and time horizon, and the robo-advisor will select a portfolio that’s a good fit and adjust it for you on a regular basis.
“There are a lot of good options out there, and each of them has their own speciality,” says Menke. Look around to find the one that best fits your time horizon and contribution level.
5. Consider using a financial advisor
If you don’t want to go down the robo advisor route, a human financial advisor can also be a great resource for beginners.
Although this is the more expensive option, they will work with you to set goals, assess risk tolerance, and find the brokerage accounts that best meet your needs. They can also help you decide where to direct the funds in your retirement accounts.
A financial advisor will also use their expertise to steer you in the right investment direction. While it’s easy for some young investors to get caught up in the excitement of the daily market highs and lows, a financial advisor understands how the long game works.
“I don’t think investing should be exciting, I think it should be boring,” says Menke. “It shouldn’t be viewed as a form of entertainment because it’s your life saving. Boring is okay sometimes. It depends on what your time frame is and what your goal is.”
6. Keep short-term savings in an easily accessible place
Like your emergency fund that you may need to access at all times, keep your short-term investments in an easily accessible place that is not subject to market fluctuations.
While you won’t make as much as the money you invest in stocks, savings accounts, CDs, and money market accounts are great options.
“If you don’t need the available money for a few years, you shouldn’t invest it in the stock market,” says Menke. “Invest in safer vehicles like CDs or money markets where you may be missing out on potential growth, but getting a return on your money is more important than a return on your money.”
7. Increase your savings over time
Setting a savings amount to stick to and having a plan to increase it over time is one of the best things to do in your 20s.
“Setting a certain savings rate and increasing it year after year will have the greatest effect at the beginning of your savings career to make it easier for you to get started,” says Menke.
If you start this habit in your 20s, you’ll ease up as you get older and won’t have to worry about extreme austerity later to reach your long-term financial goals.
Investment opportunities for beginners
ETFs and mutual funds. These funds allow investors to purchase a basket of securities at a relatively low cost. Funds that track indexes like the S&P 500 are popular with investors because they easily offer broad diversification for near-zero fees. ETFs trade like a stock throughout the day, while mutual funds can only be bought at the day’s net asset value (NAV).
stocks. Stocks are considered one of the best investment options for your long-term goals. You can buy stocks through ETFs or mutual funds, but you can also choose individual companies to invest in. You should research each stock thoroughly before investing and make sure you diversify your holdings. It’s best to start small if you don’t have much experience.
Steady income. If you’re a more risk-averse investor, fixed income investments like bonds, money market funds, or high-yield savings accounts can help you get started on the investing landscape. Fixed income securities are generally less risky than stocks, although they will also yield lower returns. However, these investments may lose value due to rising interest rates or increased inflation.
Diversification is key
One way to limit your investment risk is to ensure your portfolio is appropriately diversified. It is important to ensure that there are not too many eggs in one or similar baskets. By maintaining diversification, you can smooth out your investing journey and hopefully make it more likely that you’ll be able to stick to your plan.
Remember, investing in stocks should always be made with long-term money, giving you at least a three to five year time horizon. Money that might be needed in the short term is better placed in high-yield savings accounts or other cash management accounts.
Ready to start?
Begin your investing journey by thinking through your short, medium, and long-term goals, and then finding the accounts that best meet those needs.
Your plans will likely change over time, but at least starting a retirement account is one of the most important things you can do for yourself in your 20s.
Not only do you ensure your money keeps up with inflation, but you also benefit from decades of compound interest on your premiums.
Note: Kendall Little wrote the original version of this story
