How to invest in your 20s: 7 tips to get started

Investing as a young person is one of the most important things you can do to prepare yourself for the future. You may think you need a lot of money to start investing, but starting with a small amount is easier than ever. Once you set up an investment account, you’re ready to save for goals like retirement, buying a home, or even planning future travel.

But before jumping headfirst into the market, it’s a good idea to prioritize paying off the high-interest debt that may be straining your finances, and building an emergency fund with at least three to six months of worthy savings. It is important.

Once that’s taken care of, you can take your investments by leaps and bounds, even if you start small.

How to start investing in your 20s

Money invested in your 20s can double over the decades, so it’s the perfect time to invest in long-term goals. Here are some tips to get you started.

1. Determine your investment goals

Before diving in, you should think about the goals you are trying to achieve with your investment.

Claire Gallant, financial planner at Commas in Cincinnati, said: “For some people, they may want to travel every year, buy a car in two years, or retire. [age] 65. Create an investment plan to make sure it is possible. ”

An account you use for short-term goals, such as travel, is different than an account you open for long-term retirement goals.

You also need to understand your own tolerance for risk. This includes thinking about how you would react if your investment underperformed. Your 20s are the best time to take investment risk, as you have more time to make up for your losses. Focusing on riskier assets such as stocks and setting long-term goals can make a lot of sense if you are in a position to start early.

Once you’ve outlined your set of goals and established your plan, you’re ready to look into specific accounts.

2. Donate to a retirement plan provided by your employer

Twenties who start investing through an employer-sponsored, tax-advantaged retirement plan can benefit from compounding interest for decades. Most often, that plan comes in the form of her 401(k).

With a 401(k), you can invest on a pre-tax basis (up to $22,500 in 2023 if you’re under 50) and defer taxes until you withdraw at retirement. Many employers also offer Roth 401(k) options. This allows employees to increase their after-tax contributions tax-free and eliminates the need to pay taxes when withdrawing after retirement.

Many companies also match employee contributions up to a certain percentage.

“I always want to at least contribute enough to win that match, because otherwise I’m more or less away from free money,” Gallant said.

However, matches may be accompanied by a vesting schedule. That means you have to stay at work for a certain amount of time before you receive the full amount. Some employers allow him to keep 20% of his matches after one year of employment, with the number gradually increasing until he receives 100% after five years.

Even if you can’t maximize your 401(k) right away, starting small can make a big difference over time. As your career progresses and your income increases, plan to increase your giving.

Bankrate’s 401(k) Calculator helps you figure out how much you should contribute to your 401(k) to build up enough money for retirement.

3. Open an Individual Retirement Account (IRA)

Another way to continue your long-term investment strategy is through an Individual Retirement Account (IRA).

There are two main IRA options: traditional and loss. Contributions to traditional IRAs are similar to 401(k)s in that they are made on a pre-tax basis and are not taxed until withdrawal. Contributions to the Roth IRA, on the other hand, are credited to your account after tax and eligible distributions can be withdrawn tax-free.

Investors under the age of 50 will be allowed to contribute up to $6,000 to IRAs in 2022, with that number jumping to $6,500 in 2023.

Experts generally recommend a Roth IRA over a traditional IRA for people in their 20s.

“We’ve always liked the Roth option,” says Gallant. “As young people make more money, their tax bill will increase. I can do it.”

Ross Menke, a certified financial planner at Mariner Wealth Advisors in Sioux Falls, South Dakota, advises investors of all ages to consider their own circumstances before making a decision. “It all depends on when you want to pay your taxes and when is the most appropriate time based on your personal circumstances,” he says.

4. Find a broker or robo-advisor that fits your needs

For long-term goals that aren’t necessarily retirement-related, such as paying for a future home or paying for your children’s education, a brokerage account is a great option.

And with the advent of online brokers like Fidelity and Schwab, and robo-advisors like Betterment and Wealthfront, young people with little money are more accessible than ever.

These companies offer new investors low fees, reasonable minimums, educational resources, and often an easy way to invest through an app on your phone. , billing only 0.25% of your assets annually, with no minimum balance. 0.4% for premium plans and requires at least $100,000 in account.

Many robo-advisors keep the process as simple as possible. Give a little information about your goals and timeframe and our robo-advisor will choose the best portfolio for you and rebalance it periodically.

“There are a lot of great options out there, each with their own specialties,” says Menke. Find the one that best fits your time range and contribution.

5. Consider using a financial advisor

Human financial advisors can also be a great resource for novice investors if you don’t want to go down the robo-advisor path.

It’s the more expensive option, but they’ll work with you to set goals, assess your risk tolerance, and find the brokerage account that best fits your needs. It also helps you choose which

Our financial advisors also use their expertise to guide you in the right investment direction. While some young investors can easily get caught up in the excitement of the daily market highs and lows, financial advisors understand 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 seen as a form of entertainment because it’s your life savings. Boredom is okay sometimes. It comes back to your time frame and what your goals are.”

6. Store short-term savings in an easily accessible location

Short-term investments, like emergency funds that you may need to access quickly, should be kept in a location that is easily accessible and protected from market volatility.

They won’t make as much money as you invested in stocks, but savings accounts, CDs, and money market accounts are excellent options.

“You shouldn’t invest in the stock market if you want money that will be available in a few years,” says Menke. “You should invest in safer instruments like CDs and the money market. Sure, you may be giving up some of your potential growth, but you should be getting a money return, not a money return. more important.”

7. Increase your savings over time

One of the best things you can do in your 20s is to set a sustainable savings amount and plan to increase it over time.

According to Menke, “Committing to a certain savings rate and continuing to increase it each year will have the greatest impact early in your savings career and allow you to start saving.”

By starting this habit in your 20s, you’ll be less taxing on yourself as you get older, and you won’t have to worry about taking extreme savings measures later to reach your long-term financial goals.

Investment options for beginners

ETFs and mutual funds. These funds allow investors to purchase a basket of securities at a fairly low cost. Index-tracking funds such as the S&P 500 are popular with investors because they can easily offer broad diversification at near-zero fees. ETFs trade throughout the day just like stocks, but mutual funds can only be purchased at the closing net asset value (NAV) of the day.

stock. For long-term goals, stocks are considered one of the best investment options. You can buy stocks through ETFs and mutual funds, but you can also choose to invest in individual companies. If you don’t have much experience, we recommend starting small.

fixed income. For the more risk-averse investor, investing in fixed income, such as bonds, money market funds and high-yield savings accounts, can facilitate entry into the investment landscape. Fixed income securities are generally less risky than stocks, but they also have lower returns. However, these investments may eventually lose value due to rising interest rates and rising inflation.

Diversification is key

One way to limit the risk in investing is to make sure your portfolio is well diversified. This includes not having too many eggs in one or similar baskets. Staying diversified will keep your investment journey smooth and hopefully increase your chances of sticking to your plan.

Remember that investing in stocks should always be done with long-term money. We recommend investing money for short-term use in a high-yield savings account or other cash management account.

Ready to get started?

Start your investment journey by thinking about your short, medium and long term goals and find the account that best fits those needs.

Plans may change over time, but at least having a retirement account is one of the most important things you can do for your 20-something self.

Not only will your money be inflation-proof, but you’ll also benefit from decades of compounding interest on your donations.

Note: Kendall Little wrote the original version of this story

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