Investing in Your 20s

Our 20s are a time of firsts. First time earning a salary. First time paying rent or mortgage. And for some, first time investing. If you’re thinking about making that initial leap and wondering how to get into investing, you’re already ahead of the game. Learning how to invest in your 20s will take a bit of homework, some commitment and a lot of patience. But by the time you reach retirement, you’ll be happy you didn’t wait.

Why should you start investing in your 20s?

When it comes to investing, the earlier the better. You likely have fewer debts and financial responsibilities now than you will as you get older. Even if your current salary is somewhat modest, you can invest smaller amounts now and increase your investments over time as your income grows. Remember, the sooner you begin putting away money, the sooner interest can start growing on it.

Here’s a great example: At age 25, you begin investing $200 each month in an investment with an average return rate of 6%. When you turn 65, that investment will be worth $381,535, but you will have only contributed $96,000 of it yourself.¹

What types of stocks should you start investing in during your 20s?

In your 20s, exploring a variety of investment opportunities under the guidance of an investment adviser can benefit your portfolio. Having diverse stock options can help you reduce risk so if one stock doesn’t do well, another may do better. Investment advisers know market conditions and may also have fiduciary responsibilities so they can help you determine the kinds of stocks and levels of risk you’re comfortable with. Some young investors may choose to take on a higher level of risk in their 20s because there’s plenty of time to ride the ups and downs of the stock market and make up for any losses.

7 steps for investing in your 20s

What is the best way to get into investing? It all depends on the kind of investment, how much you’re willing to risk, and how long you’re planning to invest. But regardless of your investment goals, these 7 steps are a great way to start investing in your 20s:

Start with a plan

Pay down debts. Make a budget. In essence, make sure your financial situation is stable enough to begin investing. Make a list of your goals like buying a house, upgrading your car or traveling the world, for instance. Compare those to your long-term goals like saving for your children’s college education or retiring at age 65 (or sooner). Knowing what you’re saving for will help guide you toward the right investment vehicles.

Take advantage of your 401(k) plan if your employer offers one

If you're employed and your company offers a 401(k) plan, participating in it will not only help you save for retirement, but also potentially increase your savings through employer-matched contributions. With employer 401(k) matching, when you contribute a certain amount to your 401(k), your employer will contribute to it as well. Some companies match employee contributions dollar for dollar, while others match a certain percentage. The bottom line? If your employer offers one, be sure to take the opportunity to participate. Otherwise, you’ll be leaving “free money” on the table.

Even if your employer doesn't offer matching contributions, participating in your 401(k) remains a wise financial move with substantial benefits such as tax advantages, automatic savings and higher contribution limits. Contributing to a 401(k) is a great way to ensure you're building your retirement fund.

Get the help of a financial professional

For most of us, the world of investing is unfamiliar territory. The help of a licensed professional can help you make appropriate decisions about how to invest money in your 20s and well beyond. In addition to investment advice, a financial adviser can help you with insurance planning, budgeting, saving, retirement and estate planning, and tax strategies. An investment adviser, on the other hand, is solely focused on providing advice about securities and must be registered with the Securities and Exchange Commission or a state securities regulator.² Do your research to find the right financial professional adviser for your needs.

Set up an IRA

Individual Retirement Accounts (IRAs) offer an easy way to save for retirement. The most well-known are Traditional IRAs and Roth IRAs. Both allow you to invest in stocks, bonds, exchange traded funds (ETFs) and mutual funds. You can contribute a maximum of $6,000 each year. But keep in mind that since IRAs are intended for retirement, there may be penalties for withdrawals made before retirement age. IRAs are similar to 401(k) plans, with a few key differences.

Open a money market account or CD

Certificates of deposit (CDs) and money market accounts may not yield high returns like other investments, but they offer peace of mind. Money market accounts deliver higher interest rates than most savings accounts but often require a higher minimum deposit and balance. One advantage is that most offer debit card and check writing privileges, so you know your money is accessible should you need it. A CD is like a savings account but for a fixed length of time — anywhere from three months to 10 years. However, unlike a traditional savings account, withdrawing your money from a CD before the term expires results in an early withdrawal penalty.

Diversify

Consider splitting your investments across these three categories — stocks, bonds and cash. The benefit of diversification is that these asset types often perform differently under the same economic conditions, so by placing your investments among different categories, you can help minimize the risk of significant losses. For instance, if the stock market is experiencing a downturn, your bond investments might still yield positive returns, offsetting the impact on your portfolio. Diversification isn't just about reducing risks; it's also about optimizing your potential for steady, long-term gains.

Adjust your investment plan as your income grows

In your 20s, you may only be able to make modest contributions to your savings and investments. But as you grow in your career and in life, be sure to adjust your investment strategy accordingly, so you can keep pace with your goals.

Stay Consistent

Investing in your 20s can give you the head start you need to be financially stable throughout life and into retirement. But keep your expectations in check. Look at your investments as a way to build your financial foundation steadily over time, not as a fast way to make money. With consistency and commitment, you’ll see long-term success.

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1 https://www.calculator.net/investment-calculator.html
2 Calculations based on expected annual salary increases of 3%, return of 7% and inflation rate of 3%. https://www.calculator.net/401k-calculator.html

This article was updated from it's original posting in 2022.