5 Tips To Start Investing in Your 20s

Are you looking to build wealth in your 20s? If you answered yes then you’re in the right place!

Before you dive into the tips, we just wanted to let you know that you’re in an excellent position (even if you don’t know how to invest just yet)!

TIME IS ONE YOUR SIDE!

When it comes down to investing, the earlier the better.

Learning how to invest in your 20s is critical because starting early takes advantage of time. 

Why is time so important? That’s a great question- there is a sweet thing called compound interest that helps your money grow at a rapid pace. 

Investing in your 20s is one of the best ways to prepare for your future financially.  

Although it may not seem so, you’ll find that a small amount of money invested when you were 20 will take you a long way.

If you’re in your 20s and you want to get ahead of the game, this is the article for you. We are going to go over a few tips to start investing.

Importance of Time When Investing 

Before we get into the tips, we’d like you to take a few minutes to really understand the importance of time when investing.

When you invest in your 20s you allow yourself the privilege of taking advantage of compound interest.

Time will take your investments and grow them year over year resulting in a compounding effect. 

The basic idea behind compounding returns is that your returns will earn more returns.

While it may seem like investing with little money will result in small gains, taken over a period of time, small returns can snowball into huge gains. 

It doesn’t matter if you start investing with $100, $500 or $1000- the key is to start.

Quick Summary: How to Start Investing in Your 20s

  1. Pay off student debt
  2. Take advantage of your 401(k)
  3. Invest in an IRA
  4. Find a broker 
  5. Put money aside for the future

#1 Pay Off Student Debt

If you have outstanding student debt, paying it off should be one of your main goals. Nowadays student debt is a serious problem for those in their 20s. 

Warren Buffet is known to be one of the best investors alive. Check out how he advised a friend of his to deal with debt.

A friend of his had some money to invest so she asked him what he recommended. His first question to her was whether or not she had debt. She did and was paying an interest rate of about 18%. 

Warren said:

“If I owed any money at 18%, the first thing I’d do with any money I had would be to pay it off”

The interest on student loans is roughly 6% in the United States according to Debt.org. Although 6% is much lower than 18% the message is clear- get rid of your debt as soon as possible. 

Most college graduates carry their student debt into adulthood. Student debt is a heavy burden. 

Student loans are virtually inescapable, even if you declare bankruptcy!

If you are you can, it’s a good idea to pay off your student debt.

In fact,  clear off any debt that is restraining your future growth before you begin investing in the stock market.

#2 Take Advantage of You 401(k)

If you’re not sure what a 401(k) is, not to worry.

If you’re employed, your company can offer you a 401(k). A 401(k) is a company-sponsored retirement account that is partially funded by the employer and the employee.

These partial contributions made by your employer are basically like money on the ground.

Make sure that you give the amount that your employer is willing to match. That way you can fully take advantage of your 401(k).

A great way to start investing in your 20s is no doubt through an employer-sponsored 401(k). We’re are going to sum up some of the main reasons why a 401(k) is so beneficial for your financial future:  

  • The money comes right out of your paycheck making it simple to invest.
  • Your employer likely offers some kind of match on what you contribute, allowing you to increase your overall compensation. 
  • A 401(k) is a tax-advantaged account. That means your returns are tax-free and you won’t have to pay capital gains taxes.
  • When you change jobs or make a career move, you can always rollover your 401(k) contributions.

When you start a job, the company’s HR department should provide you a packet of information regarding your employer’s 401(k) plan. 

Read as much of it as possible and look up anything you don’t understand. At the very least, you can always ask an HR representative for help. 

Sounds like a pretty sweet deal no. As an employee, you don’t have to set up your 401(k), 401(k)s are established by employers.

The bottom line here is that 401(k)s are here to help employees prepare for retirement. 

#3 Invest in an Individual Retirement Account (IRA)

If you don’t have access to a 401(k) through your employer or want to diversify, invest and build a private portfolio.

For that, you will need to open a brokerage account. We will go over the top online brokers below.

Anyway, back to IRAs.

An IRA is similar to a 401(k) in that they are both retirement accounts. An IRA stands for Individual Retirement Account.

This is an individual account set up by the individual, not by an employer like in a 401(k). 

There are two main types of IRAs: Traditional IRAs and Roth IRAs. 

If you decide to rollover your funds into an IRA, you’ll need to choose which type of IRA account and where.

Traditional IRAs

Investing in a traditional IRA has many benefits. When you deposit funds into an IRA the funds are “pre-taxed” income. 

Traditional IRAs are taxed deferred meaning that the tax is postponed. You will have to pay tax when you decide to withdraw and cash in your IRA.

Roth IRAs

Roth IRAs are not tax-deferred investing accounts. That means that the funds that you deposit in your Roth IRA are only after you paid income tax to the IRS.

The advantage here is that you pay tax on the money before it goes into your Roth IRA and you won’t have to pay tax again (if you follow the guidelines of the IRS).

The main difference between the two is deciding whether to pay income tax now or in the future. 

Traditional IRS vs. Roth IRA

If you are in your 20s it is preferable to invest in a Roth IRA. This is because most people will be in a higher tax bracket when they retire as opposed to the tax bracket in your 20s. 

A Roth IRA is ideal for those looking to invest and save for retirement because your money grows and compounds. 

Investing early is the unspoken secret to financial wealth. It all comes back to compound interest. 

Albert Einstein knew it and this is what he said:

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

#4 Find a Broker and Start Investing

A broker is a great way to reach financial goals that aren’t necessarily related to retirement. Brokers are experts when it comes to investing and they often guide investors in the right direction.

If you’re looking to trade stocks or simply invest in a portfolio, online brokers are a great option. 

There are many things to consider when choosing online brokers but the best brokers offer:

  • Low fees and cheap pricing structures
  • An easy-to-use website and interface
  • Fast and powerful trading platforms
  • Access to investment research and educational resources
  • Excellent customer service

Discount brokers with a low investment minimum, high-quality trading tool and available customer service are ideal.

Deciding to invest in your 20s or are early as possible is no doubt a wise decision for your financial future. 

If you’re thinking “…but I don’t know how to invest in the stock market”, we have a solution for you. 

There are several ways you can start investing with little knowledge and still do quite well.

Investment advisors and Robo-advisors are the two main options to consider. We’ll walk you through them.

Investment Advisor vs Robo-Advisor 

Robo-Advisors

Robo Advisors are ideal for young investors. Robo-advisors are online wealth managers that rely on technology to provide automated investment and portfolio management.

Signing up is easy- input your details and set your financial goals. Then the Robo-advisor will create a portfolio for you based on your risk/reward tolerance. 

Most of the work is done with computers and therefore they require little to no human interaction. Because Robo-advisors bypass individual financial advisors, they minimize fees, human error and are a great low-cost option.

The two top Robo-advisors are Wealthfront and Betterment. With either option, new investors get a custom portfolio, automatic rebalancing, optimization of fund selection and much more. 

Ultimately, you get the benefits of a best-in-class asset manager at a fraction of the cost.

You can open an account with Betterment at $0 to start or you can open an account with Wealthfront for as little as $500. 

For a detailed comparison, check out our in-depth analysis of Betterment vs Wealthfront to get an idea of which is better for your needs.

Investment Advisors

Investment advisors on the other hand are financial professionals that help you manage your money. More specifically, they help you invest.

Simply put, investment advisors help build, manage and transfer wealth based on your timeline and risk tolerance.

Sounds similar to a Robo-advisor doesn’t it?

It should, at the end of the day, Robo advisors were designed to mimic investment advisors. 

Investment advisors are a great choice, but there are downsides. It is important to know that investment advisors are much pricier than the average Robo-advisor. 

No matter your choice,  online brokers should have a low investment minimum, access to high-quality trading tools, exceptional customer service, and clarity.

Based off of those values we recommend the following brokers:

Now that we got the first 4 tips coved, let’s move on to the last maybe even most important tip.

#5 Put Aside Money For Savings and Future Investments 

Investing and saving money go hand in hand. They are both active decisions that will guide you to a more wealthy future.

Save

You can’t invest money before you have some side cash. Building wealth is all about creating healthy life long habits. 

Before you dive in and start investing, you should have some money saved up for a rainy day. That is a great general starting point. 

How should you start?

Creating a monthly budget is a great wealth-building habit. For every paycheck you receive take a small portion of that and put it to the side. 

Designate how much you want to save and how much you want to invest. Truth be told, you only need a little bit of money to invest. 

Goals

Once you have some savings and you’re ready to invest, ask yourself a few questions.

  • How much money do you need to make your investment goal a reality?
  • How much money do you need to put aside each month to reach that goal?
  • How will you go about putting money aside to reach your goal?
  • Is your goal realistic? 

These are a few of the many challenging questions you need to ask yourself. Saving and investing is a lifelong journey and your goals need to be clear and attainable.  

Invest

It’s not recommended to take all of the money you are saving and invest it in the stock market. You need to take your time and choose your investments wisely. 

Invest when the moment is right.

Whether you’re interested in stocks or crypto, it important to have money put aside so that you can use it the moment you realize an opportunity. That way you can take full advantage of the situation with cash ready.

A great way to achieve that is by opening a general savings account. Although general, this account should be for the purpose of future investments in your mind. 

That way you will know exactly how much money you have towards future investment and it will be ready the moment you need it. Your money can even gain a small amount of interest on the way

What Are You Waiting For?

Investing in your 20s may be a challenge for many, but it doesn’t have to be. 

With a little research, you can build a foundation that will grow your wealth into something sizable over the years.

Start your investment journey by thinking through your financial timeline goals. 

  • Short term
  • Intermediate
  • Long term

It’s highly probable that your goals will change over time and that’s fine. 

Starting young is key. If you’re reading this in your 20s you’re already ahead of the game!

Investing over a long time horizon is one of the best ways to minimize risk and ensure stable, long-term returns.

Now that you have these 5 tips, start investing and planning for your future!