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 small. Once you 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-interest debt that may be straining your finances, and then build an emergency fund with savings that could cover at least three to six months. of expenses.
Reading: Investing for 20 somethings
once that’s handled, you can start investing, 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 at 20
Money invested in your 20s could add up for decades, making it a good time to invest in long-term goals. here are some tips on how to get started.
1. determine your investment goals
Before you dive in, you’ll want to think about the goals you’re trying to achieve by investing.
“Ultimately, it’s about looking at all the experiences you want to have throughout your life and then prioritizing those things,” says Claire Gallant, a financial planner at Commas in Cincinnati. “For some people, maybe they want to travel every year or they want to buy a car in two years and they also want to retire at 65. is putting together the investment plan to make sure those things are possible.”
The accounts you use for short-term goals, like travel, will be different from the ones you open for long-term retirement goals.
You’ll also want to understand your own risk tolerance, which means thinking about how you’ll react if an investment performs poorly. Your 20s may be a good time to take investment risk because you have plenty of time to make up for losses. Focusing on riskier assets like stocks for long-term goals probably makes a lot of sense when you’re in a position to start early.
Once you’ve outlined a set of goals and established a plan, you’re ready to pursue specific accounts.
2. contribute to an employer-sponsored retirement plan
20-somethings starting to invest through an employer-sponsored, tax-advantaged retirement plan can benefit from decades of compounding. most of the time, that plan comes in the form of a 401(k).
A 401(k) plan allows you to invest pre-tax money (up to $20,500 in 2022 for those under 50) that grows tax-deferred until you withdraw it at retirement. Many employers also offer a Roth 401(k) option, which allows employees to make after-tax contributions that grow tax-free, and you’ll pay no taxes when you make withdrawals in retirement.
many companies also match employee contributions up to a certain percentage.
“You always want to contribute enough to at least get that contribution, because otherwise you’re just walking away from more or less free money,” Gallant says.
but the match may come with an award schedule, meaning you’ll have to stay in your job for a certain period of time before you receive the full amount. Some employers allow you to keep 20 percent of the contribution after one year of employment, and that number steadily increases until you receive 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 progresses and income increases.
The 401(k) Bankrate Calculator can help you determine how much 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 anger options: traditional and roth. Contributions to a traditional IRA are similar to a 401(k) in that they come in before taxes and are not taxed until withdrawal. Roth IRA contributions, on the other hand, go to the account after taxes, and qualified distributions can be withdrawn tax-free.
investors under the age of 50 can contribute up to $6,000 to IRAs in 2022.
Experts generally recommend a Roth IRA over a traditional IRA for 20-somethings because they are more likely to be in a lower tax bracket than retirement age.
“We’ve always loved the roth option,” says gallant. “As young people earn more and more money, their tax bracket will go up. they’re paying into those funds at the lowest tax rate today, so when they retire they can withdraw that money tax-free.”
ross menke, certified financial planner at mariner heritage advisors in sioux falls, south dakota, advises investors of any age to consider their personal situation before making a decision. “It all depends on when you want to pay the tax and when is most appropriate for you based on your personal circumstances,” she says.
4. find a broker or robo-advisor that meets 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 education expenses, brokerage accounts are a great option.
and with the advent of online brokers like fidelity and td ameritrade, as well as robotic advisors like betterment and heritagefront, they are more accessible than ever to young people who may be starting out with little money.
These companies offer low fees, reasonable minimums, and educational resources for new investors, and their investments can often be made easily through an app on your phone. upgrade, for example, charges just 0.25 percent of your assets each year with no minimum balance or 0.4 percent for its premium plan, which requires at least $100,000 in your account.
many robotic advisors simplify the process as much as possible. provide a bit of information about your goals and time horizon and the robo-advisor will choose a well-matched portfolio and periodically rebalance it for you.
“There are a lot of good options and each one has its own specialty,” says Menke. shop around to find the one that best fits your time horizon and contribution level.
5. consider leveraging a financial advisor
If you don’t want to opt for the robo-advisor, a human financial advisor can also be a great resource for beginning investors.
While this is the most expensive option, they will work with you to set goals, assess risk tolerance, and find the brokerage accounts that best fit your needs. They can also help you choose where to direct the funds in your retirement accounts.
A financial advisor will also use their experience to guide you in the right investment direction. While it’s easy for some young investors to get caught up in the excitement of the day-to-day market ups and downs, a financial advisor understands how the long game works.
“I don’t think investing should be exciting, I think it should be boring,” Menke says. “It should not be seen as a form of entertainment because it is your life savings. boring is ok sometimes. it’s about getting back to what your time frame is and what your goal is.”
6. keep short-term savings in an easily accessible place
As your emergency fund, which you may need to access at any time, store your short-term investments in a place that is easily accessible and not subject to market fluctuations.
While they won’t earn as much as the money you put into stocks, savings accounts, certificates of deposit, and money market accounts are all great options.
“If you need the money available in a couple of years, then you shouldn’t invest it in the stock market,” Menke says. “You should be investing in those safer vehicles like a CD or the money market where, yes, you might be giving up potential growth, but it’s more important to get a return on your money rather than a return on your money.”
7. build your savings over time
Setting a savings amount you can stick with and having a plan to increase it over time is one of the best things you can do in your 20s.
“Committing to a specific savings rate and continuing to increase it year after year is what will have the biggest impact early in your savings career to begin with,” according to menke.
If you start this habit in your 20s, it will be easier for you as you get older and you won’t have to worry about taking extreme saving measures later to meet 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. Funds that track indexes like the S&P 500 are popular with investors because they easily provide ample diversification for near-zero fees. ETFs trade throughout the day like stocks do, while mutual funds can only be purchased at the closing NAV of the day.
- stocks. For your long-term goals, stocks are considered one of the best investment options. You can buy stocks through ETFs or mutual funds, but you can also choose individual companies to invest in. You’ll want to thoroughly research any stock before investing and make sure you diversify your holdings. it’s best to start small if you don’t have much experience.
- crypto. Cryptocurrencies have received a lot of attention in recent years thanks to the skyrocketing price of bitcoin and other cryptocurrencies. Coins While investing here may be tempting, cryptocurrencies are primarily a trading vehicle at the moment and have no intrinsic value, meaning they don’t produce anything for their owners. Assets like stocks generate cash for their investors, which supports the company’s valuation. if you decide to buy cryptocurrencies, it is better to keep a small percentage of your portfolio.
diversification is key
One way to limit your risk when investing is to make sure your portfolio is adequately diversified. this involves making sure you don’t have too many eggs in one basket or similar baskets. By staying diversified, you’ll be able to smooth out your investment journey and hopefully be more likely to stick to your plan.
Remember that stock investments should always be made with long-term money, which allows you to have a time horizon of at least three to five years. money that might have short-term use is better spent in high-yield savings or other cash management accounts.
ready to start?
Start your investment journey by thinking about what your short-, medium-, and long-term goals are, and then find the accounts that best fit those needs.
Your plans are likely to change over time, but starting with at least one retirement account is one of the most important things you can do for yourself in your 20s.
Not only will you ensure your money keeps up with inflation, but you’ll also reap the benefits of decades of compounding interest on your contributions.
note: kendall little wrote the original version of this story.
Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. furthermore, investors are cautioned that past performance of the investment product is not a guarantee of future price appreciation.