One of the most common questions I got in my previous job was how to start investing in your 20s. The question commonly came from young professionals in their first or second “real” job out of college who suddenly found themselves making a somewhat decent salary. I was always encouraged to have these conversations as it showed they were thinking about their retirement planning but it also showed, to a certain extent, the level of financial literacy in our education system. With that said, I believe the question of investing in your 20s is generally a personal situation that’s going to be largely based off of where you’re at in life. This is another installment in my how to invest in stocks series. If you’re new to it, you can check out some of the previous posts in the series below:
- How to Invest in Stocks When You Don’t Know Where to Start
- Is Investing in the Stock Market Really That Easy?
- When Should You Start Saving for Retirement
- Investing in Stocks: Are You a Trader or Investor?
- How to Invest in the Stock Market With Little Money
- Should You Pay off Debt or Invest in the Stock Market First?
Time is Your Biggest Ally and Enemy
I believe that a major issue that many face as they’re starting out is that they completely overlook the issue of time. That’s understandable, to a certain extent, as retirement can be as far away as four or even five decades for some which results in some not seeing the need to get started as soon as possible. Time, when it comes to investing, can be tricky to deal with as it can be the best thing going for you, but if you wait too long it can be your biggest detractor. That said, if you’re trying to start investing in your 20s there is a great case to be made for investing as much as you can.
I’ll spare the numbers, but you can read Joe’s article to see the fine case he made for taking a sprint mentality as you start your investing journey as it really can make a huge difference in the end game of your investment portfolio. More practically, a common excuse to not start investing in your 20s is that many feel as if they have little to start with. That is completely understandable, but you’re only harming yourself in the long run if you do allow this to hold you back. It may seem like nothing, but that $50 per month really can benefit you much more invested in the stock market as opposed to not.
Avoid Debt Like the Plague
What does debt have to do with investing in your 20s? Plenty, in my opinion. Simply put, the more debt you have the less you’ll have to invest in the stock market. Taken a step further, if it’s high interest consumer debt, it’ll only continue to grow and further eat into your income. Beyond debt, there are numerous other things you can do to mitigate debt and increase your expendable income – all of which should aid you as you begin investing in your 20s:
- Avoid lifestyle inflation as much as possible
- Find ways to grow your income such as through a side gig
- Automate your investing so you don’t forget it
A 401k is the Simplest Way to Start Investing in Your 20s
Another common objection I heard from younger investors was that they could not afford to invest in their 401k for one reason or another. I understand how easy it can be to justify not investing in a 401k if you have debt or are not making much, but if your company is offering a 401k match then you’re giving up free money. In addition to it being free money, it also has the capability of lowering your taxable income so it’s a double bonus in my book. I know I may sound like a bit of a cheerleader, but unless your 401k is bloated with terrible funds I believe it is likely the best way to start investing in your 20s.
Go Beyond Your 401k
If you’re in the enviable position of having additional income to invest in the stock market on top of your 401k, then the next (generally speaking) best options to look at would be a Roth IRA and then followed by a taxable brokerage account. If you’re looking for some options for online brokers, you can check out my online brokerage page for some of the companies I have personally used or have considerable experience with. You’re likely restricted to a handful of funds in your 401k, thus opening an IRA or taxable brokerage account instantly opens your investing options up and thus put you on better footing as you seek to build your investment portfolio.
Simplify Your Investing
I often saw individuals that were struggling in terms of investing because they were simply making things too difficult on themselves. Ultimately, this really applies to any age range as I saw a wide range of people struggle with what they were doing. If you’re just starting to invest in your 20s my suggestion is to make it as simple as possible on yourself (This need to simplify investing really applies to any age range, not just to those who are younger). Unless you’re inclined to invest in individual stocks and know what you’re doing my suggestion is to start investing in some solid index funds – or funds that track a certain index on the stock market. The beauty of this is that it allows you to invest with the market as opposed to trying to beat the market. Not only should this save you from experiencing the same general whipsaw tendencies of unknowingly going into individual stocks, but it can also potentially help you avoid the high costs associated with trading and bloated mutual funds. It may not be exciting, but as you’re investing in your 20s you want help yourself as much as possible and not hinder yourself.
The other big key to simplifying your investing is to automate, automate, automate, and then automate some more. This will largely apply outside your 401k, but automation will help you view your investing as a bill and not something you do when you can get to it. Take it from someone who is looking back on his twenties, making your investing simpler can go a long way towards helping your future self with a nice investment portfolio.
How were you investing in your 20s? What is something else you’d encourage someone just starting out to do when it comes to investing?
Photo courtesy of: 401 (k) 2013