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How to Start Investing in Your 20s: It’s Easier Than You Think

The earlier you start to invest, the better. Here's how to start investing in your 20s.

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 with a somewhat decent salary.

I was always encouraged to have these conversations as it showed they were thinking about their retirement planning needs. It also shows they were thinking beyond the present and begin to build the kind of life they wanted. The question of investing in your 20s is 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, check out some of the previous posts in the series below:

Time is Your Biggest Ally and Enemy

 

I believe a major issue many face as they consider starting to invest in their 20s is that they completely overlook time. That’s understandable, as retirement can be as far away as four or five decades. This can lull many into complacency.

Time, when it comes to investing, can be tricky to deal with as it can be the best thing going for you, but it can also be a detractor. If you try to start investing in your 20s there is a great case to be made for investing as much as you can.

If lack of funds is a thing you’re dealing with as you consider while investing in your 20s, know that every little helps. You may think that $50 you put away each month will accomplish nothing. Thus, you may spend it on something else. This is also not to mention the feeling that if you start investing with $500 or less that it won’t amount to anything.

Please don’t fall into that trap, it will most certainly help. If you feel that you can’t afford to start investing in your 20s then look at your expenses to see what can be cut to free up money to go into the stock market. Trust me, your future self will thank you.

There are many online brokerages out there that allow you to start investing with little to no funding requirements. Betterment, for example, has no minimum balance requirement and is a great way to start investing with little money. Another great feature of someone like Betterment is they manage the investments for you. This can free you up to focus on other things.

Avoid Debt Like the Plague

 

What does debt have to do with investing in your 20s? Plenty! The more debt you have the less you’ll have to invest in the stock market.

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 make extra money through a side gig
  • Automate your investing so you don’t forget it

A 401(k) 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 401(k).

I understand how easy it can be to justify not investing in a 401(k) if you have debt or are not making much, but if your company is offering a 401(k) match then you’re giving up free money.

***Additional resource: Do you have an old 401(k) you need help with? With FeeX, you can get free help finding the lowest fee options available to you. Sign up through this link to get started on lowering your investment fees.***

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 the 401(k) is generally the best tool to use as you start investing in your 20s.

Go Beyond Your 401(k)

 

What should you do if you have additional income to invest? If you’re in this position, you should then look at opening a Roth IRA followed by a taxable brokerage account.

If you need 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 401(k), 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. Regardless of whether you invest in your 401(k) or an online brokerage, take advantage of the free investment tools they offer to further investing education.

Investing in your 20s is easier than you think! Here's how to get started in a few simple steps.

Simplify Your Investing

 

I often saw individuals that were struggling in terms of investing because they were simply making things too difficult on themselves. 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 – which are essentially baskets of stocks that track a certain index.

The beauty of this approach to investing 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.

Towards that end of expenses, this is why I love using Personal Capital as a means to help simplify my investing. Personal Capital is a free tool that allows you to analyze your investments to find lower fee options, but they also offer free portfolio reviews as a part of their service.

The other big key to simplifying your investing is to automate, automate, automate, and then automate some more. 🙂  This will largely apply outside your 401(k), 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?

 

Additional resource: If you’re looking for somewhere to invest with little money, you can open a Motif Investing account for as little as $250. I personally use Motif as they offer a great way to get started as well as allowing for instant diversification, not to mention promotions when you open a new account with them. 

Open a Motif Investing account today and get up to $150 cash back!

 

 

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

66 Comments

  • Pauline says:

    I bought a property as soon as I graduated, if you don’t know the stock market it is a good way to get forced savings instead of paying rent to someone else.

    • John says:

      That’s an excellent point Pauline! I agree that if you’re not comfortable with the stock market and able to get into real estate that would be a good option to pursue.

  • I’ll admit to doing some riskier investments in my 20s. My biggest breakthrough came when I realized slow and steady investing wins the race every time. Once I quit playing with things that I thought could make me rich quick, my investing life started to turn around.

    • John says:

      Slow and steady – wisest move to make Brian! I was guilty of a few of those foolish decisions as well, but it’s those with the end game in their vision that tend to do best.

  • Martin says:

    I am still unsure on what to invest in – the whole concept scares me. I understand why you would but it is a scary deal for someone with little money anyway.

    • John says:

      I can certainly understand that Martin, I saw a lot of that in speaking with investors on a daily basis. My encouragement is to not let the amount you’re talking about hold you back – the important thing is to get started. If you have any questions, feel free to shoot me an email and I can help out where I can.

  • I think these three bullet points are extremely important:

    -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

    If you can avoid lifestyle inflation you can easily free up money to invest, assuming your pay increases over time. Additionally I think everyone in their 20s should pursue a side gig, if not for the additional income then for the diversified cash flow. Great post!

  • Excellent advice, John, especially in avoiding debt like the plague. If Rick and I had done that in our twenties, we’d be set today. Instead, we’re paying off a boatload of debt.

  • Matt Becker says:

    This is nice timing with what I’ve written today. Put very simply, the amount you contribute in your early years has a much bigger impact on your final result than your actual return in those early years. The lesson: do what you can to save as much as possible early on and don’t worry too much about how good you are. Keep things simple and you’ll be fine.

  • I absolutely believe that people in their 20s need to start investing and saving. Even for those who do not have a great understanding of the stock market…I say invest in a low cost index fund that tracks the entire stock market or maybe target retirement/balanced fund. Time and compounding works magic. I also think that avoiding lifestyle inflation is a must so that you have money to save and invest. Too many 20 year olds after college inflate their lifestyle now that they are earning a paycheck.

  • We didn’t start investing until our late 20’s. Unfortunately, we have to save that much more to make up for that fact. I wish we would’ve started sooner but better late than never I suppose =)

    • John says:

      I am right there with you Holly. We waited too late ourselves, but the point is that you’re trying to make up for it – way too many do not even do that.

  • Alicia @ Financial Diffraction says:

    This is perfect timing for me – thank you. I’m squeaking in on the higher side of my twenties, but I intend to be well-invested over the coming years. I am just trying to get to 10K before I move to a brokerage account. Even though I am still in my twenties, I wish I had gotten a handle on this even earlier in my twenties. Oh well, I suppose I will make up for it in the upcoming years.

    • John says:

      Not a problem Alicia! The big takeaway is that you’re seeing the need to do it and plan to act. If you’re close to that $10k mark I’d even suggest moving into a brokerage account now, depending on what you have it sitting in now.

  • I was too stupid to start investing in my 20’s! I finally started at the age of 30 and over the past 8-10 years I have seen some amazing results which really makes me kick myself in the butt for not starting earlier.

    Interestingly, I only started investing when my accountant suggested I open a SEP IRA to avoid paying a huge chunk of $ to the IRS. Essentially, the government funded 60% of my initial SEP contribution. A no brainer that I have stuck with over they years.

    • John says:

      I am unfortunately in the same boat Kyle, but the key is to recognize that and do all you can to make up for it. I LOVE the SEP, it was a beautiful invention!

  • I think I began putting money in a 401k as soon as I could. The match was what I found irresistible. Free money!

  • I think the most important thing for individuals that want to invest in their 20’s is financial education. It is important to focus on one investing strategy instead of trying to invest in multiple things at once. I think focus is the key to individuals of this age.

  • My mind is always blogged by my peers who don’t invest in a 401(k). Very rarely does it seem like a bad idea. A lot of friends/co-workers are simply too lazy to set it up and don’t see the point when the money could go towards a good time now.

    I also get a chuckle out of people who say that don’t/won’t invest, but have a 401(k). They don’t realize that is a form of investing…

    Great tips, John!

    • John says:

      I know Erin. I always feel the same way. Not only is it free money, but it helps you tax wise too!

      I always laugh at that as well. They say they don’t want to invest in the stock market – what do they think their 401k is investing in then?! 😉

  • I wish I would have been more disciplined about investing in my 20’s. I did invest but it was sporadic and definitely was not enough. My advice for anyone in their 20’s is to setup a disciplined strategy to invest on a monthly basis. Setting up some sort of auto-draft, especially if your company matches is a great way to ensure the money gets invested.

  • Romona (@monasez) says:

    I’m in my early twenties and I definitely plan to keep my investments simple. I’m looking to invest in real estate.I really want to buy my first rental property next year. I’m just trying to save
    for a down payment.

  • Michelle says:

    Investing in your 20s is important. So many people do not start early enough.

  • Madeline says:

    I always like to remind myself that when I invest, I’m investing in a future that is different than my present. If you’re unhappy with your job, scared about your finances or generally deterred by your future, think about investing as a way to one day live without fears and unhappiness. Working hard now means you won’t have to work as hard later!

  • Avoiding and paying down any (non-mortgage) debt is easily the best investment you can make in your 20s. Rates are equal or higher than savings/investment rates and equate to a guaranteed return on investment.

    I don’t think that there are many people who don’t look back and wish they’d just saved an extra £20 or £50 a month in their early 20s.

    • John says:

      Why not do both? I think that for many both can be done but they choose not to for one reason or another.

      I would respectfully disagree on your final point though. (If I am reading it correctly that is 🙂 ) I think many do, at some point, look back and regret that – I know I have and the crazy thing is that money all adds up and time is of the essence.

  • I didn’t finish my training until I was 26, but I only invested the minimum amount to get the match when I got a real job. If I’d just set it to max out from day 1, I would be in such good shape right now. I’d tell any 20 something to invest like mad and get rid of debt so when they hit the inevitable burn out in about 10 years, they will be in a good position to do something else.

  • This post is right up my alley! I have squandered most of my twenties as far as investments go, but I am about to ramp up my efforts!

  • anna says:

    I unfortunately didn’t contribute into my equivalent of 401(k) until my late twenties, but definitely plan on teaching any hopeful offspring otherwise! Great list, John!

  • krantcents says:

    You can start small and go with a very broad index. Simple enough!

  • Janine says:

    I’m 22 and I started investing a couple years ago and I can already see results. i’m so glad I read the book Automatic Millionaire when I was 19 and decided to start investing. I’m hoping over the long-haul I’ll be in good shape!

    • John says:

      That’s AWESOME Janine! That’s exactly what I’m talking about and if you keep it up you should be doing just fine over the long haul.

  • I am actually really upset that we don’t have a 401k in Romania (or something similar). I am considering investing in the stock market, but I know very little about it and I know I have to learn and follow the market a little bit before jumping in. I also always considered that I have too few money to invest anyway, but you are right: any little bit is better than not investing at all 🙂

    • John says:

      Interesting to hear that something similar is not offered in Romania. How is retirement investing handled otherwise? You’re right though, starting is the key component – regardless of how much it is.

  • I’m young, and so I still have a ton of time on my side. That doesn’t mean I’m going to sit idly, though – I have already started putting away money for retirement savings, and I have been working hard to invest where and when appropriate. My next step is to start investing in index funds.

  • People overthink it. With my first full-time job at 22 (no workplace retirement benefits) I just opened a Roth IRA at Vanguard and put money in a target date retirement fund. 10% to start, more later. I’d say just start. Doing something imperfect is way better than doing nothing!

    • John says:

      I could not have said it better myself Emily! Kudos to you for doing that as so many (myself included) do not do that. You hit the nail on the hit by saying just start. Open a IRA if you don’t have a 401k and go with an index fund or TD fund. If you do have a 401k, then go with, generally speaking, the lowest fee ones available and let time do its magic.

  • Good points John. I wish i had started being more financially aware like this in my 20s

  • Brian says:

    I have been investing since around the time I was 13 or so. I would research some stocks (and a few mutual funds) and then my dad or grandpa would make the trades in a custodian account. Before they would execute any of these trades they would make me show them my research and explain to them my thought process. It was fun and has really paid off for me to this day. I hope to encourage my son to do the same thing when he is older!

  • My advice that you emphasized that I would emphasize even more is to automate. Make that money come out of your paycheck before you can touch it. You will be so thankful for it in the future.

    Also, this post is now part of this weeks Carnival of Financial Camaraderie

  • Travis McKinstry says:

    This is a great article on investing. I’m now 24 and although I’m still relatively young, I definitely see the benefit in investing as soon as possible.

    I think these are all good points, but they hit on a fundamental issue with young people in the U.S.; discipline. To have discipline, you need to have been taught it or shown what it looks like from a family member or friend. How can we make investing in one’s future more appealing to young people?

    The appeal to the hedonistic lifestyle is far too strong for many young people.

    I’m not a pessimist, but many families in lower S.E.S. don’t teach their youngins how to invest in the future. I can personally attest to this; I was not taught how to invest in my younger years. By chance I learned on my own.

    Anyways, thanks for the article and all the comments. They truly do help guide us young kids 🙂

    • John Schmoll says:

      Agreed Travis, discipline is definitely an issue and is unfortunately something that’s not just applicable to those who are younger.

      I wasn’t taught how to invest myself, and am completely self-taught on it. We don’t champion it in our society, but it needs to be.

  • Scott says:

    John I am 58 and have consistently lived on less than I have made enabling me to save money and invest. More importantly it has enabled me to live relatively stress free.
    Take note if you are in your 20s today.

  • Katie says:

    HI John,
    Thanks for this its a big help . I just got 25k from my parents and the first thing i did is pay of my CC debt with the 10 k. Now i have 15 k and have no idea how to invest it. Any suggestion? ( p.s i have shit load of federal student loan to pay ) .

  • Bo says:

    I just got a job offer which will be my first job. I am a single in mid 20s. I go shopping rarely and spend only what I needs to spend (mostly). I know I will be making enough money to live on with my salary. I started to look into info associated with the benefit package from my employee. I read your article and understood how important it’s to invest 401k as early as possible. Though, I am still not sure how much money I should put into. How much percentage of annual salary is ideal for 20s? I am planning to leave the U.S a few years later to pursue my dream in abroad. Then, will I be able to carry on 401k with jobs in a foreign country? Thank you in advance!

    • John Schmoll says:

      Hey Bo – thanks for stopping by and great question. Congrats on the job offer! Not knowing your entire situation, I’d say to put away at least enough to get the full match – assuming they offer one since it’s free money.

      Beyond that, most will say to put away at least 15% of your pay into your 401(k). If you have those plans I’d save as much as possible – though dependent on the funds available in your plan. If they don’t offer a match you may want to look at someone like Betterment or Wealthfront to get started.
      http://www.frugalrules.com/betterment-review-investing-option/
      http://www.frugalrules.com/wealthfront-review/

      In terms of carrying the 401(k) to foreign jobs I’m not entirely certain. You’d most likely need to consult with a tax professional on that.

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