Investing in your 20s is one of the best ways to progress towards financial freedom later in life. However, it can be overwhelming for young investors to start investing.
Even if you have limited resources or want to avoid paying too much in fees, you can still invest money in your 20s. This post will help you start investing in stocks, and more, so you can pursue economic independence.
Table of Contents
The Power of Starting Early
Many people don’t believe it’s possible to invest with a small amount of money. According to a Bankrate study, the leading cause of not investing is a lack of funds.
The same study shows that only 18 percent of people between the ages of 18 and 25 are investing. Additionally, only one-third of people ages 18 to 35 are in the market.
It is daunting for any young investor to get started investing with limited funds, but it takes less money than you think. In fact, many online brokerages let you open an account with little or no minimum balance.
This means you can invest $100 or less and put in whatever amount you can afford each month or quarter. You want to do this because the earlier you start investing, the less money you have to use.
Studies show that if you start at age 25, you need to invest one-third less than you do if you wait until you are 45. This is due to compound investing.
If you want to reach $1 million by the age of 67, here’s how much you need to save monthly, assuming a six percent rate of return.
| Age | Monthly Amount to Hit $1 Million |
|---|---|
| 20 | $319 |
| 25 | $440 |
| 30 | $613 |
| 35 | $864 |
| 40 | $1,240 |
| 45 | $1,831 |
Even if you can’t achieve the monthly amount above, it’s vital to get started. In the beginning, the act of starting is more important than the amount.
This is because investing after college takes advantage of time. Ultimately, time is the best gift you can give your investments.
Investment Ideas for Young Adults
It doesn’t have to be overwhelming to start investing in your 20s. Here are some of the top ways to begin investing and grow your wealth.
1. Take Free Money from Your Employer
The simplest way to start investing when you’re young is through the 401(k) offered by your employer. A 401(k) lets you start saving for retirement in a selection of funds.
Money that goes into this account comes out of your paycheck pre-tax. There are two key benefits to this:
- It’s automated, so you don’t forget to do it
- You save money on taxes since money is withdrawn pre-tax
Also, don’t overlook the fact that this is an opportunity to get free money in the form of a company match. This means that your employer will match a certain percent of what you contribute to the plan.
Many company sponsored plans give employees 50 percent of their contribution. For example, if you contribute six percent of your salary, they give you an additional three percent.
In this example, you’d be saving nine percent, but only six percent comes from you. This free money is a terrific way to amplify your savings efforts.
Read our guide on how to set up your first 401(k) if you’re new to this type of retirement plan.
2. Open a Retirement Account
If your employer doesn’t offer a 401(k) or you want to save more money, a retirement account is your next best choice to invest your money.
Retirement may seem a long way off, or you may have different goals. Regardless, there are many benefits to using a retirement account, also known as an IRA.
You can transact within your account and receive the benefit of not having to pay taxes on gains.
There are two main types of IRAs you can use, including:
- Roth IRA
- Traditional IRA
Taxes are the key difference between Roth vs. Traditional IRAs.
Contributions to Traditional IRAs are pre-tax, so you receive the tax benefit now. Roth contributions are made after-tax, but withdrawals are tax-free upon retirement.
Read our guide on the top places to open a Roth IRA to learn more.
If you find retirement planning burdensome, robo-advisors can help. Companies like Betterment manage your investments to ensure they’re in line with your goals.
The service is affordable and does much of the work for you. Here are a few key features of how Betterment works.
Betterment at a Glance
| Info | Data |
|---|---|
| Minimum Investment | ✓ $0 |
| Account Types | ✓ Retirement | Trusts | Taxable | Joint |
| Management Fee | ✓ 0.25% / yr. (0.4% for $100K) |
| Features | ✓ 401(k) assistance |
| ✓ Tax loss harvesting | |
| ✓ Portfolio rebalancing | |
| ✓ Auto deposits (weekly, bi-weekly, monthly) | |
| ✓ Advice from real humans | |
| ✓ Socially responsible investing | |
| ✓ Fractional shares | |
| ✓ Cust. Svc.: Phone, live chat, email | |
| Get Started | Sign Up Now |
A robo-advisor like Betterment is a fantastic tool to get started saving for retirement without much effort on your part.
3. Invest in S&P 500 Index Funds
If you know how to invest your money but need a simple and effective approach, index funds are a popular way to invest in stocks.
An index fund isn’t as intricate as it sounds. These are a basket of stocks or bonds that mimic the performance of a specific market index.
In this case, you may want to choose to invest in Standard and Poor’s (S&P) index of the 500 largest companies on the stock exchanges.
The S&P 500 has an impressive average annual return of ten percent, dating back nearly a century. This gives you ample opportunity for growth while spreading your risk across many companies.
Keep in mind that this doesn’t guarantee a return each year. Some years have losses, but others don’t. The good news is that you’ll have plenty of time to deal with fluctuations since you’re a newer investor.
You can find S&P 500 index funds at any major online broker, and they often carry minimal fees.
4. Look for Alternative Investments
The stock market isn’t the only way to start investing in your 20s. Real estate is an excellent opportunity if you’re looking for different ways to invest money to diversify your investments.
Until recently, it wasn’t really feasible for many young investors to take advantage of real estate investments. It often meant you needed significant sums of cash or the ability to manage properties.
Crowdfunding platforms have changed that, allowing almost anyone to invest in real estate. These sites will enable you to invest in multiple property types, including:
- Multi-family homes
- Turnkey rentals
- Office buildings
- Commercial property
Diversyfund is one such company and is a great choice if you want to start investing in real estate in your 20s. They let you open an account with as little as $500 and invest in apartment buildings nationwide.
If you’re new to real estate, Diversyfund has multiple tools to help you learn. They vet all the properties available on the platform, so you don’t pick one blindly.
5. Buy Fractional Shares of Stock
You no longer need to buy an entire share of stock to invest. This is helpful if a stock you want to invest in is too expensive.
For example, Amazon is trading over $3,400 at the time of publication. But, as a young investor, you likely don’t have the funds to buy an entire share.
Stock investment apps often allow you to buy partial shares of a stock. For instance, if you have just $50 to invest in the partial share, you can do that. This makes it easier to start investing in your 20s.
Investing in fractional shares of a stock can be a fun complement to your other investments, or you can do it if you’re just starting out. It works for any situation.
Not all trading apps let you buy fractional shares. Our favorite option that will let you invest this way is SoFi Invest. They let you start trading with as little as $5, and you can buy fractional shares of stocks.
6. Kill Debt
A major stumbling block for younger investors is debt. High-interest consumer debt is particularly burdensome since it can quickly snowball into taking more of a bite out of your paycheck.
This makes it next to impossible to start investing in your 20s and grow your wealth. Paying off debt does help you increase your net worth, but you want to free up additional funds so you can invest at the same time.
The best way to accomplish this is by consolidating or refinancing your debt to a lower interest rate. This lets you save money on interest, allows you to pay off debt quicker, and frees up money to invest.
Credible is an excellent resource to lower your rates. You can compare multiple lenders to find the lowest rate possible and the best fit for your needs.
7. Pay Yourself First
As a new investor, you want to ensure that you have sufficient savings to handle emergencies. You don’t want to tie up all of your excess funds in investments, so you want to grow your savings.
Paying yourself first once you receive a paycheck is the best way to do this.
It’s simple to pay yourself first. Here’s how to do it:
- Have your paycheck directly deposited into your bank account
- Automate a transfer to a savings or money market account after each pay period
This ensures that you’re saving and grows your cash reserves. Once you save enough to cover at least three months of living expenses, you can begin moving that automated transfer to an investment account.
CIT Bank has a great money market account that has the same FDIC protection as a traditional savings account. In addition, you only need $100 to open the account, and they pay a competitive 1.55 percent on your savings.
Growing your savings may seem boring, but it plays a vital role in a healthy investment portfolio.
Tips on Investing in Your 20s
Investing in your 20s begins with building a solid foundation to grow your net worth throughout the years. Here are several tips to follow as you start investing.
Know Your Risk Tolerance
A key point to remember for any young investor is to know your tolerance for risk.
Unfortunately, the stock market is full of risk. As a result, you will likely see daily fluctuations.
Remember that you have considerably longer to recover from any loss than someone starting in their 40s. However, we all have different comfort levels with risk.
Make sure that your investment style matches your appetite for risk. Most 401(k) plans have free quizzes you can take to match your risk tolerance with an appropriate selection of investments.
Robo-advisors like Betterment will also assist you with this at no charge.
Be Consistent
Consistency is vital when you start investing in your 20s. Regardless of the amount you begin with, you want to invest regularly.
You can achieve this by automating deposits into a brokerage account or investing in your company-sponsored retirement plan. Those small contributions will grow significantly over time.
Consistency builds the discipline necessary to amass wealth.
Keep Learning
Educating yourself about investing shouldn’t be a static exercise. You want to continue learning about your investments and how the stock market works.
While you don’t need to be an expert, taking the time to learn to invest only creates confidence. There is a wealth of free information online to help, as well as free resources with your 401(k) plan or brokerage account.
Don’t Fear Alternative Investments
The stock market is an excellent way to grow wealth, but it’s not the only available choice. Investing in real estate through a platform like Diversyfund is a great way to supplement stock investments.
Real estate often doesn’t correspond with stock behavior, allowing you to potentially weather a storm in the stock market. Additionally, it helps you create another stream of passive income to grow your net worth.
Bottom Line
Investing after college might seem challenging. Fortunately, it is doable. There are more options than ever for young investors to start growing their wealth.
Time is the best gift you can give your investments. Getting started sooner, even in small amounts, will only help you intensify your efforts to reach important life goals.
How often do you invest? What is one challenge you’re facing to start growing your wealth?
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I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.
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.
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.
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.
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.
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!
Thanks DC! I completely agree. If you add those two things together you could likely do quite well for yourself.
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.
Thanks Laurie! Yes, I know that feeling – the key is though you’ve seen it and will defeat it. 🙂
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 know, I had to laugh when I read your post as we must’ve been thinking on the same wavelength. 🙂
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.
I could not agree more Andrew. I say find a solid index fund with low fees and let it do its work.
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 =)
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.
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.
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.
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!
That’s awesome Kurt! You can’t beat free money – it’s the best in my opinion. 🙂
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!
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.
I was the same way as well Deacon and didn’t take it seriously until I was nearly 30. The auto draft is a great way to go!
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.
Simple is great Romona and real estate even better in my opinion. It brings about further diversification. 🙂
Investing in your 20s is important. So many people do not start early enough.
Totally agreed Michelle!
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!
That’s a great point Madeline and one that should encourage us all to invest for our future. Thanks for stopping by!
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.
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.
I know how you feel Kim and I could not agree more – do both as much as you can, especially as you’re starting out.
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!
Glad to hear it Nick! The key is to seeing that and making needed adjustments to kill it.
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!
You’re not the only one Anna! 🙂 I made the same mistake too, and all you can do is try your best to make up for it.
You can start small and go with a very broad index. Simple enough!
Exactly KC! There’s no sense to making it any more difficult than it has to be.
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!
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 🙂
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.
That sounds great Daisy, sounds like you’re doing just fine. 🙂
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!
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
Don’t we all Robert?! 😉
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!
That’s awesome to hear Brian! Just think of how far ahead that has put you. That’s something we want to do with our kids as well.
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
Agreed Lee, automation is huge – you don’t even feel it that way.
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 🙂
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.
This is so true. Thank goodness I have a step grandfather from a different family background teaching me about the stock market. At 24 I finally got a good paying career and he immediately helped me set up a 401k and I don’t even see the money gone from my check, it’s awesome. Now at 25 he has helped me invest in the market with two ETFs. Not a single person in my family knows anything about investing and stocks nor was this taught in public high school. I wish this was more readily available and I appreciate your article! It helped me confirm I am exactly where I want to be for retirement. 😉
I love automating!
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.
That’s awesome Scott – it definitely is possible if you have the right mindset.
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 ) .
Hi Katie,
Great, glad to be of help. Even better that you were able to kill off your cc debt. 🙂 That’s a great question, though I’m unable to give a specific suggestion.
That being said, I’d say that it would depend on how much student loans you have, if you have access to a 401(k) and your comfort level with investing. If you’re newer to investing, or rather have someone else manage it for you one area you could look at is using a robo-advisor to manage the investing for you. I’ve reviewed a few of the main ones here on the site. I’ve listed them below. If you have any further questions, feel free to contact me and I’d be happy to help.
https://www.frugalrules.com/contact/
https://www.frugalrules.com/motif-investing-review-investing/
https://www.frugalrules.com/wealthfront-review/
https://www.frugalrules.com/betterment-review-investing-option/
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!
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.
https://www.frugalrules.com/betterment-review-investing-option/
https://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.
Great info!! I’ve been thinking about investing but need to do a LOT of research first; I don’t know anything about the stock market. I’m 22 right now, what would you advise as the latest age to start investing? If I wait 1 or 2 years will I hate myself for it later?
Thanks Julie! In my opinion, you should start as soon as possible. Yes, research is important, but don’t feel like you need to become an expert in order to start. Here are a few articles that may help, along with reviews of two brokers to look at to help you get started.
https://www.frugalrules.com/start-investing-1000-or-less/
https://www.frugalrules.com/how-to-invest-in-stocks-start/
https://www.frugalrules.com/betterment-review-investing-option/
https://www.frugalrules.com/wealthfront-review/
Great article! I’m in my mid-20’s and wish I started investing earlier, even if it were only small amounts. I think starting is the hardest thing as it’s completely unknown territory. But spending a bit of time researching and educating yourself before jumping into it is definitely the best thing you can do!