How to Start Investing in Your 20s: It’s Easier Than You Think
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One of the most common questions I heard as a stockbroker 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 decent salary. I still get asked how can I start investing in my 20s today, so I know it’s on the minds of many starting out in their careers.
I’m always encouraged to have these conversations as it shows the individual is thinking about saving for the future. It also shows they are thinking beyond the present and begin to build the kind of life they want. The question of the best ways to invest money in your 20s is a personal situation that’s going to be largely based on your current stage of 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:
- How to Invest in Stocks When You Don’t Know Where to Start
- How to Start Investing in the Stock Market: The Ultimate Guide
- When Should You Start Saving for Retirement
- How to Invest in the Stock Market With Little Money
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 not taking action.
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 saving for retirement in your 20s there is a great case to be made for investing as much as you can. We like to tell ourselves we’ll save later, but later often turns into years and puts you behind the curve.
If lack of funds is a thing you’re dealing with as you consider while investing in your 20s, know that every little bit helps. You may think that $25 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 stocks 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.
Likewise, Wealthfront works the same way and requires only $500 to open an account. Both Betterment and Wealthfront manage your investments for you so you can focus on other things with the confidence that you’re following a sound investing strategy that will help you reach your goals.
If you’re more of a DIY investor, you can look at Ally Invest as they have no minimum balance requirement and charge an industry low, $4.95 per trade.
Avoid Debt Like the Plague
What does debt have to do with investing in your 20s? A lot! 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 kill 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 – here are 24 ways to make extra money to pay off debt
- Automate your investing so you don’t forget it
One simple way to keep debt from destroying your ability to invest in your 20s is starting a budget. A budget will help you minimize spending so you’re not spending to your income limits, or above, but using excess funds to invest. In short, think of budgeting as a way to pay a bill to your future self.
A 401(k) is the Simplest Way to Start Investing in Your 20s
Another common objection I hear from younger investors is 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.
In addition to it being free money, it also has the capability of lowering your taxable income so it’s a double bonus. I know I may sound like a bit of a cheerleader, but the 401(k) is the best tool to use as you start investing in your 20s.
Why is that? The money comes directly out of your paycheck so you don’t truly feel it and automatically goes to work for you. If you move to a different job you can take all your money with you and often the matching funds from your employer.
If you’re not certain of which funds to select, or if your investing in the best funds in your 401(k), Blooom provides a free analysis to help make sure what you’re investing in meets your needs.
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 – here’s a list of the best Roth IRA providers if you are in that position.
With that in mind, below are brokerages you can start investing with today – even with little money:
- Acorns – no minimum deposit required
- Ally Invest – no minimum deposit required and an industry low $4.95 per trade
- Betterment – no minimum deposit required (they manage your investments for you)
- E*TRADE – $500 minimum balance required, $0 for IRA accounts
- Stash Invest – $5 minimum balance required
- Stockpile – no minimum deposit required and they give you $5 in free stock to start
- Wealthsimple – no minimum balance required (they manage your investments for you)
As you can tell, there are plenty of options to consider. You can check out our online brokerage page for a more in-depth review of each of the above brokerages.
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 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.
Simplify Your Investing
I often see individuals are struggling with investing because they are simply making things too difficult on themselves. This really applies to any age range as I see a wide range of people struggle with what they are 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 Nasdaq and S&P 500 would be examples of an index. An index fund copies what those do and usually at a very low cost.
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.
As an aside, this is the same approach Betterment follows and at an extremely low cost. 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 – as well as a tool to monitor your net worth, monitor your bills and many other features.
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 did/do you investing in your 20s? What is something else you’d encourage someone just starting out to do when it comes to investing?
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.
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