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.
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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.
|Monthly Amount to Hit $1 Million
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- You save money on taxes since money is withdrawn pre-tax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
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.
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.
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.
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.