Before you start saving for retirement, you should fund an emergency account with 6–12 months of living expenses.
If others depend on your income, you should purchase adequate life and disability insurance.
If you have short-term goals, like buying a car or putting a downpayment for a house, you’ll need to meet those goals first.
“Compounding” describes the earnings on both principal and interest, which increase the value of assets invested over time.
According to the U.S. Department of Labor, an investment of 1,000 earning 6% interest would be worth $1,791 in 10 years. The same investment would increase to $3,207 in 20 years and $5,743 in 30 years.
Saving $200 a month and earning 6% per year at age 25 will equal $393,700 at age 65. Waiting until age 35, with the same savings and same return, will only equal $201,100.
8-step guide on how to invest in your 20s
For the financially conscious, investing in your 20s is a great time to get started, especially if you’re looking to achieve long-term goals. Here are some tips to help you jumpstart your investment journey.
1. Set goals
You wouldn’t start a road trip without a plan to reach your destination. The same is true with financial planning.
Set SMART goals for reaching your financial destination. SMART goals are specific, measurable, attainable, relevant, and time-bound targets you can set for yourself.
2. Fund your retirement plans
Many employees have access to a retirement plan. Common retirement plans include 401(k) plans, 403(b) plans, 457(b) plans, simplified employee pension plans, profit-sharing plans, and employee stock ownership plans.
Start contributing to your retirement plan as early as possible.
Some employers offer a matching contribution. A typical match is 50% of your contribution up to a maximum of 6% of your salary. At the very least, contribute the minimum amount to get the maximum employer match.
Check if your employer offers a Roth 401(k) option.
3. Create your own retirement plan
4. Understand the importance of asset allocation and diversification
Asset allocation is the division of your portfolio between stocks, bonds, and cash. It impacts the amount of risk you will take with your investments.
Investors in their 20s can take more risks than older investors.
Younger investors should have most of their portfolio allocated to stocks.
Diversification refers to the practice of investing in many different asset classes and investments located all over the world. A properly structured, diversified portfolio can reduce risk without sacrificing much potential gain.
5. Pay attention to fees
Mutual funds charge “management fees” or “expense ratios.” Over time, even a small difference in fees can significantly impact investment returns.
Index funds, exchange-traded funds, and passively managed funds often have lower management fees than actively managed funds, where the fund manager attempts to beat the returns of a risk-adjusted benchmark.
This difference in fees makes it very difficult for actively managed funds to equal or beat the returns of comparable index funds, exchange-traded funds, or passively managed funds, especially over a long period and after accounting for fees and taxes.
6. Increase your contributions
Increase your contributions as your circumstances warrant. When you get a raise or bonus or pay off debt, use part of the additional income to “pay yourself first.”
7. Consider other investments
You don’t have to confine your retirement savings to the stock market, as there are other smart investments for 20-year-olds.
Investing in a home builds up equity over time while also providing shelter.
While term insurance may be suitable for many younger investors, some cash value policies, when properly structured, build up cash over time, which can be used for retirement.
8. Get help
You can get assistance setting financial goals and investing from a range of resources.
You can find a financial planner on the Financial Planner Association website. All planners listed there have earned their CFP® designation. Other meaningful qualifications are Chartered Financial Analyst (CFA®) and Certified Public Accountant (CPA).
Some financial advisors with these qualifications discount their fees. If you’re just starting your financial journey, have a smaller amount of assets, and don’t require complex financial planning, these advisors may be suitable for you. A quick Google search is a great way to get started.
Begin your investment journey early
Investing in your 20s can be daunting, but now is the perfect time to do so if you want to reap long-term benefits.