How to Invest if You Are in Your 20s
Investing a portion of your income while in your 20s can reap tremendous benefits when you are older, if you plan properly. Here are five things you can do to maximize your investments in your 20s.
Save as much as possible — Although you may not earn as much as you’d like in your 20s, time — more than large sums of money — is your greatest ally. Even if you can only set aside 5–10% of every paycheck, that small amount can grow into a large sum in retirement due to the key component in growing wealth — time.
Invest in your 401k or an IRA — It is important to take advantage of tax-deferred growth at all times, but it is even more so when you’re young. If your employer offers a 401k, participate in it, contributing as much as you comfortably can. At the very least, take advantage of every dollar of company match available to you. This is free money.
If there is no 401k offered through your job, open an IRA and make regular contributions. The average 20-year-old contributing to her 401k has a sizable advantage over a 30-year-old contributing twice as much. Don’t worry if your savings doesn’t seem like much; something is far better than nothing.
Be aggressive — No, this does not mean loan $1,500 to your friend who promises to double it by the end of the week. Pick mutual funds and Exchange-Traded Funds (ETFs) that contain more stocks. These could be foreign emerging market stocks, small cap stocks, or even domestic growth stocks. Ideally, pick some combination of all three.
Although you may (and almost certainly will) experience short-term market fluctuations, over a 10-, 15-, and 20-year period, you are far more likely to be highly rewarded for a more aggressive investing style. Plus, you’ll have lots of time to wait out fluctuations.
Pay off high-interest debt — Make sure you are using some of your discretionary funds to pay aggressively any high interest credit cards or car loans. It is all too common for someone in their 20s to be saddled with lots of high interest debt. Don’t let the revolving debt trap capture you. Live within your means and pay off all high interest debt.
Save for an emergency — Perhaps the biggest challenge the average 20-something faces is saving. Putting aside emergency cash reserve so if an unexpected expense comes up, you will not need to tap your credit cards or worse, your 401k.
The fees and taxes on withdrawing money from your 401k and IRA can be daunting. Save a little bit of cash every month to accumulate 3-6 months worth of living expenses in a safe and accessible savings vehicle, such as a money market account or CDs.