Today we are going to cover investing tips for your 20s. In fact, investing in your 20s is the best time to start investing as you are just starting out with modest savings. The reason for this is the magic of compound interest…
…So you’re at the stage where you’ve gotten yourself out of debt by paying off your student loans and credit card bills.
You’re already doing great!
And now you have even started saving a decent amount of money each month and have built an emergency fund in case you suddenly find yourself out of work or stuck with a large medical bill.
This is even better!
But now that you’re setting aside money each month into savings, the questions is “What do I do with that money?”
Interest rates on standard savings account are basically zero (less than 1%), so with inflation at 2% the value of your money declines in real terms which means you are actually losing money over the long term by leaving it in your personal savings account.
While it is important to make sure that you have access to cash when needed to pay for unforeseen expenses, you probably don’t want to leave more than 3-6 months of living expenses in your personal savings account at one time. That means that you need to find a way to invest your newly acquired savings.
Hooray for investing!
- Make use of compounding interest as early as possible
- Diversify your investments
- Automate your investments
Read on, and I’ll touch on all 3 of these points.
When Should You Start Investing?
It’s a common misconception that when people hear about investing they believe that they need “wealth” in order to invest when actually the opposite is true. You don’t need millions of dollars or even tens of thousands of dollars in order to begin investing for your future. Furthermore, investing in your 20s is a smart idea.
In fact, the best time to start investing is when you are just starting out with modest savings. The reason for this is the magic of compound interest. Compound interest is when you earn money on a deposit (a percentage that varies depending on the type of account), and then you earn more interest on that interest from the initial deposit, and then this process keeps continuing for 10, 20 or 30 years until your money has greatly increased in value!
Example of Compound Interest: You invest $1000 as an initial deposit into an account that pays a 6% interest rate (slightly lower than the average of the stock market), and then you deposit $300/month (About 10% of $50k/year salary). After 10 years you would have $50k, then $141k after 20 years and $307k after 30 years. And this is even without increasing your savings relative to your rising salary!
The best part is that you can start doing this right now with investment options available to the average person.
“So you’re telling me that there is an account out there that will allow me to grow my money that much?”
And my answer to this question is yes.
And the best part is that you don’t have to buy expensive blue-chip stocks (Apple, Amazon, Google, etc.), a life insurance policy or an expensive rental property to generate this extra income.
All you have to do is deposit your extra savings each month and be patient as time is your best friend.
When you only small deposits from your savings each month, over a 10, 20, or 30 year period you can grow your savings into multiple six figures.
Best Investments in Your 20s
(Note: All investments carry some level of risk. Please do your research and/or speak with a professional before making investment decisions)
The best way to do this is to get into the stock or bond market early in your life and keep your money there over the long term. Some people might think that there are secrets to timing the stock market, or they are worried about recessions or market downturns, but the single most important factor to growing your savings is getting into the market early and keeping your money there over the long term.
A great way this can be done by the average investor is through index funds. An index fund is designed to track a specific group of investments, often stock or bond markets as a whole, and therefore is less dependent on an individual company, which decreases your risk and diversifies your money. So if the U.S. stock market overall experiences a 7% growth per year over a 10 year period, then it is likely that an index fund tracking the U.S. stock market would experience the same growth.
Note: Index funds are a specific type of mutual fund, and all mutual funds are NOT the same. More to come on this topic.
What Investment Brokers To Use?
If you are interested in buying index funds, Vanguard is a great option as they have extremely low fees (About 0.05% of profits).
Or if you are interested in a service which will manage the buying and selling of index funds for you and automate the process, robo advisors are both great options that only charge low fees. All you do is set up an account, choose your risk tolerance and deposit your funds. Their service will automate the rest.
Smart Investments in Your 20s
Your best bet is buying smart, proven index funds with a long track record of positive returns.
The list below is from BankRate and includes S&P 500 index funds from a variety of companies, and it includes some of the lowest-cost funds trading on the public markets. When it comes to an index fund like this, one of the most important factors in your total return is cost. Included are two mutual funds and three ETFs:
- Fidelity ZERO Large Cap Index
- Vanguard S&P 500 ETF
- SPDR S&P 500 ETF Trust
- iShares Core S&P 500 ETF
- Schwab S&P 500 Index Fund
Plus, if you want to invest on the go its wise to use some of the latest investment apps on the market. My personal favorite is Robinhood because I can buy index funds, plus trade options and even cyrpto — all for free.
Robinhood: This is a free investing app for your phone. I really mean free all around – free to join and they don’t charge any fees to buy or sell the stock. You can get a share of stock like Apple, Ford, or Sprint for free when you join through this link. The value of the free share may be anywhere between $2.50 and $200, and fluctuates based on market movements. You’ve got nothing to lose. I told you this was easy! Sign up through here.
Next, we will talk about how to plan for a successful retirement and how that goes along with smart investments you make in your 20s. I know that can sound boring to a 20 year old but it’s a part of investing in your 20s that you can’t avoid forever.
Retirement Planning in Your 20s
In this section, you will learn how to plan for retirement in your 20s. These methods have been used for over 30 years almost all successful retirees can attest to its success. It is essential to plan for your future and prepare for your retirement now, not tomorrow. This can be achieved by establishing a retirement goal.
Establishing Retirement Goals in Your 20s
Firstly, you’ll want to decide how much money will be saved and invested for retirement.
- Should your investments be aggressive, conservative, or moderate?
- What type of risk are you willing to take for your investment?
- Will you make investments weekly, biweekly, or monthly?
The most difficult challenge you will face is perseverance. At times, it is difficult to save money because of health, vacation plans, or other priorities.
You still have to be diligent in putting aside as much savings as possible. To help you figure out how much you need to retire you can use retirement calculators to help determine your savings goal.
One of the best and most successful retirement planning methods available is making investments in traditional Individual Retirement Accounts and diversified mutual funds.
Individual Retirement Accounts
Investors that maintain an IRA investment, have complete control of its assets. The shareholder can directly contact the investment company. The benefit is making investments without incurring a broker or dealer fees, there is no account churning, and you sit in the driver’s seat.
There are two main types of IRA accounts, Traditional IRA and Roth IRA.
A Traditional IRA portfolio is designed to save for retirement that provides tax advantages. Tax-deferred until you reach the age of 70½. Investment distribution of income and capital gains that are “reinvested” will not be taxed as income. At that time, you pay income tax when you withdraw the money from the account during retirement (required minimum distribution).
The Roth IRA portfolio is similar to the traditional IRA except that the money invested in this type of account grows tax-free. Other unique features allow contributions to be continued past the age of 70½, while the investor has earned income. The taxpayer can maintain the Roth IRA indefinitely and there is no required minimum distribution (RMD). The best course of action is always to consult with your accountant to determine which IRA is most beneficial. Click here for IRS policy governing IRAs.
Tip: There are other different types of IRA accounts. It can be hard to know which one to choose. Don’t worry, this article can show you the different types and why one may benefit you more than another.
Roth IRAs vs Traditional IRAs
Which is more profitable?
The answer depends more on the tax implications of each type of account. When you contribute to a Roth, you receive no immediate tax benefit such as a deduction on your tax return but the money grows tax-free and can be withdrawn tax-free if certain requirements are met.
The thing to remember with a Roth is that contributions can always be pulled out without any tax implications. It is the earnings/growth that accumulates in a Roth that certain requirements must be met in order to avoid any tax/penalties.
With a traditional IRA, the contributions may be tax deductible but withdrawals at a later point in time will be subject to ordinary income tax.
Mutual funds that have successful long–term returns are excellent investments to build assets in Individual Retirement Accounts (IRAs).
A mutual fund is an asset comprised of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, etc.
A mutual fund’s portfolio is structured and maintained to achieve the investment objective listed in its prospectus.
The specific objective could be:
- Equity Income
- Corporate Debt
- High-Yield Muni
Every mutual fund has professional managers controlling, directing, and managing the individual stocks or bonds to buy and sell. There are 4 major factors that investors should always consider when investing in mutual funds.
1) Net Asset Value
the current market price of the mutual fund assets per share. A mutual fund net asset value is reduced by the amount of performance loss or amount of distribution given shareholders.
Comparing the opening share price vs the closing share price percentage of gain or loss. An excellent website that shows year-to-date and 5-year mutual fund performances is Fidelity’s market performance page.
Income and/or capital gains that mutual fund shareholders receive from the investment. The benefits of the income distribution are on the model page of the same website.
Investment losses. Below average, average, above-average, or High. The bottom line of achieving a successful and prosperous retirement program depends on how soon you begin your retirement savings and how committed you are to your retirement plans.
How Much Should You Save for Retirement?
Experts recommend saving 10% to 15% of your income each year, but you can learn how to plan for retirement by using the steps below.
Start Investing Your 20s
Consider getting started with brokerage bonuses that are available to all investors. There are several companies out there that will give you free money (in the form of bonuses) to invest in stocks. A popular one that’s available now is:
Robinhood: This is a free investing app for your phone. I really mean free all around – free to join and they don’t charge any fees to buy or sell stock. You can get a share of stock like Apple, Ford, or Sprint for free when you join through this link.
Tip: The value of the free share may be anywhere between $2.50 and $1000 and fluctuates based on market movements. You’ve got nothing to lose. I told you this was easy! Sign up through here.
To chalk it up, investing shouldn’t be expensive or complicated as it’s so important to start early in order to maximize the value of compound interest. There are plenty of useful investing guides right here on My Millennial Guide, free to use, and dive more into the topic of how to start investing in the stock market.
Hopefully, you have learned a bit about investing and have gained the confidence to get out there and begin investing for yourself!
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