Investing at a young age is one of the most important things you can do to prepare for your future. You may think you need a lot of money to start investing, but it’s easier than ever to start with a small amount. Once you’ve set up your investment accounts, it’s easy to save for goals like retirement, buying a home, or even future travel plans.
But before you dive headfirst into the market, it’s important to make it a priority to pay off any high-interest debt that could be putting a strain on your finances, and then build an emergency fund with savings that can meet as little as three to six months of expenses.
Once that is processed, you can start investing, even if you are starting with a small amount. Developing a consistent approach to saving and investing will help you stick to your plan over time.
How to start investing in your 20s
Money invested in your 20s can accumulate for decades, this is a great time to Invest for the long term. Here are some tips on how to get started.
1. Define your investment goals
Before you start, you’ll want to think about the goals you’re trying to achieve by investing.
“Ultimately, it considers all the experiences you want to have over your lifetime and then prioritizes them,” says Claire Gallant, a financial planner at Commas in Cincinnati. those things. “For some people, maybe they want to travel every year or they want to buy a car in two years and they also want to retire at old age. [age] 65. Make an investment plan to make sure it’s feasible.”
The account you use for short-term goals, like travel, will be different from the one you open for long-term retirement.
You’ll also want to understand your own risk tolerance, which involves thinking about how you would react if an investment underperforms. Your 20s can be a great time to take on investment risks because you have a long time to recoup losses. Focusing on riskier assets, such as stocks, for long-term goals makes more sense when you start early.
After you’ve outlined a set of goals and established a plan, you’re ready to look at specific accounts.
2. Contribute to an employer-sponsored retirement plan
people in their 20s who start investing through an employer-sponsored tax-advantaged retirement plan can benefit from decades of combine. Usually, that plan takes the form of a 401(k).
A 401(k) fund allows you to invest money on a pre-tax basis (up to $22,500 by 2023 for those under 50) are tax-deferred until they are withdrawn in retirement. Many employers also offer a Roth 401(k) option, which allows employees to make after-tax contributions for a tax-free increase, and you won’t have to pay tax on withdrawals during retirement.
Many companies also matching employee contributions to a certain percentage.
“You always want to contribute enough to at least get that match, because otherwise you’re just giving away more or less free money,” Gallant said.
But the match can come with an empowerment schedule, meaning you’ll have to stay at your job for a certain amount of time before receiving the full amount. Some employers allow you to keep 20 percent of the corresponding amount after one year of employment, with that number increasing gradually until you receive 100 percent after five years.
Even if you can’t up to your 401(k) right away, starting small can make a big difference over time. Develop a plan to increase contributions as your career progresses and earnings grow higher.
Bank rate 401(k) calculator can help you calculate how much to contribute to your 401(k) to accumulate enough money in retirement.
3. Open an Individual Retirement Account (IRA)
Another way to further your long-term investment strategy is to use an individual retirement account or IRA.
There are two main IRA options: Traditional and Roth. Contributions to a traditional IRA are similar to a 401(k) in that they are put on a pre-tax basis and are not taxed until withdrawal. On the other hand, Roth IRA contributions are transferred to an after-tax account and qualified distributions can be withdrawn tax-free.
Investors under 50 are allowed to contribute up to $6,000 to an IRA in 2022, but that number will increase $6,500 in 2023.
Experts often recommend a Roth IRA instead of a traditional IRA for people in their 20s because they’re more likely to be in a lower tax bracket than they would otherwise be in retirement.
“We’ve always liked the Roth option,” Gallant said. “As young people earn more and more money, their tax bracket will increase. They’re contributing to those funds at the lowest tax rates available today, so that when they retire they can withdraw that money without paying taxes.”
Ross Menke, a certified financial planner at Mariner Wealth Advisors in Sioux Falls, South Dakota, advises investors of all ages to consider their individual circumstances before making a decision. “It all depends on when you want to pay your taxes, and what works best for you based on your individual circumstances,” he said.
4. Find a broker or auto advisor that meets your needs
For long-term goals that aren’t necessarily related to retirement, like a down payment for a future home or your child’s education costs, Broker account is a great option.
And with the advent of online brokerage As honest and Schwabas robot advisor Prefer improve and richthey are more accessible than ever to young people who can start with little money.
These companies offers low fees, reasonable minimums, and educational resources for new investors and your investments can often be made easily through an app on your phone. For example, Betterment only charges 0.25 percent of your assets per year with no minimum balance, or 0.4 percent for their Premium plan, which requires at least $100,000 in your account.
Many robo-advisors simplify the process as much as possible. Provide a bit of information about your goals and timeframe and the robot advisor will choose a suitable portfolio and periodically rebalance it for you.
“There are a lot of good options out there, and each of them has its own expertise,” Menke says. Shop around to find what works best for your time period and contribution level.
5. Consider taking advantage of a financial advisor
If you don’t want to go the robo-advisor route, a human financial advisor can also be a great resource for beginner investors.
While it is more expensive option, they will work with you to set goals, assess your risk tolerance, and find the brokerage account that best suits your needs. They can also help you choose where to put the money into your retirement account.
A financial advisor will also use their expertise to steer you in the right direction of investing. While it’s easy for some young investors to get caught up in the excitement of the market’s daily highs and lows, a financial advisor understands how the long-term game works.
“I don’t believe investing should be exciting, I think it should be boring,” Menke said. “It shouldn’t be seen as a form of entertainment because it’s your lifetime savings. It’s okay to be boring sometimes. It’s coming back to your timeframe and what your goals are.”
6. Keep short-term savings where it’s easy to get to
Like an emergency fund that you may need access to immediately, store your short-term investments in an easily accessible place independent of market fluctuations.
Although they won’t earn as much as you invest in stocks, saving account, disk and money market account are great options.
“If you need money in the next few years, don’t invest it in the stock market,” Menke said. “It is better to invest in safer vehicles like CDs or money markets where you may be giving up some growth potential, but it is more important that you receive your return instead of your return. Friend.”
7. Increase your savings over time
Setting up a savings amount that you can maintain and having a plan to increase it over time is one of the best things you can do in your 20s.
According to Menke, “Committing to a specific savings rate and continuing to increase it year after year is what will have the biggest impact early in your savings career to get you started.” .
By starting this habit in your 20s, it will be easier for you to get older and not have to worry about taking extreme savings later on to meet your long-term financial goals. .
Investment options for beginners
ETFs and mutual funds. These funds allow investors to buy a basket of securities at a relatively low cost. Funds that track indices like S&P 500 They are popular with investors because they easily offer wide diversification at near-zero fees. ETFs trade throughout the day like a stock, while mutual fund can only be purchased at the end of the day net asset value (NAV).
Share. For your long-term goals, stocks are considered as one of the best investment options. You can buy stocks through an ETF or mutual fund, but you can also choose individual companies to invest in. You will want research in details any stock before investing and make sure to diversify your holdings. It’s best to start small if you don’t have much experience.
Fixed income. If you’re a more risk-averse investor, fixed-income investments like bonds, money market funds, or high-yield savings accounts can allow you to ease into the investing scene. private. Fixed-income securities are generally less risky than stocks, although you will also earn lower returns. These investments can still end lose valuehowever, thanks to rising interest rates or high inflation.
Diversification is the key
One way to limit investment risk is to make sure your portfolio is fully diversified. This involves making sure you don’t have too many eggs in one or similar baskets. By maintaining diversificationyou will be able to smooth your investment journey and hope that you can stick to your plan more.
Remember that investments in stocks should always be made with long-term money, which gives you a term of at least three to five years. Short-term usable money is better invested in High interest savings account or other cash management account.
Ready to get started?
Start your investing journey by thinking about your short, medium and long term goals, then find the accounts that best fit those needs.
Your plans will likely change over time, but starting with at least one retirement account is one of the most important things you can do for yourself in your 20s.
Not only will you ensure your money keeps pace with inflation, but you’ll also benefit from decades’ worth of compound interest on your contributions.
Note: Kendall Little wrote the original version of this story
