How to Invest in Your 20s – Small Moves for Big Impact
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Twenty-somethings have a lot to think about these days. There’s no question the everyday news regarding student loan forgiveness, the housing market crunch, and volatility of the stock market are impacting all of our wallets, including our young Millenials and Gen Z. While these major headlines may scare off young investors, the truth is, there are plenty of steps you can take in your twenties that can improve your financial outlook both immediately and in the future.
Some of you reading this are new to the idea of investing or saving altogether. Others may know what to do, but you’re unsure how to start. The good news is, there are so many small financial steps you can take as a 20-something that will make a major impact down the road. And before we go through these, you should know I’m writing these steps as things I only wish I had made in my twenties. When you’re younger you definitely have time on your side and if you take advantage of them then it can set you up for a brilliant future.
In this article
How to invest in our 20s
One thing you’ll notice as you start investing is there’s a ton of advice out there. There’s so much in fact it often becomes overwhelming. It may be easier to break it down into a few broad categories so you can start to think about your own investment strategy.
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Start an emergency fund
An emergency fund may not be the first thing you think of when you hear the word “investing.” But truthfully, establishing a financial safety net - no matter how big or small – is investing in yourself.
Building an emergency fund means designating a certain amount of money for financial emergencies. What you define as an emergency is ultimately your call, but many personal finance experts recommend limiting emergencies to big, unexpected payments such as insurance deductibles, unforeseen home or auto repairs, medical bills, and other items out of your control.
What makes establishing an emergency fund a wise investment? It stops a cycle (or prevents one from starting) of using credit cards to pay for unexpected expenses. By avoiding as much credit card debt as possible, you can put your money in other places. If you do need to dip into your emergency fund, be sure to replenish it as quickly as possible.
If starting a fund feels overwhelming, try setting up automatic withdrawals when you get paid. You could also sell a few items or take on a side gig to establish or replenish it. Set a goal and you’ll be able to knock it out with a little bit of focus.
There are no hard and fast rules to how much you should have but keep this in mind as you’re saving:
- Start small and work your way up. It’s okay to start with a small emergency fund. $500 or $1,000 can be all you need to prevent financial disaster. Once you have this, you can work up to saving enough to cover three to six months' worth of expenses. This way you’ll be covered if you lose your job unexpectedly. Read: Make a $1,000 Fast with these No-Nonsense-Income-Generating Ideas
- Keep it liquid. Set up your funds in a savings account that is easily transferable or withdrawn. Online savings accounts can work great too, as long as you can easily transfer money. Read: 11 Best Online Banks for Savings Accounts
- Keep it separate. Put your money in a separate account, such as a high-yield savings account, so it doesn’t sit in your checking account where you’re tempted to use it. You want it to be out of sight and out of mind. Read: Best High-Yield Savings Accounts
Establish a savings account
Okay, hold up. Isn’t an emergency fund the same as a savings account? Yes and no. And understanding the distinction between the two when you’re in your twenties, can set you up for greater success later on.
Establishing a savings fund means setting aside money for big goals. Think retirement, down payment on a car or home, education, or simply a rainy day fund. You can set up one big fund and divide up the money into designated buckets, or you can establish goals for each category and contribute accordingly.
Investing in a big savings goal often feels out of reach and unobtainable. It’s hard to think about retirement in your twenties when you don’t even know what you want to do for the rest of your life. Setting aside savings doesn’t mean you have to have it all figured out. Starting with a small amount and contributing regularly will give you the benefit of compound interest and teach you the discipline of saving.
Your savings vehicle (or type of account) will depend on your goal since some accounts are better suited for certain long-term goals. Here are some examples to get you started.
- Retirement: An individual retirement account (IRA) is an account specifically for saving towards retirement and is tax-deferred. There are four different choices of accounts — traditional IRA, Roth IRA, SEP, and SIMPLE. Each one allows you to invest in stocks and bonds (or other assets) but the tax advantages are different depending on which one you choose. Read: Best IRA Accounts of 2022
- Down payment on a large purchase or future education: Depending on when you need to withdraw your money, you have numerous choices for savings and investing. These choices range from traditional savings accounts and certificates of deposit (CD), which are very low-risk and also make very little interest. Other options for asset allocation are available, such as exchange-traded funds (ETFs), index funds, mutual funds, or perhaps a bit of cryptocurrency. These allow you to save and invest according to your own risk tolerance. Read: How to Invest $1,000 – Make the Most of Your Investment
When you establish your financial goals and understand your risk-tolerance level, then you can expand your investment portfolio. But when you’re in your twenties, you don’t want to put off savings because you are unsure. You can always adjust your investments as your goals change or your appetite for risk changes.
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Take advantage of a 401(k) account
As a 20-something, contributing to a 401(k) account is one of the strongest money moves you can make. It’s a simple entry into investment accounts and setting up your retirement plan. A 401(k) plan is a tax-free savings account offered by employers specifically for retirement (there are options for 401(k) if you’re self-employed, but for this article, we’ll focus on employer-sponsored).
Being tax-advantaged simply means you are allowed to report your 401(k) contributions on your taxes and it can help you save money on the amount of taxes you owe. There are contribution limits set by the IRS each year, but your main goal is to start contributing, no matter how small the amount.
In addition to the tax advantages, there are many other pros to contributing to a 401(k).
- Automatic deposits (when you enroll). When you sign up for a plan through your employer, it becomes automatic. You’ll hardly miss the money because it doesn’t have a chance to get deposited into your paycheck.
- Company match. Many employers offer an employer match up to a certain percentage of your salary. This is a major retirement benefit and ideally, you’re maxing out the amount offered by your employer. If not, you’re essentially leaving free money on the table.
- Compound interest. Your money can grow exponentially thanks to compound interest. Think of it as earning interest on top of interest. Even with the current market volatility, the overall positive trajectory of the stock market helps further the benefit of compound interest.
Related: How To Make the Most of Your 401(k)
Further your financial education
The last step is to arm yourself with knowledge. Taking control of your personal finances requires effort, but there are so many resources available to help you navigate through the investment options. There are plenty of books, podcasts, articles, and videos on investment strategy and retirement savings, financial planning, and finding the information you trust can help you with your decision-making.
Many investors, or would-be investors, question if they should use a financial advisor or a robo-advisor, where you manage your investments on your own. Either way, this is a personal choice and there are pros and cons to both scenarios for making investment decisions. Understanding your financial situation, armed with your credit score, millennials can start creating a diversified portfolio with little money.
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The bottom line
Knowing how to invest in your 20s may seem nearly impossible, given the market volatility and the sheer number of choices of investments these days. However, by taking time to focus on your financial goals and educating yourself on your savings and investing options, you can find small ways to make your money work for you. Making sure you start an emergency fund, a savings fund, and take advantage of a 401(k) are great ways to get started.
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Writer
Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.
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