How to Easily Invest in Your 20s

Investing is probably one of the last actions you think of in your 20s as you juggle student loan payments, establishing a career, and maybe even starting a family. Whether you know it or not, investing in your 20s is the most important time to invest because your first contributions have 40 years to skyrocket in value with compound interest before you retire. It’s also a great way to earn a higher interest on a portion of your non-retirement savings instead of earning 1% or less in a high-yield bank account. These are some tips to help invest in your 20s.

Make sure you also check out how to retire with a million dollars. It’s pretty useful for those looking to be a millionaire (it’s possible with investing).

#1: Invest At Least 10% of Your Retirement

Most experts recommend saving at least 10% of each paycheck for retirement when you start investing in your 20s. When you wait until your 30s to begin investing, that minimum number jumps to 20% so you can “catch-up” on not investing for the past 10 years.

What’s easier? Starting to invest 10% of your paycheck when you first get a “real job” or having to find 20% when you turn 30 after you are already in the habit of spending that money on other life expenses like student loans, vacations, or other bills? While you might not be able to save 10% right away, save as much as possible and make a plan to hit the 10% number as soon as possible.

When it comes to investing, the mantra is “save as much as you can as soon as you can.” To help you calculate exactly how much you need to save each month & how you much you will accumulate by investing at your current savings rate, using a free money management tool like Personal Capital will help you calculate your future net worth & create savings goals.

An easy way to boost your savings rate is to invest any salary increase you receive and continue to live on your starting salary.

#2: Meet Your Employer 401(k) Match

If your employer offers matching 401(k) contributions this is “free” money that you need to take advantage of. Don’t leave this on the table. For example, your company might match the first 7% of your salary each month. Assuming you make $1,000 each paycheck and contribute 7%, your contribution is $70 and your employer contributes $70, meaning you have a $140 contribution. Over the course of a year, that’s a lot of extra money in your account that you didn’t have to work any harder to earn.

Since there are good 401(k) plans and bad 401(k) plans, you might be better off financially to not contribute any more to the 401(k) beyond the initial match. You might choose this option if there are poor investment options or high account fees. Instead, invest the difference in an individual retirement account (IRA) that allows your contributions to grow tax-advantaged.

#3: Choose a Low-Cost Brokerage

The hidden cost of investing is fees. They can literally mean the difference of tens of thousands of dollars in your overall account balance by investing in funds with high fees and low fees. Assuming you invest $100,000 for 20 years in Fund A with an expense ratio of 1% and Fund B with 0.25% and both funds earn 4% each year, you will have $30,000 extra dollars with Fund B because it charged lower fees.

When investing on your own, you will want to choose an online brokerage with the lowest fees.

There are plenty of good ones to choose from including Vanguard, TD Ameritrade, or TradeKing that have many low-cost index mutual funds, ETFs, and low commissions for buying stocks. And, these brokerages have low initial account deposits, making it easy to start with only $100!

If you want to enjoy the low costs but don’t feel comfortable investing completely alone, you have three different options to choose from. They are Betterment, Wealthfront, and Motif Investing.

These three investing platforms are low-cost robo-advisor funds that charge a small management fee of 0.35% or less in most cases (Wealthfront will manage your first $15,000 for free when you sign-up through Debt Roundup!) that invests in a portfolio of ETFs that best suit your investing strategy. After your investing knowledge increases, you can always switch to a regular brokerage. Until then, investing with a robo-advisor is still a better option than not investing at all.

#4: Be Aggressive-Invest In Stocks Instead of Bonds

You are most likely to earn your highest returns in your 20s because you can invest more aggressively. As you near retirement you will need to shift to safer and less volatile invests that earn a consistent income. This is because aggressive investing strategies that primarily focus on stocks can gain 20% one year and potentially drop sharply the next year. If your portfolio drops 15% in one year at age 25, you will most likely regain the value in couple years when the market rebounds. If the same thing happens when you turn 60, you might have to delay retirement several years until your portfolio bounces back and you can once again afford to retire.

It’s generally recommended to have at least 80% of your portfolio invested in stocks & the remainder in bonds that are generally safer but often have much lower rates of return. This doesn’t necessarily mean you buy individual shares of company stock like Apple or Amazon. To limit risk and still get good returns, you should invest in index funds that try to match the performance of a market index like the S&P 500 and have rock-bottom expense fees.

Your brokerage will recommend funds based on your age and risk tolerance that are good performers. A general rule of thumb is to choose funds with a Morningstar rating of 4 or 5-stars as they generally perform better than similar funds long-term. Once again, choose a fund with low fees and no transaction costs to maximize your earning potential.

#5: Consider Target Date Funds

One final suggestion is to invest in target date retirement funds. These funds are a good option for your 401(k) or IRA accounts as they automatically shift your investments from a stock-heavy portfolio to balanced stock & bond allocation as you approach retirement. Target date funds tend to have higher fees than index funds or robo-advisor accounts like Wealthfront or Betterment. But, if you are still unsure about investing, they will still most likely earn you more money than simply keeping your money in the bank

A Brief Review of How to Invest in Your 20s

Let’s briefly review how to invest in your 20s. Firstly, invest at least 10% of your income into a portfolio that consists of at least 80% stocks to maximize your earning potential. Choose a brokerage with low trading fees & account fees. If you invest in mutual funds or ETFs, choose funds with good ratings and expenses below 1%. Finally, don’t be afraid to use a robo-advisor or target date fund if you want some inexpensive help to start investing.

Not Sure How to Start Investing?

I opened up my first investment account back in 2012 after paying off a lot of debt. That account was with Betterment. Since then, I haven’t looked back. I love the simplicity and ease of use they provide. I think their system is good for any type of investor. If you want to get into investing, check out Betterment.

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  1. Hey! Saw your pin on the Lady Blog Project.

    I’ve been looking into which robo-advisor to use to manage my savings! Just heard of Wealthfront and Motif so I definitely want to look more into those!!

  2. Thank you for these tips. Just wanted to add that you should have a clear objective in mind regarding investing. The objective will give you an idea of what you want to achieve and what your risk tolerance is in pursuing these goals. You should include asset allocation guidelines in your objectives. Before investing, be an avid spectator first. You can observe the market behavior without actually investing your money.

  3. Thanks for the article. Very good tips shared. I particularly agree with getting some savings for your retirement funds as early as possible is a good move. Playing catch up would be extremely difficult when you are in your 30’s and have lots of payments to take care of monthly.