Updated February 24, 2023

Investing in Your 20s: Beginner's Guide

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You don't need to have a lot of money or experience to start investing in your 20s. Here's how to build long-term wealth starting in your 20s.

Your 20s is an exciting time. You're finally a young adult out on your own. Your career is taking off and you have more money now for things like travel, shopping, and eating out.

While you should have fun in your 20s, keep in mind that your money decisions now will impact your future. The best thing you can do is build a strong financial foundation for the rest of your life.

Investing may seem really intimidating at this age, but it doesn't have to be. In this guide, we'll break down easy ways to invest in your 20s.

Why Start Investing in Your 20s

Investing when young will give you better chances of success. When you start in your 20s, you have a lot of time for compound interest to do its magic.

If you start investing at 22 years old (after college), if you invest $2,660 per year, and assuming 8% investment returns, you will have $1 million by retirement at age 65.

If you start investing at 30 years old, you will need to invest $5,200 per year to reach the same amount by retirement age. That's a pretty big difference.

How much you should be saving in your 20s
Here's a chart that shows how much you will need to invest at every age to reach $1 million by age 65 (assuming 8% annual return).

AgeHow much to invest annually

This is why it's important to invest when young, even if you're only investing small amounts.

You can play around with numbers yourself using this compound interest calculator.

What are you saving and investing for?

How to Build Wealth in Your 20s

Between immediate needs and long-term goals, it can be hard to know what to work on first. Here's what we recommend to prioritize in your 20s, as well as easy ways to start investing.

Also, we recommend SEC's fantastic resource on saving and investing.

There are many online personal finance tools to help you keep track of your finances. Empower lets you see all your bank accounts, investments, credit cards, and loans information in one place.

1. Take Advantage of Free Money From Your Employer

In your 20s, retirement may seem far away. But the sooner you start planning for it, the better off you'll be. The easiest way to start is with your work's 401(k) retirement plan.

When you enroll in a 401(k) plan, a portion of your salary is taken out even before the paycheck reaches your hands. You don't see it and so won't even miss it. That money gets invested and will grow.

And what's even better - most companies offer an employer match. That's free money they're giving you toward your retirement, so take advantage of it. Try to contribute at least the maximum match amount.

For example, let's say you start contributing to your 401(k) at age 22. Let's make these assumptions:
  • $35,000 yearly salary (pre-tax)
  • 3% annual salary increase
  • 3% contribution
  • 3% company match
  • 8% annual return
By age 65, you will have $1.04 million in your 401(k) account.

This above scenario shows how you can reach $1 million by retirement even on a lower income and without giving up too much of your paycheck. If you start on a $35,000 salary and contribute 3%, that's only $87.50 per month. That money is better off being invested for your future than spent on a few dinners and drinks.

As you get raises and move up in your career, increase your contributions. The more you contribute, the more you'll have for your future nest egg.

2. Have an Emergency Fund

If an emergency happens, do you have enough money to cover it?

It's important to have a safety net if you need a car repair or experience job loss. The last thing you want is to rack up credit card debt or dip into your retirement savings.

How much do you have saved for emergencies?

Most financial experts recommend that you have enough savings to cover three to six months of living expenses. After you have socked away at least 3 months' worth, then you can start investing.

To get started, open a savings account dedicated to your emergency fund. Online banks usually offer savings accounts with a higher interest rate so your money can grow more. It's smart to put your savings on autopilot by setting up automatic monthly transfers, even if it's just $25 or $50 a month.

3. Auto-Invest with a Robo-Advisor

The idea of investing may seem really scary to young beginners. What if you don't know what to invest in or make bad choices?

Investing with a robo-advisor is a good choice for newbies. It automatically invests your money and manages your portfolio for you. You don't need any knowledge or experience.

It will create an investment strategy based on your age and financial goals. In addition, robo-advisors automatically handle complicated tasks like rebalancing your portfolio and tax-saving strategies. This can help you stay on track better than if you were to do it yourself.

A lot of robo-advisor platforms don't have account minimums, so you can get started with just a little bit of money. You can set up automatic monthly transfers, so it's completely hands-off.

Read more on the pros and cons of robo-advisors.

Keep in mind that stock investments are best for longer-term goals (at least 5 years away) or retirement. Stocks are likely to go up and down, so you don't want to risk your money if you need it soon.

4. Start Small with a Micro-Investing App

In your 20s, you probably don't have a lot of extra cash to invest. This is when a micro-investment app comes in handy. These apps allow you to invest just tiny amounts.

Look for a brokerage account that supports fractional shares. This means you can buy just a small fraction of a stock if you don't have enough for a full share. For example, you can just invest $5 for a tiny piece of Apple stock if you don't have enough for a full share.

Stash Invest and Robinhood are both micro-investing apps designed for beginners. There is no minimum to open an account. And you can invest in fractional shares with little money.

Investing something is better than nothing. Even if you just have $10 or $20 a month to invest, that may not seem like much now, but it will grow into thousands over time.

5. Diversify Instantly with Funds

It's important to create a diversified portfolio. That way, if a couple of companies or investments don't do well, you still have others to carry you through.

The easiest way to diversify is to invest in ETFs (exchange traded funds) or mutual funds. These are baskets containing up to hundreds of stocks. This way, you're instantly diversified with one investment.

Some funds you can consider include:

  • Index funds follow a specific market index. For example, you can buy into an S&P 500 index fund, which invests in the 500 largest U.S. companies.

  • Target date funds are designed for a specific retirement date. For example, if you're 25 now, you can invest in a 2060 target date fund. The investment strategy will be more aggressive to start and become more conservative as you get closer to retirement.

You can pick a handful of funds to invest in, which will give you a diversified investment plan.

6. Save for Retirement with a Roth IRA

Now, what if your company doesn't offer a 401(k) or you work for yourself?

The next best option is to save for retirement in a Roth IRA account. An IRA is an Individual Retirement Account that you can open at brokerages. The best part is that they come with a tax break.

With a Roth IRA, your contributions are made with after-tax dollars. It has these two benefits over a Traditional IRA:

  • After age 59 ½, all withdrawals are tax free. You also don't pay any taxes on investment gains.

  • You can withdraw contributions at any time with no penalty. This means you can access your funds if you really need to for an emergency.

IRAs have an annual contribution limit. For 2023, the maximum you can invest in an IRA is $6,500.[1] If you don't have a company 401(k), then try to contribute the maximum amount. If this is out of reach for now, then just contribute as much as you can.

Even if you have a 401(k) plan, it's smart to have an IRA account too as part of your retirement plan. After all, you can never save too much for your future.

You can open an IRA retirement account with a self-directed brokerage or robo-advisor. A DIY account is good for investors with a bit of experience, while a robo-advisor offers automatic investment for those who want to be hands-off.

7. Pay Off and Avoid Bad Debt

Being debt-free is one of the best investments you can make.

Credit cards can be a great tool to help you reach your financial goals. And as a young adult, it can be tempting to open up a bunch of cards. But make sure to keep your spending in check. Only spend what you can pay off at the end of every month.

The debt you rack up in your 20s can be a problem for the next decade (or even beyond). It can impact your ability to save and invest for the future.

And even more - bad debt will affect your credit score. This can hurt your chances of getting a loan, leasing an apartment, or even getting a job.

If you already have some credit card debt, make paying it off your priority. The reason is because the high interest charges can far outweigh any investment earnings.

If you have student loan debt or a car loan, while they can be a drag, those kind of debts are not considered bad debt. Just continue to make your payments on time each month. You can increase payments as you earn more.

8. Increase Your Savings

When you first start, you may not have much to save or invest. And that's okay. Investing anything will give you a good head start.

But as you get older, you'll need to save more money. By the time you get to your 30s, you'll have other goals such as marriage, buying a house, and starting a family.

As people earn more, they're also tempted to spend more too. If you get a raise, invest the extra income instead. Contribute more to your 401(k) plan. Put more toward your debt payments. Open a new savings account for short-term financial goals and start saving for your future home down payment. Deposit more funds into your investment account.

Risk in Your 20s

As a young investor in your 20s, you have a higher risk tolerance.

You still have 40-something years to retirement, so you have time to ride out the volatility of the stock market. Don't be afraid of risk. Historically, the stock market always trends upward, so temporary losses won't matter if you're investing for the long term.

This means you can take on a more aggressive investment strategy. Your portfolio can contain a higher percentage of stocks, which has the potential for higher growth.

For 20-somethings, your asset allocation could be anywhere between 80% and 90% stocks. The rest 10%-20% can be in bonds. Bonds have lower returns, but they're low risk, so it's important to have some in your investment portfolio to balance out risk.

As you grow older, gradually make adjustments to reduce the percentage of stocks and increase bonds.

To determine your asset allocation, a rule of thumb is to take 110 - your age. This determines the percentage of stocks in your portfolio. So if you're 25, you can have 85% of your assets in stocks.

What Experts Say

CreditDonkey assembled a panel of industry experts to answer readers' most pressing questions. Here's what they said:

Bottom Line

Hopefully, you now see why it's important to invest young. Even if you don't have a lot of money, there are plenty of options to invest with just very small amounts.

Investing in your 20s will set you up for a strong financial foundation. This means stay out of debt and build up an emergency fund. Start contributing as much as you can to a retirement plan. It's important to develop a healthy money habit now that will lead you to financial freedom down the road.


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Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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What are you saving and investing for?
25% Retirement
5% Vacation
59% Building wealth in general
11% Buy a home
Source: CreditDonkey
How much do you have saved for emergencies?
35% No emergency savings
20% Less than 3 months
21% 3 to 6 months
24% More than 6 months
Source: CreditDonkey poll of 1,841 respondents
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