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How To Invest In Your 20’s

By David Krug 11 minute read

As a young adult, it’s never too early to start learning about investing. People are naturally curious about how to get into investing now that the stock market is rising and Reddit is fueling new investment ideas. Young investors, on the other hand, may find the prospect of investing daunting.

The good news is that you don’t have to struggle to learn how to invest in your 20s. If you don’t have much money, there are basic and uncomplicated ways to invest. Consider some of the information and resources you may use in your 20s to learn about investing money.

What are the benefits of getting started early?

You’ll have a higher chance of building a successful investment portfolio if you begin investing early. To accomplish your financial objectives, you may not need to invest as much money as you would if you started investing later in life.

A millionaire by the age of 65, for example, is an ideal objective. If you begin investing at the age of 25, you’ll need to set aside $350 every month to earn an annualized rate of return of 8%. A millionaire status would require a $750 monthly investment if you wait until you’re 35 years old to begin investing.

The earlier you begin investing, the more time compound interest has to work for you. Investing in the stock market for the long run might be a great method to accumulate money.
A savings account can be a decent short-term location to save your money, but you won’t get the profits you would if you were to invest that money. You may not be able to meet your long-term goals, such as accumulating enough money for your retirement, with a savings account. Just 0.04 percent (as of March 9, 2021) is the average annual percentage yield for typical savings accounts.

The stock market has yet to encounter a period of negative returns in any given 20-year period, even though there is always a danger of loss while investing. Even while you may experience short-term losses, long-term losses that jeopardize your financial objectives are unlikely to occur.

What to do with your money while you’re still in your 20’s

Once you’ve seen the benefits of investing in yourself, you’ll want to continue.

Employer-sponsored retirement savings plan

One of the simplest ways to begin saving is through your employer’s retirement plan. 401(k) plans are common in the private sector, but organizations can also benefit from comparable employer-sponsored programs.

Pre-tax contributions (up to $19,500 in 2021, or up to $26,000 if you’re at least 50 years old) are often made directly from your paycheck into a 401(k). In most cases, you contribute the same amount each pay period to your retirement account using money that you haven’t yet paid taxes on. Contributions can be postponed for tax purposes. You’ll have to pay taxes when you remove money from your account in the future.

A matching contribution benefit may also be available to you, in which case your employer will contribute an equal amount to your 401(k) plan, up to a certain percentage of your salary. Employer contributions matched at a rate of 4.7% on average in 2019. Getting your company to match your contributions is like getting free money, so most people find that contributing enough to obtain the full % match is well worth the extra effort.

Take, for instance, the scenario in which you earn $45,000 per year and set aside 4.7% of your earnings for retirement savings (k). Your contribution would be $2,115 at the conclusion of your first year of work. An additional $2,230 would be added to this sum if it were matched by your employer at a rate of 4.7 percent. As a result of this match, early retirement savings can be more easily achieved.

If you have a Roth option on your 401(k), you can contribute using money that has already been taxed. Roth 401(k) contributions are tax-deferred until they are withdrawn in retirement. There are no taxes to pay on distributions if your account has been open for five years or more and you are 59 12 years of age or older. Nevertheless, your employer’s matched contributions will go into a conventional 401(k) account.

Finally, familiarize yourself with the 401(k) plan’s guidelines (k). Your 401(k) may have an early withdrawal penalty of 10% if you try to make money before the age of 59 12. The tax you owe may also be affected. As a general rule, it’s a good idea to keep your money in a savings account until you’re at least 21. Regardless of your financial situation, it is important to be aware that at the age of 72, you will be compelled to receive distributions from your IRA.

Roth retirement savings account

Using a Roth IRA as an investment vehicle in your twenties might also be an option (IRA). A Roth IRA contribution maximum of $6,000 for 2021, plus a $1,000 catch-up contribution if you’re at least 50, is significantly lower than that of a 401(k). It’s possible that the money you put into a Roth IRA will grow tax-free, meaning that when you take it out later, you won’t owe any taxes.

You don’t have to pay a penalty if you take money out of a Roth IRA at any time. There is a penalty for early withdrawals, but as long as you stay with your contributions, that money is yours — even though you miss out on the opportunity to invest it in the market once it’s out of your account. There is no minimum payout at 72 with a Roth IRA.

For people in their 20s, it may make sense to fund their retirement accounts with post-tax monies because of their reduced tax burden at this time. Assuming that your first employment is tax-free, you may be able to start a Roth IRA to save money in the long run. As your income rises and the tax advantage for contributions becomes more appealing, you may want to consider raising your 401(k) contribution or contributing more to a Traditional IRA.

If you have a Roth IRA and 401(k), you may be able to contribute to both (k). If your workplace offers a match, you may want to consider taking advantage of the maximum match and then making extra contributions to a Roth IRA, depending on your personal situation and potential tax consequences.

Online broker or robo-advisor

A tax-advantaged retirement account isn’t necessary while you’re in your 20s, but it may be an effective strategy to enhance your wealth over time. A taxable investing account may be opened with one of the greatest online brokers or Robo-advisors. Note that several internet brokers and Robo-advisors can also assist you to establish an IRA.

If you’re looking for a hands-off approach, a Robo-advisor like Betterment, Wealthfront, or Acorns may be a suitable fit. These tools can help you build a portfolio based on your risk tolerance and investing plan at a reasonable cost. To keep your portfolio in line with your intended asset allocations, many adjust your portfolio over time. Your portfolio will be handled in accordance with your short- and long-term financial objectives. Inexperienced investors who wish to begin investing but aren’t yet ready to make their own stock selections might benefit from Robo-advisors.

Online brokers such as Robinhood, Stash, or M1 Finance are good choices if you prefer to manage your own portfolio of stocks. Your investments will be taxed regardless of whatever broker you choose, so be sure to keep that in mind. Taxes will be levied if you make a profit after selling and withdrawing your money. Your ordinary tax rate applies if you’ve held the investment for less than a year. To take advantage of a lower tax rate on capital gains, you must keep the investment for at least one year.

Before making an investment move, think about the tax consequences carefully. A tax professional or financial counselor might be of assistance to you if you have issues with taxes.

7 types of investments and how they work

In your early twenties, you’re likely to encounter a number of typical sorts of investments. Investments can either increase in value or provide income. Investing in many asset classes or kinds is a common practice. Take a look at these typical investments.

Stocks

A stock represents a portion of a company’s ownership. Your investment is an ownership stake in the firm. If the stock price rises, you will reap the benefits. You earn a share of the company’s profits based on the number of shares you have.

On a stock market, it’s extremely simple to purchase and sell stocks. Buying and selling stocks is as simple as opening a brokerage account. The expenses associated with brokerage accounts should be taken into consideration if you’re considering this option.

In addition to purchasing whole shares, it is also possible to acquire a portion of the stock. The term “purchasing a fractional share” refers to when you purchase a piece of a stock rather than the entire shares. You may be able to establish an investment portfolio without a lot of money by purchasing fractional shares.

Bonds

To put it another way, when you buy a bond, you’re effectively lending money to a company. You buy the bond and receive monthly interest payments. It is only when the bond matures that you receive the full value of your investment.

You can either purchase bonds issued by corporations or by governments. Corporate bonds can be purchased through a number of traditional brokers. TreasuryDirect.gov is the place to go if you want to buy US government bonds. Municipal bonds, issued by state and local governments, are another option for raising money for local initiatives. Many municipal bonds have tax incentives attached to them. The federal government does not tax the interest on municipal bonds, unlike the interest on corporate and treasury bonds, which are taxed at your ordinary-income rate.

Mutual funds

To avoid having to choose individual stocks or bonds, it may make sense to invest in mutual funds. Assets that have specific qualities make up a mutual fund. Every investment you make in a mutual fund is a part of your portfolio. To put it another way, by owning one stock in the 200-stock mutual fund, you own a portion of every single stock in the fund, but you only need to make one purchase.

Bonds can also be included in mutual funds. Inflation-protected bond mutual funds may be purchased that incorporate a variety of various maturities of US Treasuries, as well as other bonds.

In order to spread your money among a variety of assets, investing in a mutual fund may be a wise choice. Mutual fund portfolios can be made up of stock and bond funds, and some investors prefer to use mutual funds for their entire investing portfolios. So that you don’t end up spending too much on one stock, mutual funds can help you diversify your investments.

Index funds

In fact, index funds are mutual funds. Instead of selecting investments that share a set of qualities, an index fund selects assets based on their ability to match a specified index. The S&P 500 index, for example, comprises a variety of firms, so investing in a mutual fund that includes those companies gives you ownership of a portion of the whole index. Index funds for bonds are another option.

An expense ratio is what you’ll pay when you invest in any type of mutual fund, whether it’s a “normal” managed fund or an index fund. As a proportion of the total value of the fund, this is calculated each year. Mutual fund cost ratios and other charges tend to be higher in mutual funds than in index funds.

In any case, it’s a good idea to evaluate the fund’s expenses and fees because they chip away at your actual returns. Between 0.50 percent and 1.00 percent of assets under management are typical yearly cost ratios for actively managed mutual funds. Passively managed funds may have lower annual expense ratios, of the order of 0.20 percent.

Exchange-traded funds

There are a few differences between ETFs and regular mutual funds. Unlike a mutual (or index) fund, you do not hold any of the assets contained inside an ETF. A group of investments can be represented by an ETF, but you only own the ETF, not the underlying assets that make up the ETF portfolio.

An ETF trades like a stock because of this distinction. The only time a mutual fund (or an index fund) transaction may be performed is once a day, and at that time, the fund’s assets must be settled. As with a stock, you can place a market order for an ETF at any time of the day or night.

ETFs are a type of hybrid between mutual funds and stocks since they offer both diversification and convenience of trading. Like index mutual funds, index ETFs exist as well. As with mutual funds, ETFs come with expense ratios, and if the broker you’re using imposes a transaction fee on trades, you’ll have to pay for it as well, just as you would with a stock transaction.

Real estate investment trusts

A real estate investment trust (REIT) may be an alternative for you if you’re looking for real estate exposure but don’t have the money to acquire property. Real estate investment trusts (REITs) own a variety of assets and distribute profits to their stockholders. Because REITs are listed on the stock exchange, it is possible to discover a ticker symbol and purchase them through a brokerage.

The Fundrise platform, for example, allows you to start investing in real estate with just $10 in their own REIT.

Alternative assets

An alternative asset is an investment that is regarded riskier than usual. They may also be more difficult to purchase and sell, or have less liquidity. They may also be relatively new assets in some circumstances. The following are a few instances of unconventional investments:

  • Commodities
  • Precious metals
  • Cryptocurrency
  • Collectibles
  • Art
  • Tax liens
  • Private funds
  • Master limited partnerships

All of them can be fascinating additions to your portfolio, but before investing in alternative assets, you need to exercise caution and assess your risk tolerance. Keep your alternative assets to less than 10% of your portfolio at all times. As an illustration, I hold cryptocurrencies to the tune of around 5% of my total assets. Even though they’ve grown, I’m not comfortable investing too much money into them, in case there are large losses later.

Bottom Line

Investing in your early twenties can help you build a strong financial foundation for the future. Assuming you don’t have a lot of money, to begin with, it’s best to get started as soon as possible to take advantage of compounding returns.

There are a plethora of starting points available. Check out our list of the top brokerage accounts if you’d want to establish an account and begin investing. Investing in your early twenties can help you build a strong financial foundation for the future. Assuming you don’t have a lot of money, to begin with, it’s best to get started as soon as possible to take advantage of compounding returns. There are a plethora of starting points available. Check out our list of the top brokerage accounts if you’d want to establish an account and begin investing.