Your 20s offer the best opportunity to build long-term wealth through compounding, rather than saving more money.
If you invest $190 per month starting at age 22, you’ll have over $1 million by age 62, at an average historical stock market return of 10%. But if you wait until 32 to start investing, you’d need to save $510 per month to reach the same net worth.
Start young, and you can let time do the heavy lifting for you. Wait, and you’ll need to save exponentially more money just to catch up.
How to Invest Your Money in Your 20s
In your 20s, you should invest aggressively. Hard stop.
You don’t need to worry about stock market crashes gutting your retirement savings. You can have a high risk tolerance because you don’t need to touch your investments for decades — plenty of time for the market to recover from temporary corrections and surge higher.
In fact, bear markets serve you well as a young investor. You get to buy stocks at a discount, without having to worry about selling low during them.
Let older investors fret about stock market gyrations. As a young investor, just focus on funneling as much money as possible into investments, every single month.
1. Identify Your Financial Goals
Everyone has different long-term goals, which impact your investing strategy. But not by as much as you might think, especially for younger adults.
For example, you might want to save up a down payment to buy your first home. If you plan on buying within the next 12 months, you should leave the money in more stable, short-term investments. Otherwise you have more flexibility to invest for higher returns.
The same logic applies to saving seed money to start a business. And you should aim to set aside two-to-six months’ expenses in an emergency fund to protect against shocks like losing your job or a large bill.
If you want to set aside money for your children’s education, consider tax-sheltered investment accounts such as 529 plans or Coverdell education savings accounts (ESAs). Again, because you have such a long time horizon before you’ll need the money, you can and should invest the money aggressively for the highest possible returns.
Regardless of your other financial goals, nearly every human being shares one long-term goal: a secure retirement.
2. Save for Retirement
Gone are the days when Americans worked for a single employer their entire careers, and then collected a pension from them for their last few years of life.
Today Americans live longer, work many different jobs, and assume responsibility for saving for their own retirement. You can bemoan how retirement has changed — or you can embrace the greater flexibility and control over your financial future.
For instance, some people aim for extreme early retirement in their 30s, 40s, or early 50s. I count myself among them. Because all you need to do in order to retire is build enough passive income to cover your living expenses, or at least enough to cover some of them while you pick up a fun post-retirement job or gig.
That’s not a trivial feat, but it’s not complicated. It simply requires the discipline to maintain a high savings rate and invest aggressively — more on savings shortly.
You can save and invest for retirement in a taxable brokerage account of course. But explore and take advantage of tax-sheltered accounts before volunteering to pay taxes on your hard-earned money. These come in two broad varieties, for retirement investing:
- Individual Retirement Accounts (IRAs). You can open these accounts directly with your investment brokerage, such as Vanguard or Charles Schwab. You maintain complete ownership and control over them, and can pick and choose any investments you like. However the government only allows you to contribute up to $6,000 per year in 2022, as a 20-something.
- Employer-Sponsored Retirement Plans. Many employers offer access to a retirement plan as part of your benefits package. The most common of these is the 401(k), but other possibilities include the 403(b), Thrift Savings Plan, 457 plans, and SIMPLE IRAs. In 2022 you can contribute up to $20,500 to most of these ($14,000 for SIMPLE IRAs). When you leave your job, you typically roll the account over to your IRA. Some employers offer to match your contributions as an additional benefit, up to a certain percentage of your salary.
For most retirement accounts, you can choose between traditional and Roth options. Traditional IRAs and 401(k)s allow you to deduct contributions from your taxable income this year, but you have to pay taxes on withdrawals in retirement. Roth accounts work the opposite way: you don’t get a tax deduction this year on contributions, but the money compounds tax-free and you pay no taxes on withdrawals in retirement.
As a general rule, always take full advantage of employer matching contributions as free money. Most 20-somethings should also consider maxing out their Roth IRA contributions because Roth IRAs allow more flexibility than other retirement plans to withdraw money tax- and penalty-free.
Because you’re likely to make a higher income later in your career, many 20-somethings might stand to gain more from letting your money grow tax-free in a Roth account rather than taking a tax deduction today to invest in a traditional IRA.
3. Boost Your Savings Rate
Your savings rate refers to the percentage of your income that you save and invest. The higher your savings rate, the faster you build wealth.
If you don’t currently have a budget, follow this template to create one in Google Sheets. If you do have one but aren’t happy with your savings rate, look into these ways to save money in each budget category.
Remember that the simple ways to save a little money here and there — cutting out the occasional latte or avocado toast — offer the least potential for saving. Americans typically spend two-thirds to three-quarters of their income on just three expenses: housing, transportation, and food. That makes them the greatest opportunities for saving money.
My personal favorite way to supercharge savings is by house hacking. When you can live without a housing payment, you can funnel all that money directly into investments. Many 20-somethings, especially those who have yet to start families, find it easier to rent out space or take on a roommate to reduce their cost of housing.
Read up on other ideas to boost your savings rate for more tricks and tactics.
4. Diversify Your Investments
You know the old cliche: don’t put all your eggs in one basket. If that basket shatters, it leaves you with nothing.
Investors apply the same logic, spreading their money across many different asset types. On the most basic level, that includes stocks, bonds, and real estate, although it could also include alternative assets like precious metals or cryptocurrencies.
But you can and should also diversify within each asset class. That includes geographic diversification, such as investing in both U.S. and international stocks. It also includes industry diversification, investing in many different industries such as technology, health care, finance, and so forth. And you should invest in a mix of small-, mid-, and large-cap companies.
Does that mean you have to go out and pick hundreds of individual stocks to gain broad exposure to the market? Not at all — you can buy a few simple mutual funds or exchange-traded funds (ETFs) that each own hundreds or even thousands of stocks.
For example, the SPY fund mimics the S&P 500 stock index, owning shares of all 500 companies in the index. You can buy other index funds to mimic other stock market indexes for an easy and cheap way to diversify.
As a 20-something, you don’t necessarily need to diversify into bonds for added safety and stability, since you can leave the money invested throughout market corrections. I didn’t invest in bonds in my 20s, or my 30s for that matter. I did and still do invest in real estate however, for additional tax advantages, diversification from stocks, and reliable passive income.
If you want to speculate on cryptocurrencies or other high-risk investments, only set aside a small percentage of your portfolio to do — 5%, for example.
5. Get Help from a Financial Advisor or Robo-Advisor
I’m not a financial advisor, so take everything I just said with a grain of salt.
When in doubt, speak with a professional advisor, such as a certified financial planner. Talk to them about your goals, and how you should invest to best reach them.
In today’s world you can take advantage of free or affordable robo-advisors as well, to manage your investment portfolio for you. After completing a brief questionnaire, they propose an asset allocation appropriate for you. From there, you can set up automated recurring contributions into the account, and they manage your investments for you to maintain your ideal asset allocation.
A robo-advisor should suffice for most 20-somethings. As you build more wealth, your needs grow more complex, and you may want to start speaking periodically with a human financial advisor.
Many robo-advisors now offer a human-hybrid advising model, where the system automatically manages your investments on a day-to-day basis, but you can speak with human advisors when you need to discuss more complex topics like tax questions, estate planning, or specific investing goals.
Investing in Your 20s FAQs
Still have questions about how you should invest as a young adult?
The good news is that you can and should keep your investments simple in your 20s. If you invested in nothing but three ETFs throughout your 20s, exposing you to U.S. large-cap stocks, U.S. small-cap stocks, and international stocks, your portfolio would accomplish everything it needed to by the time you turned 30.
Even so, many 20-somethings ask the following questions about how to invest. Put your mind at ease with the answers below.
Why Should I Invest in My 20s?
Invest in your 20s to take advantage of compounding. The longer your money stays invested, the more exponential the growth curve.
You start earning returns on your returns, forming a virtuous cycle of upward growth. Your investments take on a life of their own, generating more money each year as the returns get reinvested.
If you invest $300 per month for 10 years, then never invest another cent for the next 30 years, you’ll have over $1 million dollars by the end of it. But as illustrated earlier, it would take $510 invested every month for 30 years to reach the same sum.
Invest early so you don’t have to invest much later.
Should I Invest or Pay Down Debt in My 20s?
It depends on the interest rate of the debt.
As a general rule, pay down the debt as your first priority if you’re paying more than 7% on it. You earn a guaranteed return by paying down the debt and avoiding the interest, making it the safest “investment” you can make.
It doesn’t make sense to invest money at an 8% to 10% return if you’re paying 24% interest on a credit card balance or 12% on student loans.
That said, you earn a 100% return on contributions to your retirement account that your employer matches. Always prioritize those first.
What Investment Strategy Is Best for 20-Somethings?
Aside from maxing out your employer matched contributions, and potentially maxing out your Roth IRA contributions, I recommend automating your investments with a robo-advisor as a 20-something.
Set up an account with a robo-advisor, such as SoFi Invest, Ally Invest, or Schwab Intelligent Portfolios, all of which are free. Answer the initial questionnaire aiming for the most aggressive portfolio settings possible, because you don’t need to sacrifice returns for stability in your 20s.
Then schedule automated recurring transfers into the account. I set up mine to transfer money from my checking account every single week, but if you get paid biweekly, consider setting it up to transfer funds every payday.
Set it and forget it, so you don’t have to rely on self-discipline to do the right thing each month.
How Can I Start Investing With Little Money?
There’s no minimum balance to open accounts with most investment brokers. And some robo-advisors, such as SoFi Invest and Ally Invest, don’t require a minimum balance either.
Should I Invest in Real Estate in My 20s?
As a professional real estate investor, I obviously like real estate as an asset class. But it comes with plenty of caveats and cautions.
I do recommend expanding into real estate in your 20s, but only after you’ve stabilized your retirement account contributions. And even then, don’t start with direct property purchases.
Start with indirect real estate investments such as real estate crowdfunding platforms. Some, such as Fundrise and Groundfloor, let you invest with as little as $10, and require no labor or skill on your part.
Don’t make the transition to direct real estate investing without spending plenty of time learning the skills required, such as scoring good deals and accurately calculating returns. Most beginner real estate investors make costly mistakes, assuming that property investing is intuitive and that they don’t need special training or skills. They learn those lessons the hard way.
Don’t overthink investing in your 20s. Just get started, and keep pumping as much as you possibly can into your investments.
Sooner than you expect, you’ll start seeing tangible gains on your investments. That will boost your enthusiasm for investing even more money, and you’ll build even faster momentum. You can use a tool like Mint.com to track your progress automatically, with the added bonus of tracking your credit score.
And don’t be afraid to set ambitious goals such as retiring in your 30s or 40s. You can follow the investing strategies for financial independence and retiring early (FIRE) to make fast progress, if you’re willing to set a high savings rate.
But whether you save 10% or 65% of your income, automate your savings and investments as much as possible, so your wealth keeps growing without you having to do so much as log into your accounts.