Smart Investments In Your 20S: Where To Begin?

Investing in your 20s is a great way to set yourself up for financial success later in life. With time on your side, you can take advantage of compounding interest and grow your wealth over time. Here are some tips to get you started on your investment journey:

- Start investing early: The power of compounding means that even small investments made in your 20s can grow significantly over time.

- Understand risk and return: Investing comes with risk, but the potential for higher returns. As a young investor, you can afford to take on more risk, as you have time to recover from any losses.

- Set financial goals: Determine your short-term and long-term financial goals, such as buying a house, retirement, or saving for children's education. This will help you create a plan and choose the right investment vehicles.

- Choose the right investments: Some popular options for young investors include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Consider your risk tolerance and investment goals when choosing.

- Contribute to a retirement plan: Employer-sponsored plans like 401(k)s are a great way to start investing for retirement, with tax advantages and sometimes employer matching contributions.

- Automate your investments: Consider using a robo-advisor or setting up automatic contributions to your investment accounts, so you don't have to worry about manually investing each month.

- Manage debt and build an emergency fund: Work on paying off high-interest debt and build up an emergency fund to cover unexpected expenses.

- Educate yourself: Investing can be complex, so it's important to continuously learn about different investment options, market trends, and strategies.

Start saving early

Starting to save and invest early in your 20s is one of the most important things you can do to prepare for your future. The benefit of time allows investors in their 20s to take more calculated risks and benefit from compounding growth. Compounding growth means that assets invested in your 20s can potentially yield far greater returns over a lifetime compared to those invested even just a few years later.

For example, if you invest $14 per day starting at age 23, your money could reach $1 million by age 67. However, if you wait until age 30 to start saving, you'll need to increase that amount by 50%. Hold off until age 35, and you'd have to save more than twice as much as at age 23.

• Set clear financial goals: It's important to examine your financial goals, considering both short- and long-term plans. Common short-term goals include saving for a vehicle, housing, or discretionary costs like travel, while long-term goals may include retirement, buying a home, or expenses related to medical care or children.
• Understand risk and return: Investing axiom states that the higher the risk, the greater the potential reward. Younger investors can generally afford to take on more risk than older investors, especially when it comes to retirement planning. When determining your risk tolerance, consider the level of risk of a particular investment and your own ability to tolerate risk.
• Choose the right investment vehicles: Some common investment options for young investors include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Stocks tend to be higher risk but can yield tremendous returns over a long time horizon. Bonds provide low-risk access to investors but are limited in their potential payout. Mutual funds and ETFs offer broad diversification and are good for a buy-and-hold strategy.
• Start investing early: To achieve long-term growth, gain access to the investing world as early as possible by opening a brokerage account. Robo-advisor tools can automate a large portion of the investment process, reducing barriers to access for inexperienced investors. When choosing a platform, consider factors such as fees, the types of assets offered, educational resources, customer support, and the user interface.
• Manage debt and build an emergency fund: Debt can be a major hurdle to investing for many young people. Focus on paying off any high-interest debt and consider using a debt-reduction system like the snowball method. At the same time, build an emergency fund to protect your retirement savings and ensure you have liquid assets to cover unexpected expenses.
• Open retirement accounts: Contribute to employer-sponsored retirement plans such as 401(k) and 403(b) accounts, which may include contribution matching from your employer. If you don't have access to these plans, consider opening an individual retirement account (IRA), such as a traditional or Roth IRA.
• Keep short-term savings accessible: Maintain a liquid savings account or emergency fund to cover unexpected expenses. Most professionals recommend having at least three to six months' worth of salary in an emergency fund.
• Continuously educate yourself: Stay up to date on market trends, emerging asset classes, and investment strategies. Seek out educational resources from federal agencies, reputable publications, and leading investors and economists.

By starting to save and invest early in your 20s, you can take advantage of compounding growth and set yourself up for financial success in the future.

Understand risk and return

Understanding risk and return is essential for making informed investment decisions. One axiom of investing is that the higher the risk, the greater the potential reward. Conversely, the lower the risk, the smaller the possible reward. For example, investing in stocks is generally considered riskier than putting your money in a savings account, but over time, stocks have proven to be a more rewarding investment.

When you invest in stocks, you'll likely experience drops in the short term. This is why investing in the market is generally not recommended if you need the money within five to ten years. However, historically, investors have always come out ahead for long-term financial goals, such as retirement.

Younger investors can afford to have a higher risk tolerance than older investors, especially when it comes to retirement planning. For older investors, a low-risk, low-reward investment like bonds or T-bills may be more appealing than a speculative investment like cryptocurrency.

It's important to be mindful of your own risk tolerance and create an investment plan that factors in considerations such as asset allocation, diversification, and investment timeline to make the best possible decisions for your current situation and goals.

Choose the right investment vehicles

When it comes to choosing the right investment vehicles, there are several options available to young investors. Here are some of the most common ones:

• Stocks: Stocks tend to be riskier than bonds, but the level of risk depends on the specific company, sector, and industry. A buy-and-hold strategy can yield significant returns over time, but with thousands of stocks available, this can be a daunting area for young investors.
• Bonds: Bonds provide a low-risk entry point for investors. They often require less day-to-day management than stocks, but their payout potential is limited. A common approach is to allocate a percentage of your portfolio to bonds that is equal to your age, which means young investors may not focus heavily on this asset class.
• Mutual Funds: Mutual funds are an excellent choice for new investors as they provide broad diversification and minimise the need for frequent trading and oversight. However, mutual fund returns are typically modest.
• Exchange-Traded Funds (ETFs): ETFs are a highly popular option for both new and seasoned investors. They are baskets of other securities, providing a one-stop-shop approach for those who don't want to manage individual stocks or assets. ETF risk and return profiles vary, allowing you to tailor your investment strategy to your risk tolerance.

When choosing investment vehicles, it's important to consider your risk tolerance, investment goals, and time horizon. Diversification is also key to limiting your risk and smoothing out your investment journey. Remember to do your research and understand the risks and potential returns associated with each investment option before making any decisions.

Manage debt and build an emergency fund

For many young people, debt is a major hurdle to investing. Student loan debt, credit card debt, and other types of debt can present a significant financial burden. To successfully manage your debt, consider using a debt-reduction system such as the snowball method. This involves listing your debts in order of balance size, making all minimum payments, and then allocating any extra money to pay off the smallest debt first. This approach can help you reduce the number of debts you have and improve your credit score.

It's also important to stay on top of your payments to avoid defaulting on your loans, which can negatively impact your credit score. Federal programs may be available to help reduce the burden of student loans, so be sure to research these options.

In addition to managing debt, it's crucial to build an emergency fund to protect your retirement savings. An emergency fund ensures that you have liquid assets readily available to cover unexpected expenses, such as a job loss, medical bills, or car repairs. The recommended amount for an emergency fund is typically three to six months' worth of living expenses. By prioritising debt management and building an emergency fund, you can create a strong financial foundation for your future investments.

Open retirement accounts

Opening a retirement account is one of the most important things you can do in your 20s to prepare for your future. The power of compound interest means that even small amounts of money saved in your 20s can grow into a large sum by the time you retire.

• Employer-sponsored plans: If your company offers a 401(k) or 403(b) plan, this is a great place to start. Contributions to these accounts are often made pre-tax, and your employer may match your contributions up to a certain percentage. This is essentially free money, so try to contribute enough to get the maximum match. If your employer offers a Roth 401(k) option, this can also be a good choice as you'll pay no taxes when withdrawing during retirement.
• Individual retirement accounts (IRAs): If you don't have access to an employer-sponsored plan, you can open a traditional or Roth IRA. Traditional IRAs are funded with pre-tax dollars, while Roth IRAs are funded with after-tax dollars. Withdrawals from traditional IRAs are taxed, while qualified withdrawals from Roth IRAs are tax-free. If you're in a lower tax bracket now than you expect to be at retirement, a Roth IRA may be the better option.
• Robo-advisors: These online platforms use algorithms to construct and manage an investment portfolio based on your risk tolerance, goals, and time horizon. They often have low or no initial deposit requirements and minimal fees, making them a good choice for young investors.
• Financial advisors: If you prefer more personalized advice, consider meeting with a financial advisor. They can help you create a financial plan, choose the right accounts, and select investments that match your goals and risk tolerance. However, financial advisors typically require a minimum account size, so this may not be an option if you're just starting out.

Frequently asked questions