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Your 20s offer the best opportunity to build long-term wealth through compounding, rather than saving more money How to Invest Your 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 (How to Invest Your Money)

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 funnelling 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. However, this impact is not as significant as you might believe, particularly 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 broking 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 broking, 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 them ($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 their 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. Examine these strategies to cut costs in every area of your budget if you have one but are dissatisfied with your rate of savings.

Remember that the simple ways to save a little money here and there — cutting out the occasional latte or avocado toast — offer minimal 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 favourite 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.

My wife and I also found a way to live without a car, which not only saves us money on car payments but also on auto insurance, repairs and maintenance, and gas.

Read up on other ideas to boost your savings rate for more tricks and tactics.

4. Diversify Your Investments (How to Invest Your Money)

Don’t rely solely on one investment strategy. 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 it. You can buy other index funds to mimic other stock market indexes for an effortless 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 so — 5%, for example.

5. Get Help from a Financial Advisor or Robo-Advisor

Since I’m not a financial advisor, heed my advice with caution.

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 (How to Invest Your Money)

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