This post is by our regular contributor, Erin.
How many of you are in your 20s (or later!) and have procrastinated on getting started with investing?
*raises hand*
We’re told over and over again how important investing for the future is, how it’s better if we start earlier, and yet, we take no action.
That’s probably because investing seems like this next-level “adult” thing that’s too overwhelming to deal with right now.
Or maybe you’re like me and weren’t aware of how important investing or contributing to a retirement plan was until you were a few years into your 20s.
Whatever the case may be, today we’re going to walk through exactly how to start investing in your 20s so you can get on the right path to growing your wealth.
Step 1: Look to Your Employer
Does your employer offer a 401(k)? Most medium to large companies offer some sort of employer sponsored retirement plan; you can check with HR to find out if you have one.
Not sure what a 401(k) is? It’s a retirement plan you can easily contribute to as money is taken straight out of your paycheck (before taxes) and into your plan.
Some companies automatically enroll you in a 401(k) once you’re eligible. It’s common to contribute 3% of your salary to start, and some employers match your contributions up to a certain percent. That’s free money for you!
Participating in a 401(k) lowers your taxable income, and withdrawals made in retirement are taxed as income.
This is the easiest way to begin investing and saving for retirement in your 20s. There’s a low entry barrier as your employer handles picking out the funds and decides where to allocate your money. It can be very hands-off.
However, when you’re ready, you should take a look at where your money is going. Not all 401(k) plans are equal – some are riddled with fees, and more fees means less growth for your money.
Step 2: Consider Opening an IRA
Some of us don’t have a retirement plan offered through our employer. I’ve worked for smaller companies that didn’t offer one, and for that reason, I delayed saving for retirement because I had no idea what other options were out there.
Fortunately, you’re reading this, so you don’t have to stay in the dark. If you’ve maxed out your 401(k) or don’t have access to one, the next thing to look at is an Individual Retirement Account (IRA).
These come in two flavors: Roth and Traditional. There are many articles out there debating which one is “better”. That’s beyond the scope of this article, but I’ll briefly go over the two so you understand the differences.
With a Roth IRA, your contributions are taxed upfront, but your withdrawals aren’t, giving you a source of tax free income once you retire. You can also withdraw your contributions (not earnings!) without penalty – even before you’re 59 1/2 years old.
A Traditional IRA is the opposite, meaning your contributions aren’t taxed upfront, but withdrawals are taxed as ordinary income later on. Contributions may be tax-deductible, and earnings and contributions from both IRAs grow tax free.
There are many variables to consider when choosing which one is right for you. There are income limitations and other exceptions to the rules. Both serve as good starting points if you don’t have any other retirement plans.
Step 3: Decide on a Broker
Whether you’re opening an IRA or a taxable investment account, you need a brokerage account. This allows you to actually trade and invest in stocks and funds.
When I opened my Roth IRA last year, I chose Vanguard because of its low fees. However, you need $1,000 to open a Target Retirement Fund, and $3,000 for most others.
If you can’t contribute that much right now, don’t let that stop you! There are plenty of other brokers who don’t require as much to open a taxable account:
- Trade King: There are no minimums to open an account, and you can begin trading for $4.95 per stock.
- Scottrade: You need $2,500 to open an account, and stocks are $7 to trade as long as they’re priced over $1.
- Motif: You can invest for $4.95 per stock, or $9.95 per motif, which is a basket of 30 stocks or ETFs that follow a specific theme. There’s technically no account minimum, but you need at least $250 to invest in a motif. If you sign up, you’ll also get a $150 deposit bonus.
When you have your brokerage account set up, you can then use Personal Capital to track your portfolio. It’s very similar to Mint, but it’s specifically for investors.
Figure Out Why You’re Investing
In your 20s, you’re likely investing for the long haul. Retirement is decades away, and you can use time to your advantage to absorb any bumps the market may go through. Now is the time to be more open to risk.
For that reason, you may not want to exclusively invest for retirement if you can spare the funds. It’s always a good idea to diversify your investments.
ETFs are usually easier to invest in than stocks because they track a certain index. They provide instant diversification and are a great starting point for beginner investors.
If your goal is to generate passive income to achieve financial independence, consider looking at dividend stocks.
Keep it Simple
Don’t let investment jargon (or market dips) scare you off. As long as you get started with something, you’re in better shape than you were before.
If you need help, don’t be afraid to reach out to a financial advisor for advice. Just make sure to focus on fee-only services, so you know your advisor doesn’t have any conflicts of interest when making recommendations.
Lastly, if you don’t think you can afford to invest, think again. You can’t afford not to. Investing is the best way to stay ahead of inflation. If you let your money sit in the bank for years where it gains next-to-no interest, the value will decrease. As the price of goods and services increase, your money will get you less.
Again, starting small is better than never starting at all. Contribute what you can to your 401(k), and even if you can only afford to spare $10 – $50 per month for an IRA, open one! You don’t have to max out your accounts if it’s not possible. Your money will still grow.
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Starting to invest in your 20s is a wise idea. Chances are, if you ask anyone in their 30s, they’ll tell you they wish they started sooner. Make investing a priority by starting small and keeping it simple. The key is to not overwhelm yourself to the point of procrastination.
When did you start saving for retirement? When did you open your first taxable account? What do you like investing in? Any tips for beginners?
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I like the idea of getting your feet wet with free money from your employer. Why not take advantage of a companies match. Most 401k plans have limited investment options so you won’t be overwhelmed and some over some time of professional advice so it’s a good way to get introduced to retirement savings.
I started investing in my mid twenties with my employer, but I had a really bad attitude about it because I only ever saw that money being lost (it was 2007). But it’s still the right thing to do! Now I’m trying to catch up.
Great ways to get started Erin! I started in my late 20s though wish I started earlier. I was paying off debt at the time, so I put it off. That being said, I think your employer (assuming they offer a 401(k)) is the hands down best place to start in most cases. The thing I always tell those in their 20s is to focus on simply starting and not hold back due to the amount started with. That $50/month might seem like nothing but it’s getting started that counts.
These are great tips, but I just have to mention Betterment to keep investing simple and to “check” a few more of the awesome suggestions off this list too! We’ve been using it for a couple of years and have been thrilled with the ease of use! Regardless, investing in your 20’s is so important, and something that the more we’ve been doing, the more we’ve enjoyed!
As long as you avoid active trading as a form of investing, you can’t go to far awry in your twenties. I’ve changed investing strategies four times in my life, and I’m only 27. It takes a little time, and sometimes trial and error to figure out investing, but if you start in your twenties compounding will likely overtook rookie mistakes in time.
I started investing in retirement this year so clearly I have a long way to go. Debt has been getting in the way and my employer doesn’t offer a 401(k) but I did open a Roth IRA with Betterment and I’m enjoying the simplicity and ease of Betterment.
Great minds think alike right?! I just wrote something similar on my blog. Great tips here!
I think if more people knew how simple investing could be, there’d be a lot more people doing it!
I hate that most people only think about investing in retirement accounts when you can invest beyond just retirement accounts. You will have to pay some attention to tax events that could be triggered in a brokerage account but for the most part you will make your money work so much harder for you in a brokerage account than in a bank account. Most people actually lose money based on inflation just staying in a bank account only for their taxable money. Like you mentioned, you can just keep it simple and simple will pay off over time.
I’m from Europe, so I automatically started saving for retirement when I started working (first time when I was 14 years old). I think I tried first time to invest on my own when I was like 20 or so. However, I currently have divided my investments and incomes between many things and it is important to keep balance. The key really is to educate yourself and to start doing it in early ages already.
DebtDiscipline Great summary, Brian. While I haven’t had access to a 401(k) myself, I have looked at my fiance’s and it was pretty simple to understand! Plus, most employers are willing to help you out and I imagine most programs have some sort of handbook.
Mark@BareBudgetGuy Ah, I can definitely understand that! My fiance initially hated the idea of part of his paycheck going toward something he wouldn’t have access to for years to come, but I just kept insisting his future self would thank him for it. It’s difficult when you could use the money now!
FrugalRules Exactly! I fell for that trap, too. I figured throwing $20/month toward retirement wasn’t worth it, but you may as well start somewhere. It certainly won’t hurt, and it’s better to get in the habit as early as possible.
RetiredBy40 Yes, I’ve heard good things about Betterment as well! Glad you’ve experienced success with it. I definitely think investing is one of those things that gets more enjoyable as you start to see how your efforts will pay off.
Hannah UnplannedFinance Oh yes, I wouldn’t recommend active trading to start at all (and I don’t think it’s for me, period!). I’m glad you mentioned your own experience with changing strategies. It’s much better to make mistakes in your 20s when you can afford to!
Chonce Glad to hear it! I really wish my former employers had offered 401(k)s, but that’s one of the reasons I’m thankful I started reading personal finance blogs – otherwise, I probably would have opened an IRA much later in life.
Financegirl Thanks Natalie, I enjoyed your post, too!
brokeandbeau It’s so true, which is sad. Yet another reason why a basic personal finance course would come in handy at the high school/college level.
blonde_finance Agreed! There’s definitely no reason to solely invest in a retirement account – once you’ve got that down, it’s worthwhile to explore your other options. That’s why I recommended reaching out to an advisor if it’s too overwhelming. You always want your money working harder for you.
Reelika @Financially Wise On Heels That’s awesome, Reelika! I can’t imagine where I would be if I had started investing 10 years ago. I’m glad you’ve found something that works for you – I agree that balance is important.
My first investment was in a 401k at my first “real” job after college. 401ks are definitely an easy way to start investing. I wish more 20 year-olds realize why investing at young age made sense as many young people think investing is something their parents do. Starting young, even with a small amount, makes a huge difference in the long run and people make much more complicated than it really is.
This is a very good summary Erin. I know if I had started investing years ago, I would be so much further ahead. But better late than never.
I agree with your statement that if you think you can’t afford to, the truth is you can’t afford not to.
Thanks for your informative post. I always learn something here :)
Laura Beth
Keeping it simple is really important. I know lots of people who put off investing because it seems confusing or they are afraid of choosing the wrong investments. Almost anything is better than nothing. Get started and figure it out as you go along.
ShannonRyan The opposite actually happened for me – my parents never talked about investing, and never gave me any advice on it. There were only brief moments where they discussed what to do with an inheritance my dad received. However, they’re living off of a pension and Social Security and I know I want more peace of mind than that!
Laura Beth @ How To Get Rich Slowly Yes, definitely better late than never, especially when it comes to retirement. Glad you liked the post!
Eyesonthedollar Exactly. I know investing seems like this daunting thing that’s complex, but it doesn’t have to be. There are plenty of resources out there that will help you get started with as much as $50 or $100.