How to Start Investing in Your 20s: Top 9 Strategies

Investing in your 20s can be a smart financial move to set you up for long-term wealth. While you’re working to find a clear career path or pay off student loans, saving for retirement can seem too far away to be real. As a 20-something, your biggest asset is time, even if you’re carrying student loan debt or still in school. The years fly by, and investing even $100 to $300 a month can help set you up for financial security and a comfortable retirement. Read on to learn how to start investing in your 20s.

Why Should You Start Investing in Your 20s?

The benefits of investing in your 20s come down to compound interest and long-term growth. When you invest just $100 a month in your 20s, with an average return of 7%, you can build over $16,000 in savings by the time you’re 30. If you don’t invest anything more, that same $16,000 could be worth over $170,000 at age 65 (assuming 7% average annual return). 

If instead of $100 per month, you could save $250 per month, from ages 20 to 30, you’d have over $41,000. Again, leaving it until age 65 without additional deposits at a 7% average annual return, it could grow to over $437,000. That’s the start of a solid retirement plan with relatively little money upfront. Even if you’re making $2,500 monthly, that’s just 10% of your total income. It’s unrealistic to expect as high as a 7% return over a period of decades, but this example gives you an idea how your money can grow when it is invested. 

Using the asset of time, even a small amount invested in your 20s and 30s can compound and grow. Putting these funds into a tax-advantaged retirement account like a Roth IRA could earn that long-term growth tax-free. 

9 Steps to Start Investing in Your 20s

Here are nine steps to start investing in your 20s. 

1. Determine Your Investment Goals

In your 20s, you could have several competing savings goals, such as saving for retirement, buying a home or starting a business. You should also build an emergency fund and might want to save for a mortgage down payment, vacations or other goals. Setting clear investing goals based on cash flow will help prioritize savings and investing decisions. 

2. Assess Your Personal Risk Tolerance

Your personal risk tolerance is how much risk you’re willing to take with funds and your

emotional tolerance for market fluctuations. By evaluating factors such as your income stability, financial resources and emotional comfort with volatility, you can gain insights into the level of risk you are willing and able to take on. 

Generally, those with higher income, greater savings or strong financial security can take on greater risk. However, even if you have a small amount to invest, you can balance high-risk investments with low-risk investments and savings to diversify risk. 

3. Contribute to a Retirement Plan Offered by Your Employer

An employer plan for retirement, such as a 401(k), offers a tax-advantaged option to build retirement savings. Many employers offer a matching program in which they match a certain percentage of contributions you make to the 401(k), effectively doubling some percentage of the savings you make. 

With a 401(k), you contribute pre-tax dollars, lowering your total taxable income for the year. Then, when you withdraw funds at retirement, you’ll pay taxes at your applicable tax rate. Remember that you’ll face penalties and fees for withdrawing 401(k) funds before age 59 ½, so only deposit what you can keep in the investing account for retirement. 

4. Find a Broker or Robo-Adviser that Meets Your Needs

A broker or robo-adviser offers opportunities to invest in stock markets or indexed funds without having to choose individual stocks or investment products. Instead, the robo-adviser or broker can suggest a diversified investment plan. Look for brokers or robo-advisers with low or no fees.

Alternatively, consider investing in an index fund that tracks the S&P for a diversified investment strategy with strong historical returns. 

5. Open Short-Term Savings Somewhere Easily Accessible

While they won’t earn as much as money you put into equities, savings accounts, CDs and money market accounts are great options. Look for a high-yield savings account with 4% to 5% interest rates to store short-term savings while earning more in interest. 

6. Incrementally Raise Your Savings Over Time

If hitting big savings goals seems overwhelming, start small and build up over time. Consider saving 5% of your current income, and keep increasing savings, first to 10% of your income, and then, if you can, aim to save even more. 

While setting big savings goals, like $1,000 a month, or 30% of your income, can be motivating, aim for sustainable goals you’ll be able to reach even if other unexpected expenses crop up. 

7. Explore Alternative Investments

Alternative investments include real estate investment trusts (REITs) or real estate property, coins, wine and even comics or shoes. If you have a passion that could potentially increase in value over time, consider putting a small percentage of your portfolio into alternative investment classes to increase diversification. 

8. Diversify Your Portfolio

Diversifying your portfolio means choosing to purchase different asset classes and asset locations. Asset allocation refers to the process of dividing your investment portfolio among different asset classes, such as stocks, bonds, cash, real estate and commodities. Asset allocation aims to create a diversified portfolio that balances risk and potential returns based on your financial goals, risk tolerance and investment time horizon. 

Asset location is the accounts where you hold different types of investments, such as taxable accounts like brokerage accounts and tax-advantaged accounts like IRAs. 

9. Consider Using the Expertise of a Financial Adviser

A financial adviser can give you additional insight and advice on balancing risks and returns. They may be able to advise you on a simple investment strategy you can build on over time and how to best take advantage of the time you have on your side. 

5 Investment Options if You Are in Your 20s

Here are five simple options to start investing in your 20s. Find investment accounts for young adults here.  

Stocks

Stocks are generally considered a riskier asset class.  Focusing on long-term goals with aggressive growth potential through stocks can make a lot of sense when you're in a position to start early. An aggressive growth strategy might include 60% stocks, 25% foreign stocks, and 15% bonds. A balanced portfolio can include 40% to 60% stocks. Learn how to invest in stocks.

Mutual Funds

Mutual funds can be good investment options if you’re in your 20s as they’re actively managed by professional fund managers across a diversified portfolio of stocks, bonds, or other securities. With mutual funds, you pool money with other investors, and then the fund is managed across diverse asset classes on behalf of the investors.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are a type of investment fund traded on stock exchanges. ETFs own financial assets, including stocks, bonds, currencies, futures contracts and commodities like gold bars. ETFs can have a specific focus, like a tech ETF or an ESG ETF that focuses on specific areas or goals, like sustainability. Investing in an ETF in your 20s diversifies your investment portfolio and allows you to choose ETFs that match your interests or investment goals. 

Bonds

Bonds are a type of debt securities issued by companies or governments. State or local municipality bonds are commonly referred to as munis, while federal bonds are called Treasury bonds or T-bonds. 

With bonds, the issuer owes the holder a debt and according to the terms, is usually obliged to pay a certain amount in interest and return the principal after a set period of time known as maturity. Bonds are generally considered low-risk investments, with T-bonds offering the greatest security as they’re backed by the federal government. 

Investing in bonds in your 20s is a smart strategy to diversify your investment portfolio while still earning interest greater than typical savings accounts. 

Money Market Funds

Money market funds are a type of mutual fund usually used for short-term debt securities such as U.S. Treasury bills. Money market funds aim to maintain stable asset value while paying investors regular dividends. Investing in money market funds in your 20s can expose you to low-risk investments with regular returns through dividends and, ideally, an increase in portfolio value. 

Start Early for Wealth-Building

You don’t need to inherit a trust fund or make $100,000 a year to build long-term wealth. Start with what you have, put aside a little each month and plan for the future. With the strategies here, you can continue to build investing knowledge and experience to create financial security and wealth.

Frequently Asked Questions