For a lot of young people, learning how to invest in your 20s hangs pretty low on their priority list. If this sounds like you, don’t fret. The problem with investing in your twenties isn’t that you’re a slacker who doesn’t take your future seriously (if you’re taking the time to read this article, we know that’s not you).
The problem actually lies in two major mental barriers that affect millennials:
1) Overcoming the idea that you can’t afford to save a lot of money at this point in your life.
The simple truth is that you probably have more control over your cash flow now than you ever will. Once you have a family, kids, a mortgage, etc., the game changes. Big time. With some discipline and planning, you can actually save a lot more than you think. Even if you start out small, getting started is the most important step.
2) If your parents didn’t teach you (or you don’t have a finance degree), then investing is probably a foreign concept to you.
You’ve never really had to think about grown-up stuff like this before, so figuring out how to invest in your 20s can be super overwhelming. There’s good news though: with today’s technology, it’s actually easier than ever for anyone to get started (even with little to no experience).
Despite these challenges, investing in your twenties is absolutely critical in terms of overall earnings power. Let’s take a look at the best ways to take advantage of these important years.
Step 1: Understand that time is on your side
And it won’t always be that way. The power of compounding becomes much stronger the longer you can let it work for you.
Consider this: If you start saving $100 bucks a month at 25 years old (just $1,200 a year!) you’ll have $187,500 by the time you’re 65, assuming a 6% annual return.
HOWEVER, let’s say you waited ten years and didn’t start saving until 35 years old. Keeping everything else exactly the same, you’d end up with only $94,800. Barely half of what you would have had before. That’s why it is so critically important to get started now.
Step 2: Automate your savings
The best way to make sure you keep up with regular contributions to your investments is to set up an automatic bank draft each month that goes straight to your brokerage account(s). By automating your savings, you won’t be tempted to spend that extra money each month on stuff you don’t need, since the money just goes straight to your investments.
Don’t underestimate the value of setting this process up- getting out of your own way is so important here.
If you have a 401(k) at work, make sure you are contributing the maximum for each pay period that your employer will match. This is basically free money for you, don’t pass it up!
Step 3: Keep your fees low
Step 1 showed you the power of compound interest. Unfortunately, it also works just as potently in the opposite direction. Yes, we’re talking about fees.
Assuming you’ll be building your portfolio using exchange traded funds, or ETFs (we don’t recommend buying individual stocks until you are much more familiar with the ins and outs of investing), you’ll be paying a small annual fee for each of those funds. This isn’t a bad thing, as long as you keep yourself in check.
You are likely best off using low-cost index funds that mirror the stock market (for example, an S&P 500 index fund). This also takes away your excuse of not being a stock market wizard; index funds are a great way for beginners to invest. Index funds have extremely low fees which have made them quite popular among both new and experienced investors.
As a general rule of thumb, you should only invest in funds that have annual expense ratios under 0.50%. There are plenty of funds that are even under 0.20% per year. If you’re paying any more than .5%, you’re being ripped off. Don’t get ripped off.
If you’d rather sign up for a brokerage account where you can more readily take out your money if you need it (as opposed to waiting until retirement) we recommend TradeKing. We have a “how to” article that walks you through it step by step. At $4.95 per trade and no account minimums its one of the more user/millennial friendly (and trusted) investing services. You can open an account and start investing in mere minutes.
Step 4: Be Aggressive
In order to achieve higher returns, often times it means taking on more risk with your investments. Remembers, stock prices fluctuate every day with the market, some more than others.
Because you have time on your side, learning how to invest in your 20s allows you to take a more aggressive approach with your investments in hopes of locking in higher returns. This means favoring stocks over bonds, and buying companies that have higher growth potential (and more risk). If you choose to be conservative while you’re young, you risk losing out on market gains and compromising your long term savings and retirement goals.
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