How to start investing while in your 20s (2024)

In your 20s, it may be difficult to imagine a future self who’s not working a job to pay the bills.

However, by learning how to invest money in your 20s, you can lay the groundwork for financial success decades from now. With a few essential strategies, such as understanding risk and choosing the right investment vehicles, you’ll be on the road toward wealth building.

Understanding investing in your 20s

There’s a lot to learn about finances in general in your 20s as you’re beginning your working life or even deciding exactly what career is a good fit. Fortunately, you have time to make the inevitable mistakes and figure out what goals are important to you.

“In your 20s you have the superpower of time on your side,” said Erin Wood, a certified financial planner (CFP) and a senior vice president at the Carson Group. “Compounding interest will be a huge benefit, even if you can only save a small amount.”

The benefit of time allows investors in their 20s to take more calculated risks.

“People in their 20s need to be strategic with their finances. While stocks and bonds are still important, Gen Zers should change up their portfolios by adding alternative investments,” said Kelly Ann Winget, founder and CEO of Alternative Wealth Partners.

“Think real estate, private equity or even precious metals,” she suggested.

Winget also said many professional investors like alternative investments because they can deliver high returns and serve as a hedge against equity market volatility.

Determining your investment goals

When starting to map out your financial goals, you might have to take a step back and address your debt first.

“It is important to first develop a plan to pay down high-interest debt, as this can erode the overall return of your savings and investments over time,” said Jamie Taloumis, a chartered financial analyst (CFA) and CFP who serves as portfolio manager at Reynders, McVeigh Capital Management

After that, she said, it’s helpful to think of investment goals as different time horizons.

“Short-term goals are usually within the next few years and should be met with liquid cash,” she said. “Cash needs beyond this, but before retirement, are seen as separate goals where this money can be invested using an appropriate amount of risk to match the goal’s time horizon.”

For example, if you want to save money to buy a house in five years, keep that in a separate bucket from your retirement money.

Lastly, Taloumis said that goals such as retirement are longer-term. These accounts “can generally be invested for long-term growth where the money can afford to go through multiple business cycles and market volatility,” she said.

Investment options for beginners

If you’re learning how to invest in your 20s, the idea of portfolio construction can seem daunting. While it’s important to educate yourself about the markets, there are ways to shortcut the process and not spend half your waking hours doing investment research.

Exchange-traded funds and mutual funds

Taloumis said young investors can use exchange-traded funds (ETFs) and mutual funds to gain broad market exposure.

“This removes the need to heavily research and monitor individual companies for someone who may not have the time or interest in doing so, while still allowing the investor to participate in economic growth over time,” she said.

Younger investors can take on more market risk, meaning a heavier allocation into stocks than their parents or grandparents may have. However, every investor, regardless of age, has a unique risk tolerance level and a unique set of goals.

Low-risk investments

If you can’t sleep at night because you’re worried about your portfolio, you might consider allocating more toward fixed income or certificates of deposit (CDs), even though they likely won’t generate the same return as stocks. Yes, that might seem like an “old person’s” way to invest, but it may help you to relax and enjoy the benefit of compounding over time.

When determining how to invest your money in your 20s, if you have more willingness to embrace risk, consider adopting a more aggressive investment strategy. While this approach may entail larger losses during market downturns, your extended time horizon allows for potential recovery and historically higher returns.

Start with an employer-sponsored retirement plan

If you work for a company that offers an employer-sponsored retirement plan, such as a 401(k), by all means, take advantage of this. Sure, it skims some money off the top of your paycheck, but you’re not taxed on that amount.

Your employer can automate the withdrawals, and you never have to think about it unless you decide to increase your contribution percentage. It’s possible to decrease the percentage, but it’s usually a good idea to contribute as much as possible. Your future self will thank you.

By developing the habit of saving early, you’ll have your retirement contributions on autopilot. When you change jobs, you’ll have to enroll in the new employer’s plan, but you can roll over the investments from previous jobs without paying a fee or taking a tax hit.

Insights on individual retirement accounts

If you freelance or are self-employed, you won’t have access to an employer-sponsored plan like a 401(k). Still, you can open an individual retirement account (IRA) if you have earned freelancer or contractor income from 1099 gigs.

Traditional and Roth IRAs

These have lower contribution limits than 401(k)s, but you’ll still get tax advantages. You can fund a traditional IRA with pre-tax dollars, but your retirement withdrawals will be taxable. If you choose the option of a Roth IRA, you’ll fund that account with after-tax dollars, but your withdrawals later in life are tax-free.

“It is important to note there are income limits that can affect the deductibility of your traditional IRA contribution when you have an active employer-sponsored plan,” saidTalouris.

There are income limits for eligibility to make Roth contributions, but most workers in their 20s won’t hit those limits yet.

Self-employed IRAs

If you are self-employed, Talouris added, there are other IRA account types available, such as Simplified Employee Pension Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, with higher contribution limits than the typical Roth and traditional IRA accounts.

Choose the right broker or robo-advisor

You have plenty of choices about where to open a brokerage or retirement account if you do this outside your employer’s plan. Major brokerages such as Fidelity, Schwab and Vanguard have options for accounts you can manage yourself, meaning you select which investments to buy and sell.

These companies, and others, such as Betterment and Wealthfront, also offer what are called robo-advisors. These online platforms use algorithms to construct and manage an investment portfolio tailored to your risk tolerance, investment goals and time horizon.

For investors in their 20s, a robo-advisor is often appealing due to minimal initial deposit amounts and the lack of a need for market expertise.

“Fees vary by brokers and robo-advisors, and it is recommended to look for a provider with no or low fees to maximize your investment returns,” said Chris Rahemtulla, a CFP and vice president at Citizens Bank.

Fees can include account management fees, transaction fees and expense ratios for investment funds. When comparing firms, it is important to evaluate the value you receive against any fees paid, Rahemtulla said.

“A major decision point is the technology and user experience offered by a broker or robo-advisor,” he added. “Look for a provider with a platform that makes it easy to manage your investments and focuses on security. Many clients are choosing their broker or robo-advisor based on the availability of a robust and user-friendly mobile app experience.”

The role of financial advisors in your investment journey

In your 20s, you probably won’t have an account size that meets the minimum for many financial advisors. Your parents’ or grandparents’ advisor may take you as a client as part of a family plan, and that may be a good option if you want someone else to handle your investing details and even get some planning advice.

“When you’re in your 20s, you’re most likely not sitting on a huge amount of money,” said Winget. “If that is the case, you don’t need a robust private wealth advisor. In most cases, a robo-advisor can work well for somebody who is early in their career and early in their wealth journey because they can most likely handle your needs.”

Once you start building your career and establishing a six-figure income, she said, you may want to look for an independent advisor who can advise you beyond life insurance, annuities and public equities.

It’s worth noting that many advisors with a fiduciary duty to put client interests first offer planning-only services, which may be useful for investors in their 20s. Even if you’re just trying to figure out how to invest in your early 20s, a planner can help you develop a roadmap.

Of course, your path will twist and turn many times over in your lifetime, but a plan can give you some perspective on investing and managing money now and in the future.

“For younger clients just starting their investment journeys, working with a financial advisor can help you create a personalized financial plan based on your goals while protecting your investments against market volatility and other risks,” said Rahemtulla.

The importance of easily accessible short-term savings

With prices high, especially when it comes to housing, many young adults feel financially squeezed, and the notion of salting away money for savings can seem impossible.

However, emergencies happen. Unexpected medical or veterinary bills or the need to make car repairs are among common curveballs that many Americans, not just those in their 20s, have challenges paying for.

“Life can be unexpected at times, especially in your 20s. While I hope you will never need it, I recommend having three to six months’ worth of living expenses set aside that you can quickly access from a savings account,” said Julie Beckham, financial education officer at Rockland Trust.

“Whether you are able to put three to six months of savings aside or not, any amount of savings will be beneficial in the future,” she added. “That way, an event like a job loss, serious illness or time off to care for a loved one is less burdensome because the extra expenses are more easily covered.”

For money you may need on short notice, a high-yield savings account is a good option, as there’s no required holding time, so there’s no such thing as a penalty for early withdrawal. If you invest your short-term money, you may face market declines before you need it, meaning you’ll take a hit if you need to make withdrawals.

How to increase your savings over time

Much as it’s a good habit to begin making regular contributions to your employer-sponsored 401(k), it’s also a good idea to make regular deposits to a savings account for emergencies or expenses you know you’ll be facing in the near- or mid-term.

Saving for a wedding is a good example of cash you may need in the foreseeable future. Buying or replacing a car is another example.

“Saving responsibly doesn’t have to feel so restrictive,” Beckham said. “Instead of thinking about what you can’t spend, think about what you can spend. I recommend creating a spending plan, which can feel more accessible than using the term budget.”

Beckham recommended keeping items in your spending plan that are important to you and eliminating those that aren’t.

“Why are you paying for a Netflix subscription if you don’t use it anymore?” she asked. “Why do you belong to a gym if you prefer running outside? Taking inventory of your wants and needs, must-haves and non-priorities, will allow you to more easily evaluate your capacity for social spending, what you actually like to spend your money on and free up some extra cash for things you choose, with your priorities and goals in mind.”

The importance of diversification

While stocks may be the main pillar of your investment strategy in your 20s, you can diversify in other ways to smooth your return and mitigate your risk in a broad equity market downturn.

“Keeping a diversified portfolio helps your investments to withstand different business cycles,” said Talouris. “It reduces company and industry-specific risk and can expose you to various long-term secular growth trends. Incorporating different asset classes, such as using equities and bonds together, can also help to diversify your portfolio and adjust your risk profile.”

Incorporating different asset classes can be as simple as allocating a small percentage of bonds into your portfolio or investing in stocks from various sectors and global regions.

Diversification can also be more expansive. For example, real estate could be a good way to diversify if you can get the financing and have the time and ability to manage a property, including a primary residence.

Likewise, you can diversify using collectibles, as long as they grow in value over time. Holding commodities in your investment portfolio is also a common strategy, as these may rise when stocks are down.

Frequently asked questions (FAQs)