There are few things more important than setting yourself up on the right financial footing in your 20s. But figuring out how to start investing your money can feel overwhelming – after all, no one teaches this stuff in school.
The good news is that investing is more accessible than ever. In fact, young investors can choose from a wide range of beginner-friendly investment options and platforms. In this guide, we’ll cover everything you need to know about how to invest money in your 20s.
The Importance of Investing Early
You might think that you don’t need to worry about investing until at least after you turn 30. However, the opposite is actually true – the sooner you start investing, the better.
That’s because starting to invest early builds the habit of investing. Even if you only have a little bit of money to invest right now, you can get all the investing infrastructure you need in place and form a pattern of making regular contributions to your investment account. When you’re earning more money in a few years’ time, you’ll know exactly how to invest in.
The other major reason investing early is important is that investments compound over time. If you invest $100 today, that investment will generate returns – and those returns generate even more returns.
To show you how powerful compound investing can be, let’s say you invest $100 today at an annual return of 10% and keep it invested until you turn 60. In 40 years, that investment will be worth $4,525. If you invest the same $100 when you’re 30 and hold it for 30 years, it will only be worth $1,745 when you turn 60. That’s a big difference! Now imagine if you invest $1,000 or even $100,000!
Create an Investment Plan
Before you can start investing, you need a plan. Below is how to make your investment plan.
Step 1: Determine Your Investment Goals
The first thing you need to figure out is what your reason for investing is. Investing for retirement looks very different from investing to make a quick profit. It’s okay to have multiple goals, but each investment goal should have its own plan and its own portfolio.
Step 2: Determine How Much Money You Can Invest
Next, you need to decide how much money you can invest. Ideally, you’ll want to make a moderately-sized initial investment and then plan to transfer a set amount to your investment account each month.
Make sure you also leave enough money aside for a rainy day fund. You should assume that any money you move into your investment account won’t be available to use for everyday expenses, even if you open a standard investment account rather than a retirement account.
Step 3: Determine Your Risk Tolerance
There’s no right or wrong answer when it comes to deciding how much investment risk you’re comfortable with. This is a personal decision that’s based in part on how much money you have invested, what your investment goals are, and how long you plan to be invested for.
Basic Investing Principles You Should Understand
Now that you have an investment plan, it’s important to review a few fundamental principles of investing.
Pay Off Debt Before Investing
First, it’s important to pay off any debt you have before worrying about investing. The reason is that the interest rate you pay on your debt can be higher than the return you get from investing. This is especially true if you have debt with high interest rates, such as credit card debt.
Recognize Investment Risk
Risk is unavoidable in investing, and it’s important for you to be aware of that. Even the safest investments carry some risk. Only invest money you’re willing to forget about for a while. If you invest in risky assets like individual stocks or cryptocurrencies, only invest money you can afford to lose entirely.
Diversify Your Portfolio
The practice of portfolio diversification involves spreading your investments across a variety of different assets. That means that instead of investing all your money in one or two stocks, for example, you might invest in a mix of individual stocks, bonds, ETFs, and cryptocurrencies. That way, if the stock market drops, your bond and cryptocurrency investment will help keep the value of your portfolio up. If the cryptocurrency market drops, your stock and ETF investments will support your portfolio.
Take a Long-term View
It’s easy to get wrapped up in the daily ups and downs of the market. But for the health of your portfolio – and your mental health – it’s best to take a long-term view of investing. Ignore the daily noise around the market. If the market drops, remember that it will rebound eventually and that you have many years to go before you have to worry about using the money you have invested to buy a home or retire.
How To Invest Money In Your 20s
With all that in mind, let’s take a closer look at several options you have for how to invest your money.
Micro-investing is a great option if you don’t have a lot of money to set aside for investment, but want to get started with small contributions. With micro-investing, you can invest as little as a few dollars at a time to start building your portfolio.
One of the best platforms for micro-investing is Acorns, a robo-advisor that lets you invest with no account minimum. You can invest in stocks, bonds, and even Bitcoin.
What’s especially neat about Acorns is that if you use the platform’s checking account and debit card, you can round up every purchase to the nearest dollar and send the spare change to your investing account. Acorns also supports recurring investments from your bank account, making it easy to build up your investing habit.
Self-directed Stock Investing
Self-directed stock investing involves investing in stocks and ETFs on your own. This can be extremely gratifying because you get to build a custom portfolio and develop your own ideas about what companies are worth investing in. However, it also takes time and practice since you have to decide what companies represent good investments.
You’ll need a brokerage to invest in stocks on your own, and we recommend Webull. Webull offers commission-free stock trading and doesn’t require a minimum account balance. You can invest in fractional shares of stocks, and the platform offers price charts and stock research to help you choose investments.
If you want help choosing stocks, check out Stock Advisor from The Motley Fool. Stock Advisor is a once-a-month newsletter that delivers two stock picks to your inbox. In addition, Stock Advisor comes with a selection of recommended starter stocks to get your portfolio off the ground. The newsletter has beaten the market by more than 200% (as of March 2022) since it launched in 2002, and it only costs $199 per year.
Robo-advisors invest your money for you in pre-made portfolios of stocks and bonds. They also keep your portfolio balanced over time, allowing you to set up your investments and then forget about them. Robo-advisors make investing as simple as possible, which is a huge plus for many new investors.
Two of the top robo-advisors worth exploring are Betterment and Wealthfront. Both offer a selection of different portfolios that are tailored to your investment goals and risk tolerance, and they both offer retirement accounts in addition to standard investing accounts. Betterment and Wealthfront each charge a 0.25% account management fee based on the total you have invested. Check out the portfolio options available to decide which of these robo-advisors is better for you.
Investing in cryptocurrencies is a high-risk, high-reward strategy. This asset class is still relatively unregulated compared to stocks and ETFs, and which coins are popular seems to change from day to day. Only invest money you’re willing to lose in cryptocurrencies.
If you do want to try your hand at crypto investing, you can use Coinbase to buy and sell cryptocurrencies. Coinbase supports over 100 popular cryptocurrencies and has a built-in wallet to make storing and tracking your investments easy. You can buy as little as $2 of crypto at a time when using Coinbase.
Conclusion: Investing In Your 20s
Getting started with investing as early as possible can set you up for financial success in the future. If you’re just starting out, it’s important to make an investment plan that’s specific to your goals. Once you have a plan in place and understand the basics of investing, you can use a wide range of beginner-friendly platforms to start investing today.