How to Start Investing in Your 20s (2024)

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 betterif we start earlier, and yet, we take no action.

That’s probablybecause 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 investingor contributing to a retirement plan was untilyou were a few years into your 20s.

Whatever the case may be, today we’re going to walk through exactly howto 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 tolarge companies offer some sort of employer sponsored retirement plan; you can check with HR to find out if youhave one.

Not sure what a 401(k) is? It’s a retirement plan youcan easily contribute to as money is takenstraight out of your paycheck (before taxes) and into your plan.

Somecompanies automatically enroll you in a 401(k) once you’re eligible. It’s common to contribute3% of your salary to start, and some employersmatch your contributions up to a certain percent. That’s free money for you!

Participating in a 401(k)lowers your taxable income, andwithdrawals made in retirementaretaxed 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 atwhere your money is going. Not all 401(k) plans are equal – some are riddled with fees,andmore fees means less growth for your money.

Step 2: Consider Opening an IRA

Some of us don’thave 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 atis 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 aRoth IRA, your contributions are taxed upfront, but your withdrawals aren’t, giving youa 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.

ATraditional 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 fromboth 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 mostothers.

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 youcan 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 theytrack 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 affordnot 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’thave to max out your accountsif 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?