When it comes to investing, the earlier you start the better. Compound interest will help grow your money exponentially, meaning that if you start investing in your 20s, rather than later in life, you can end up with many times the amount you saved as a young person. When it’s time to retire, you will find that a few hundred dollars invested at age 20 has grown into a valuable asset.
If you are in your 20s and want to get a head start on investing, here are a few tips to help you out.
What is your Investing IQ?
See how you stack up against other investors.1. Pay Off Your Student Debt
These days, student debt is an all too common burden for people in their 20s. If you still have outstanding student debt, paying it off should be your primary investing goal. In the same way that sound investments grow your wealth exponentially, debt increases exponentially as well, growing larger and larger as the years go by.
Before you wade into the stock market, start by eliminating any debt that may be holding you back.
2. Enroll in Your Company's 401K Match Program
Depending on where you are employed, your company may offer a 401K match program, meaning that they will match your contributions to a 401K up to a certain point. Think of these matching contributions as free money that is there for the taking, and be sure to take advantage of it as best you can by always contributing the amount that your employer is willing to match.
It's fairly easy to be successful investing when your money is automatically doubled every time you contribute.
3. Open a Roth IRA
While 401Ks are great if your company is matching your contributions, they don't offer quite the same freedom that an IRA does. After you've contributed up to the amount your company is willing to match, it's a good idea to put the rest of your investment money into a Roth IRA.
This way, you have the ability to pick and choose your investments using the principles of Rule #1 investing in order to see higher returns.
As for why a Roth IRA is preferable for individuals in their 20s as opposed to a traditional IRA, Roth IRAs require you to pay taxes on your contributions now but are tax-deferred when you withdraw the money later.
Since most people will be in a higher tax bracket when they retire as opposed to the tax bracket they fall into in their 20s, you'll pay less money in taxes in the long run if you start out investing in a Roth IRA.
4. Set Savings Goals
Creating a budget - and sticking to it - allows you to stay disciplined with your investing. From every paycheck, designate a certain percentage for investments and set that money aside right away rather than investing what you have left over.
In addition to setting a budget that includes money set aside for investments, you'll also want to set specific investment goals. How much money do you want to have invested by the time you are thirty? And how much money do you need to invest each month or each year in order to achieve that goal?
If you set savings goals and push yourself to achieve them, you'll find it much easier to stay motivated and push yourself further.
Related Post: Learn how to invest in your 30s here.
5. Set Aside Money for Future Investments
Investing doesn't require you to immediately put all of the money you are saving into the market. In fact, you'll be better served by biding your time and choosing to invest your money when the moment is right and the market has put a great company on sale.
However, in order to take advantage of these opportunities when they do arise, you will need to have money set aside that you can use to purchase stocks when the time is right.
The best way to set money aside for investing is to open a savings account specifically for the purpose of future investments.
This way, your money can gather some small amount of interest while you are waiting for an investment opportunity, and when the chance to buy a great company at a price lower than its value does come up, you'll have the money they're ready to go at a moment's notice.
Do you have investing goals set up for yourself? Get your finances in order with my free guide to map our your investing journey.
How to Pick Rule #1 Stocks
5 simple steps to find, evaluate, and invest in wonderful companies.
