How to Invest in Your 20s (7 Steps for Success)

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So you're here because you want to know how to invest in your 20s.

Well, first of all, that's great!

You probably know nothing about investing, and that's fine. I'm going to show you how to invest in your 20s, step-by-step.

As a 25-year-old, time is your biggest asset when it comes to investing.

You can even become a millionaire from nothing by investing $610/month into stock market index funds from age 25 to 60!

I'll talk more about that in a little bit, but enough talk.

Let's dive into my guide on how to invest in your 20s.

1. Start Building an Emergency Fund

An emergency fund is a fund that stores money for any financial emergencies that may arise in your day-to-day life. 

This could be an unexpected medical expense or your car breaking down.

You should fully fund your emergency fund before you start investing your money to build wealth. 

The stock market will fluctuate widely over time, and you may find that the investment you made six months ago has fallen by 10%. This is normal and should be expected.

This is why it's so important to store enough money to cover three months' living expenses in your emergency fund before you start investing.

Dave Ramsey says that a two-income household could get by with a three-month emergency fund. But if you're a one-income family, self-employed, or people earning straight commissions, a six-month emergency fund is probably a better idea.

You should never have to sell your investments or use a credit card to pay for emergencies.

You'll want to store your emergency fund in a high-yield savings account like CIT Bank's Savings Builder account to ensure that your money isn't being eaten away by inflation.

2. Set Investment Goals

Once your emergency fund is set up, it's time to think about the sort of long-term financial goals you want to achieve, and plan how to get there.

As I mentioned, a typical 25-year-old can become a millionaire by age 60 by investing just $610/month or $7,320 a year. 

Here is what your investment portfolio would look like while growing at average stock market returns of 7% (adjusted for inflation) with your contribution of $610/month.

investing $610/month at 7%

But maybe you want to have more money for retirement so you can afford to travel or live in a home with more creature comforts.

Well, you'll have to plan for that and work out how much you'll have to invest to get there.

Dave Ramsey believes that most people should aim to invest 15% of their take-home or after-tax pay. 

He says that a 10% savings rate is too low and a 20% savings rate can be hard to achieve consistently.

So, in this step you'll want to work out how much money you need to retire and how much you'll need to invest to get there.

3. Consider Consulting a Financial Planner

Consulting a financial planner can be a great option for beginner investors. Financial planners are professionals that help you manage your money.

If you want to spend a bit more money, you could consult a certified financial planner. They have more credentials and experience than other financial planners. 

Their areas of expertise include financial planning (budgeting and investing), taxes, insurance, estate planning, and retirement.

It can be difficult to manage your money on your own, especially if you don't have close friends or family that are experienced in this area.

A financial planner will help you create strategies to minimize financial risk and get you on track to achieve your short and long-term financial goals.

Financial Planners Can Give You Peace of Mind

They can also give you peace of mind. You can spend less time worrying about money and more time working (to make the money to invest) or enjoying yourself, knowing that your money is being managed by a professional.

4. Open a Brokerage Account

The best and easiest way to start investing your money is by investing in the stock market through a discount stockbroker.

Why the stock market you say?

The stock market has provided average returns of 7% annually (adjusted for inflation) over the past 130 years. It can also be much more hands-off than purchasing a rental property.

Your money will double every 10 years on average while growing by 7% annually. And as I mentioned earlier, an average 25-year-old can become a millionaire by 60 by investing $610 a month into S&P 500 index funds over the course of their career.

S&P 500 index funds purchase all of the stocks in the S&P 500 index and simply grow over time without you needing to manage them.

My favorite index fund is the iShares Core S&P 500 ETF. This is one of the largest index funds in the world and charges minimal annual fees.

The Best Discount Stockbroker

My favorite discount broker is Webull.

Webull is a commission-free trading platform that gives you the tools you need to analyze and buy stocks.

This makes Webull a great option whether you’re new to investing or an experienced trader.

Webull specializes in stocks, options, and ETFs.

Read my Webull review if you'd like to learn more about the platform.

5. Contribute to Your Employer-Sponsored Retirement Plan

Contributing to your employer-sponsored retirement plan is another way to invest your money for retirement.

You'll typically have a choice of large mutual funds to pick from when you start a 401(k), although some are starting to offer ETFs like the one I recommended earlier.

Investing in a 401(k) is pretty neat because you can contribute pre-tax money. This means you can reduce your taxable income while building wealth for retirement.

You will, however, have to pay long-term capital gains tax once you withdraw your money for retirement. The capital gains tax rate is typically around 15%-20%.

You can contribute up to $19,500 towards your 401(k) in 2020 if you're under the age of 50, which is more than enough for one year.

You probably won't be making enough money to hit the cap in 2020 if you're in your 20s, but I thought I'd mention it.

401(k) Matching

Also, some employers will match your contributions up to a certain amount, so you basically get free money added towards your retirement fund.

On average, employers will match up to 4.3% of your salary in contributions.

For example, if you made $62,000/year, your employer would match your contributions up to $2,666.

So you would be effectively contributing $2,666, + $2,666 for free from your employer.

6. Open an Individual Retirement Plan (IRA)

Another way to invest for retirement is through an individual retirement account or IRA.

There are two main IRAs, your traditional IRA and Roth IRA.

Contributions to a typical IRA are like a 401(k), in that they go in tax-free, which means you'll have to pay tax when you withdraw your money. On the other hand, Roth IRA contributions go in after-tax which means you'll be paying the tax when you contribute your money, and not after.

You're better off contributing to a Roth IRA while you're young and still in a low tax bracket. You're basically getting more out of your money by contributing to your Roth IRA over your traditional IRA.

The contribution cap for Roth and traditional IRAs for people under the age of 50 is $6,000 in 2020, or the same as 2019.

7. Keep Your Short-Term Savings Somewhere Easily Accessible

As I mentioned, keeping your short-term savings somewhere that is easily accessible, like a high-yield savings account is very important.

You shouldn't ever need to sell your investments or use a credit card to cover emergency expenses.

You should keep your emergency fund in a high-yield savings account like CIT Bank's Savings Builder account. This account has a low $100 minimum opening balance, and offers some of the highest interest rates of any savings account.

Conclusion on How to Invest in Your 20s

Now you know the seven steps to get started investing in your 20s. 

Also, remember that you shouldn't constantly be checking your portfolio to see if you have made money because the market will fluctuate.

If you check every day, you might get scared and be tempted to sell on days when your portfolio is in the red. This will ultimately hurt you in the long-term.

The best thing to do is to invest in iShares' Core S&P 500 ETF through a discount broker like Webull, and let your money grow on its own.

Here are some other ways to start investing your first $1000 today.