Investing as a young adult is one of the most important things you can do to prepare for your future. You might think that you need a lot of money to start investing, but it’s easier than ever to get going with small amounts. Once you set up your investment accounts, you’ll be well on your way to saving for goals like retirement, purchasing a home, or even future travel plans.
But before you dive head first into the market, it’s important to prioritize paying off any high-interest debt that might be straining your finances and then build up an emergency fund with savings that could meet at least three to six months of expenses.
Once that is handled you can get a jump on investing, even if you’re starting small. Developing a consistent approach to saving and investing will help you stick to your plan over time. Money invested in your 20s could compound for decades, making it a great time to invest for long-term goals. Here are some tips for how to get started.
- Determine your investment goals
Before you dive in, you’ll want to think about the goals you are trying to achieve by investing. The accounts you use for short-term goals, like travel, will differ from those you open for long-term retirement goals.
You will also want to understand your own tolerance for risk, which involves thinking about how you’ll react if an investment performs poorly. Your 20s can be a great time to take on investment risk because you have a long time to make up for losses. Focusing on riskier assets, such as stocks, for long-term goals will likely make a lot of sense when you’re in a position to start early.
Once you have outlined a set of goals and established a plan, you are ready to look into specific accounts.
- Contribute to an employer-sponsored retirement plan
20-somethings who begin investing through an employer-sponsored tax-advantaged retirement plan can benefit from decades of compounding. Most often, that plan comes in the form of a 401(k).
A 401(k) allows you to invest money on a pre-tax basis (up to $19,500 in 2021 for those under age 50) that grows tax-deferred until it is withdrawn in retirement. Many employers also offer a Roth 401(k) option, which allows employees to make after-tax contributions that grow tax-free, and you will pay no taxes when taking withdrawals during retirement.
- Open an individual retirement account (IRA)
Another way to continue your long-term investment strategy is with an individual retirement account or IRA.
There are two main IRA options: traditional and Roth. Contributions to a traditional IRA are similar to a 401(k) in that they go in on a pre-tax basis and are not taxed until withdrawal. Roth IRA contributions, on the other hand, go into the account after-tax, and qualified distributions may be withdrawn tax-free.
Investors younger than age 50 are allowed to contribute up to $6,000 to IRAs in 2021.