When you’re in college and/or new to the full-time workforce, finding the motivation to regularly save money can be challenging after so many years of relying on your parents and minimum wage, part-time jobs to pay for the things you need and want. Now that you’re bringing in a decent income on your own, it can be tempting to splurge on the things and experiences you’ve been wanting for so long but couldn’t partake in due to income limitations.
However, getting on the track to long-term financial stability should be one of your biggest goals for your 20s, and that starts by consistently saving and investing a percentage of your income. This should also include retirement planning; although you’re new to the workforce and retirement is likely 30-45 years away, you should begin saving for retirement as early as possible to enjoy the benefits of compounded interest on your investments.
If you’re committed to securing your financial future but don’t know where to start, here’s everything you need to know about investing in your 20s.
Budgeting in Your 20s
You can’t set up a proper investment strategy without having a budget in place beforehand. You may have some experience with budgeting at this point in your life, but people often struggle with sticking to a budget, regardless of how young or old they are. With this in mind, it’s important to treat budgeting like eating healthy or exercising: it needs to become a habit that you practice regularly if you want to stick with it.
When you’re in your 20s, budgeting may include: covering monthly necessities (rent, food, transportation, healthcare), repaying debts (student loans, credit cards, auto loans), and setting aside a portion of your income for savings and/or investments. To successfully stick to a budget, be sure to revisit it on a weekly (or monthly) basis, keep track of your income and expenses in one secure location (budgeting app like Mint, spreadsheets, budgeting notebook, etc.) and remain on the lookout for ways to reduce your expenses with minimal impacts to your quality of life.
How Much Should I Have in Savings?
If you don’t own a home yet, then you should at least have 3 months’ worth of expenses saved up (including necessities and debt repayments). Personal finance pros typically recommend having at least 6 months’ worth of expenses deposited in an emergency savings fund to ensure you’re covered in case of unemployment, unexpected life changes or any other possible reason for income loss.
If you own a home, then consider saving up a bit more than 3-6 months’ worth of expenses, just in case your home needs a major, unexpected repair or you experience a costly health concern that could hinder your ability to cover your mortgage payment for a while.
General Investment Strategies
When you’re in your early 20s, you likely want to repay debts and save up for a home (or other major financial goal) as quickly as possible. If you have multiple student loans, you can efficiently repay them using the snowball method (prioritize the smallest loan first) or avalanche method (prioritize the highest interest rate loan first).
If you plan to buy a home at some point in your 20s or early 30s, then saving for a down payment on a property should be a similarly important financial goal (yes, you can and should save for a home while repaying debts).
Of course, you don’t want to relegate the dream home fund to a regular, low-interest savings account. Take advantage of compounding interest by setting up a separate home investment account – preferably with a trustworthy, results-driven investment company like Betterment or Wealthfront, which rely on algorithmic robo-advisors to help investors maximize their returns.
The newest robo-advisor on the market called M1 Finance gives the more established, sophisticated investors great investing options. M1 Finance simplifies the investment process for beginning and experienced investors alike. Unlike other robo-advisors, M1 Finance does not charge a fee, and it gives you the option of taking more control over your investments if you want them (and less if you don’t).
Retirement Planning in Your 20s
Although retirement seems like a far-off dream at this point in your life, planning for retirement is a very real, urgent task you must get started on as early as possible. Even if most of your monthly income is drained by the costs of necessities and debt repayments, be sure to make room for retirement savings in your budget.
If you have a 401k with your employer, find out if they offer matching contributions (typically 3-5% for employers offering the match option). You can contribute up to $18,000 per year of your pre-tax income to a 401k, so don’t miss out on the valuable opportunity to get free money (employer matching) if it’s available to you.
If your employer doesn’t offer a 401k or 403b retirement plan, then open a Roth IRA account and contribute as much as possible (up to $5,500 per year). These contributions are made after taxes, which means you won’t have to pay taxes on withdrawals later on, as long as you meet the minimum age requirements for penalty-free withdrawals.
Recap: Invest for Success in Your 20s
Your 20s will likely be some of the most exhilarating years of your life, but don’t let the excitement of college, new full-time jobs, rising incomes and higher standards of living deter you from maintaining a budget, saving a percentage of your income for a home investment fund and setting aside at least 10% of your annual income for retirement (preferably 20-25% of your income should go towards retirement).
Investing gets easier the older you get (more experience, more disposable income as you move up in your career). It may seem daunting now, but you will look back and thank your 20-something self later if you begin investing as much as you can, as early as you can.