Investing in your 20s is crucial for building wealth and securing your financial future. However, it can be overwhelming to know where to start. Don’t get caught up in all the hype of the latest make money quick stock or crypto. As we’ve seen in the last year, those can go down as quickly as they went up. You have decades left to reap the benefits of investing in stocks and it’s important you make the right investing decisions for yourself. This beginner’s guide will walk you through the basics of investing, choosing the right investment options for your needs and saving for retirement. By starting early, you’ll have the advantage of time on your side to grow your investments and reach your financial goals.
Invest Enough In Your 401k To Get The Full Employee Match
A 401(k) plan is a retirement savings plan sponsored by employers. It allows employees to contribute to their retirement savings pre-tax in the United States. The 401(k) contribution limit for 2023 is $22,500, an increase of $2,000 from 2021. Don’t know if you have a 401(k) plan or match? Ask your boss or look at the internal benefits webpage at your company. If you are eligible, your company will have information on how to sign up. The contribution amount you elect will be taken directly from your paycheck.
At minimum, you should always contribute enough to your 401(k) to get the full match. As you start making more money, understand how much you’ll save on taxes and begin increasing your contributions until you hit the max. Also consider your money needs in the next 5-10 years. When you’re starting out in your 20s you’re paying down debt, saving for a car and saving for a house. It’s easier to put more money in retirement accounts when you’re no longer saving for a down payment.
Even though a 401(k) can be a set it and forget it account it’s best to check the performance of your 401(k) investments periodically. A 401(k) is a great investment vehicle; however, many companies limit what you can invest in. Even if you have a 401(k) you should also open a Roth IRA account for retirement savings and investments.
See Also: Corporate Benefits That Help You Make And Save More Money
Open A Roth IRA To Lock In Gains Tax Free
A Roth IRA is a retirement account that offers you a tax benefit when you retire in the United States. Roth IRA contributions are not tax deductible. You also do not pay taxes when you withdraw money at age 59 ½ +. This is different from traditional IRAs and 401(k) plans.
Make sure you’re familiar with the benefits of a Roth IRA and the Roth IRA rules first. Important rules include you can only invest up to $6,500 in 2023 pending income eligibility and you can only withdraw certain money penalty free before 59 1/2. While you don’t pay taxes on gains, you also can’t write off losses on your taxes.
At the beginning of your career, your salary is lower, your taxes are lower and you have less money. It’s harder to contribute at all to your Roth IRA, let alone the maximum. At the same time, you have the opportunity for money you contribute to grow tax free for 40+ years. In a Roth IRA you also have the flexibility to invest in any stocks, ETFs and mutual funds you want.
How do you set up a Roth IRA? It’s very easy and can be done in minutes. Charles Schwab, Vanguard and Fidelity all offer Roth IRA accounts among others.
Invest Money Through ESPP and Vested RSUs
Do you work for a publicly traded company? Your company may offer an Employee Stock Purchase Plan, or ESPP. This benefit enables you to buy company stock at a discount. ESPP is a way for you to make extra money without any extra effort. The only steps? Enrolling in ESPP and deciding when you want to sell the shares. Whether you keep the shares or sell the shares is based on your own investment and tax strategy.
Another possible benefit to take advantage of is equity compensation. Restricted Stock Units (RSUs) are a popular way of giving company equity to employees at tech startups and large public companies. RSUs are a great way to grow your wealth. If they aren’t part of your comp plan today, inquire if this is something your company offers. A company may offer RSUs to employees, but may not offer them to all employees. Sometimes employees have to perform at a certain level, or need to be at a certain level, or they are offered as part of an employment package. Whether you keep the shares or sell the shares is based on your own investment and tax strategy.
Buy Individual Stocks in the Stock Market If You Like Risk
You want to buy individual stocks to get rich quick, but how do you know which one to buy? When starting anything, I always ask myself about what I’m willing to pay to learn. Learning anything cost money. Even if you teach yourself, you always need to buy the basics. For example buying / renting gold clubs or technology to watch how to videos on YouTube. How much are you willing to spend learning something new?
The thing about stocks is that there is a chance it could go to $0. That chance depends on which stock you pick. For example, Gamestop is a very volatile stock. If you buy a share and it comes crashing down you could lose most of your money when you decide to sell. This is why it’s good to know how much you’re willing to spend to learn something new.
If you’re willing to spend $100 to learn something new, buy $100 worth of a stock or several stocks. Say the stock goes up in value, great! If it goes to $1, you were willing to spend $100 to learn something new. Now, you’re left with $1 and knowledge about how to set up an investing account, how to buy a stock, how stock prices fluctuate, where to learn more about your investments, how to sell a stock, how to write off stock losses on your taxes and more.
When you buy your first stock consider buying a share of a company that excites you. That way, you’ll want to learn more about the company. You’ll want to listen to quarterly earnings, learn about market valuations and more. If you’re not excited about your first investment you’re less likely to spend extra time learning about investing in the stock market. Generally, stocks fall into two categories: growth stocks and value stocks.
Growth stocks are stocks that are considered to have the potential to outperform the overall market based on their future potential. These stocks usually don’t pay dividends and tend to be more volatile. Examples of growth stocks include Tesla, Roku, Square and Amazon.
Value stocks are stocks that are currently trading below what they are really worth and the thought is they have the opportunity to provide a better return. Some value stocks also offer dividends so you don’t have to wait to sell a stock to get some cash. Value stocks are usually larger, more established companies. Examples of value stocks include companies like Verizon and 3M.
Both growth and value stocks have the possibility to go up in value and go down in value. There is no guarantee the stock will go up. And, if you think a stock is overvalued there is also no guarantee that stock will go down.
See Also: Smart Money Moves In Your 20s
Buy ETFs If You Don’t Want To Actively Manage Your Stock Portfolio
ETFs stand for electronically traded funds, also know as index funds. When you buy an index fund you are buying a basket of individual stocks. If you buy a S&P 500 ETF, you’re investing in all 500 companies that are in the S&P 500. The more diversified your portfolio, the less volatile your portfolio is. The goal of index funds is to match the performance of a specific benchmark.
There are fees for ETFs; however, they tend to be lower than mutual funds. Before you buy an ETF make sure you know what fees the ETF charges per year. The average fee for index funds is 0.15% according to Morningstar data from April 2019.
Keep Some Money In Low Risk Investments
As you’re getting established, it’s always a good idea to keep some money in low risk investments. This includes keeping your emergency fund in a high yield savings account, moving cash around to take advantage of bank bonuses, and buying short term Treasury Bills.
Investing Money In Your 20s Summary
No matter how you decide to invest money in your 20s it’s important you choose a strategy that works for you. Before you start investing, make sure you know the options that may give you free money to start investing. This includes things like a 401k employee match and RSUs. Other important considerations? When you’ll need the money, your risk tolerance and how much time you want to spend.
Investing money in your 20s is hard when you don’t have as much money and it’s new. Like everything, you’ll learn from your mistakes and get better over time. Even if you buy a bad stock, or sell a good stock early it’s better to learn these lessons when you have less money at stake.
Different strategies work for different people. Investing when you may need the money for a big purchase in the next 5 years is different than investing money when you don’t need money for 20 years. Different people also have different risk tolerances. If you’re going to lose sleep worrying about losing money in the stock market a lower risk, set it and forget it strategy may be more aligned to your goals.