Everything You Need to Know About Investing in Your 20s

Whether you just started your first job out of college or already have a job and a brand-new retirement account, it’s never too soon to start thinking about how the investment decisions you make now will impact your future. When you graduate, you immediately face a lot of pressure to find any job. Sometimes that’s a hard call, because you also may end up getting a job you like but don’t love. That’s OK. You can still gain valuable experience that will give you more career options after only a couple of years, and you can start setting your finances on a course for future success.

Where to Start Investing in Your 20s

Are you thinking about investing but don’t know where to start? The following are categories to consider making investments in as you begin your financial journey. 

Retirement Plans

It is never too early for young professionals in their 20s to start planning for the future — even as far ahead as retirement. Some rules are easy to remember. Start a retirement account through your employer, preferably one with 401(k) matching benefits. Always contribute to your retirement account from every paycheck. Find out what other benefits and discount perks your company offers to save you money and start building wealth. 

Most publicly traded companies offer employee stock purchase plans. Even if you aren’t ready to start buying stocks right away, keep this in mind as a future strategy. A few small but critical decisions can get you on a strong path to investing, even in your 20s. 

Beyond a 401(k), there are other common retirement plans to consider. For example, people often open individual retirement accounts, which ofer tax-advantaged retirement savings.  

Even if you are already participating in your 401(k) account, you can also open an IRA. The following are popular choices for 20-somethings.

• Roth IRA: As one of the most common retirement accounts, Roth IRA contributions are taxable as income in the same year of the deposit. With this type, you can’t claim tax deductions on any money put into the account. Any withdrawals from this account are not taxable. 
• Traditional IRA: This type of account is also called a deductible IRA. It allows you to make contributions on a pretax basis, and the investments in the account will grow tax-deferred. When you retire, you will pay income tax on any withdrawals from this account. 
• Nondeductible IRA: With this kind of IRA, you can deduct your early contributions from your income taxes. The same year you deposit contributions, they are taxable as ordinary income. As its name indicates, you cannot deduct contributions from gross income with this kind of IRA. 

Brokerage Accounts 

If you are interested in starting your investment journey with one or more of the following, you will need to open a brokerage account.

• Stocks: An ownership share in a company
• Bonds: Long-term borrowing agreements from an investor to a borrower
• Mutual funds: A pool of money from multiple investors for buying securities like stocks and bonds

Like a bank account, a brokerage account allows you to move money in and out. Unlike working with banks, brokerage accounts allow you access to investments, including the stock market. Since investment income within brokerage accounts is taxable as a capital gain profit, you may hear them called taxable investment accounts. There are also no tax advantages for investing through a brokerage account. You can make unlimited contributions with no withdrawal limits or penalties.

The process of opening a brokerage account is straightforward, and typically requires completing a brief online application. Online brokerage firms allow you to buy or sell investments through the broker’s site. Other account providers offer managed brokerage accounts where either a human or a robo-advisor oversees the account for you. 

Real Estate 

When investing in your 20s, consider buying property. With real estate inflation rates, property values tend to increase over time. That means the home you purchase in your 20s will be worth more down the line. You could invest in a home for yourself or a place to use as an investment property. You can leverage investment real estate by using the tenant’s rent payments to pay off the property loan. Having renters allows you to receive consistent cash flow every month.

People who invest in real estate early in life can reap maximum advantages. Between depreciation and other deductions, real estate offers many tax benefits. 

Remember Emergency Funds and Paying off Debts 

Before deciding where and what you should invest in during your 20s, consider your emergency funds and any debts you have to pay off. Experts generally suggest that you save around three to six months of living expenses in case of emergencies or unpredictable costs. Instead of tying up all your extra cash in investments, it is always safer to keep short-term savings somewhere you can easily access them in case of an emergency. 

If you have debt but want to start investing, you must find a careful balance between the two. For people ages 18 to 29, the average debt is $23,872, and because credit card debt tends to have the highest interest rates, paying these back first is often an excellent place to start. Tackle high-interest student loans early on in your investment journey. 

How to Invest Money in Your 20s

You’ve decided you want to start investing. The next step to take is asking yourself some pertinent questions. Begin by addressing when you want to start and how much you want to invest. 

When Should You Start? 

Ideally, the earlier you start investing in your 20s, the better! However, many different things can get in the way, from loan payments to monthly bills. So when do you know now is the time? Look for the following signals that you are ready to begin putting your cash into investments:

• You have emergency savings for a rainy day.
• After paying your bills and meeting the minimum payment requirements for any debts, you still have money to spare at the end of each month. 
• You are ready to commit to your long-term financial goals. 

Many investments have interest rates that compound over time. The longer you maintain them, the more money you can accrue. For example, if you start putting $100 per month into an investment account with a 6% return rate, you would end up with $16,247.34 after 10 years. If you added that same monthly amount into an account with no interest, you would end up with only $12,000 after the 10-year period. 

And remember, when you’re only beginning, you can start small. 

How Much Should You Invest? 

While everyone’s financial goals are different, there are some general rules for how much you should invest from each of your paychecks. 

One rule for people in their 20s is spending 50% of take-home pay on essential expenses like rent and groceries. Depending on your retirement plan, 15% of pretax pay should go toward retirement funds. Emergency funds, also known as short-term savings, make up 5% of take-home pay. You can allot the final 30% of your income for personal expenses like entertainment or going out to eat.

Depending on your financial situation, you can slightly tweak these percentages to meet your objectives. Before creating your investment plan, consider what you want your financial position to be by retirement time. By starting at the end, you can work your way back and configure personal targets for investing and saving. That way, you can create a road map for your financial future. 

Balancing Investing in Your 20s With Funding New Purchases

Life can throw you some curveballs. You may suddenly need extensive repairs on your car or a hefty deposit on a new apartment. When you’re just getting started, unexpected expenses can easily get you off track financially. How do you pay for these things? 

If you don’t have the savings or don’t want to deplete your bank account, you may decide to charge a bill to your credit card or borrow temporarily. However, doing so can have adverse consequences for you down the line. Instead, consider taking a second job or seasonal work to pay off the debt or make an exciting new purchase. Your goal is to ensure you aren’t demolishing your savings or facing a growing interest rate.

Is there something fun that you’d love to do, but you can’t afford it on your current income after paying bills? Try planning trips with friends in advance, so high costs won’t catch you off-guard. Fear of missing out can get you down if those concert tickets cost too much or the price of a plane ticket to Mexico suddenly shoots up. There are ways to save money and cut costs, while still participating in the activities you love.

Budgeting for Cost of Living 

The cost of living in some San Francisco Bay Area counties ranks among the nation’s highest. For instance, assume your rent for a one-bedroom apartment in San Francisco is $3,500 per month. That adds up to $42,000 per year, not including utilities, transportation, food and parking expenses. In 2019, the Department of Housing and Urban Development determined that any income under $82,200 per person in San Francisco or Marin counties is under the poverty line! Many people share apartments for this reason. Qualify your roommates thoroughly before you lease with them. A poor roommate choice could dramatically change your life overnight.

Some resources can help you save money while still finding ways to have fun and enjoy living in the Bay Area. Funcheap San Francisco does locals a valuable favor. This website tracks event promos and early-bird ticket pricing to events like chocolate festivals, comedy nights and restaurant weeks in the Bay Area. You can go out with friends without feeling guilty about exceeding your monthly entertainment budget. 

Starting Small Establishes Habits for Life

There’s no way to change money’s time value. When you’re investing in your 20s, you have as much time on your side as you will probably ever have. But, if you live in an expensive and competitive area like the San Francisco Bay, life’s pressures make it harder to develop a consistent saving habit. Things that can impact you include:

1. Large apartment deposits
2. Rents that consume a significant percentage of your salary
3. Salary increases that lag cost-of-living adjustments
4. State and local taxes
5. Transportation, parking and travel

One wise way to address some of the pressures life tosses at you is to connect with others who share the same challenges and exchange ideas. Many people live only one paycheck from not being able to afford rent. What can you do to change that dynamic?

Choosing a Financial Advisor, Even in Your 20s

You may need to make some sacrifices early on for more long-term financial security and protect yourself from already inflated monthly expenses. One way to do this is to choose a financial advisor with ample experience in navigating the challenges you face with investing in your 20s. You may think hiring a financial advisor is expensive and that you don’t need one yet. Still, putting off crucial financial choices can end up costing you more and leading to regrets later in life. Firms like SD Mayer have the tools to help you make pivotal decisions early on to better ensure your success, including podcasts and e-books that are full of valuable information.

If you’re in your 20s and are just starting to think about setting yourself up for success financially, consider talking with an experienced wealth advisor. SD Mayer’s advisors have decades of experience helping young adults like you with investing at all stages of life, so your future can look the way you envision. To learn more or to set up an initial consultation, contact us. 

And, if you want to know more about investing during the other decades of your life, don’t miss the rest of this series about investing in your 30s, 40s, 50s and 60s!