Anyone who starts out in their 20s with a financial plan and investment program will assure themselves of financial security for the rest of their lives. When it comes to accumulating wealth, the sooner you start, the better. Here are some guidelines for investing in your 20s.
Why Start Now?
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Starting out with an investment plan does two things:
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- It creates a habit of saving and investing: If you make savings part of your budget, just like paying the bills, you'll be able to build your net worth. On the other hand, if you adopt the strategy of saving money if you have anything left at the end of the month, there usually won't be anything left to save. Saving must become a habit.
- You'll be able to take advantage of compounding returns: Even if you start with small amounts, the magic of compounding returns increases your wealth faster, especially if you're putting your funds in a Roth IRA where you don't pay taxes on the growth of your investments.
Create an Emergency Fund
You should always maintain an emergency fund that you can access quickly. Something unexpected will always happen, and you'll need money fast. It's just part of life, so it's better to be prepared.
A good target is to set aside three to six months of your monthly living expenses and increase the amount in your emergency fund as your income goes up.
After you've set up your emergency fund, you can begin to make other investments.
Consider also: Advantages & Disadvantages of Investing in Stocks
How Much to Invest
Start with an amount that won't seem difficult to maintain and increase each year. For example, you could begin by saving 1 percent of your income per month and increase this amount by another percent each year. By the time you're in your early 30s, you'll be saving 10 percent or more of your income. When you reach age 40, you'll be saving 20 percent.
Consider also: How to Calculate Portfolio Risk
When it comes to accumulating wealth, the sooner you start, the better.
Determine Your Risk Profile
As a person in your twenties, you can afford to take more risk in your investments than you will be able to when you are in your 50s or 60s. It's much easier to recover from a bad investment early in your life than later.
You might consider investing a larger proportion of your money in stocks when you're in your 20s, and then gradually move into more conservative investments, like certificates of deposit and bonds, when you're in your 50s and 60s.
Consider also: How to Calculate Financial Risk
What to Invest In
Unless you're genuinely interested in doing in-depth research on stocks and bonds and engaging in active trading, the easiest way to start investing is to adopt a buy and hold strategy for a longer investment term with mutual funds. You can select mutual funds that invest in small-cap companies, such as high-tech startups, or large, blue-chip companies, like Coca-Cola and McDonalds, that pay dividends. Or you can choose index funds, like the Standard & Poors 500 Index, that follow the overall market.
Stocks are considered riskier and more volatile than bonds. However, stocks will have a higher return over the long term. You'll want to balance your portfolio between stock funds and the more conservative bond funds.
To buy mutual funds, you can go through a broker, like e-Trade or Schwab, or purchase directly from a fund provider, such as Fidelity.