Investing in your 20s is a great way to set yourself up for financial success in the future. Just because you are young or in college doesn’t mean you can’t start investing and building your financial foundation.
The main reason to start investing early in life is because of compound interest. Compound interest can be a powerful tool for growing your money over time!
Compound interest is the interest earned on both the principal amount and the already accrued interest. This means that the interest you earn in one period is added to the principal amount, and then interest is earned on the new, larger principal amount in the next period. This process of earning interest on interest can lead to significant growth over time, especially with a long time horizon and a high-interest rate.
It can be hard to start investing when money is tight. Try one of these side hustles or jobs to start creating income to invest with.
Here are my top 3 tips to start investing in your 20’s…
1. Open A High-Yield Online Savings Accounts
Opening a high-yield savings account is super easy and high-yield online savings accounts offer a number of benefits over traditional savings accounts. It is one of the best ways to start investing in your 20s. Online savings accounts are convenient. You can link them up to your checking and other accounts. If you have an extra $10 or $100 transfer it over to your high-yield savings account so it can start earning compound interest.
Some Benefits Of A High-Yield Online Savings Account Are:
- Higher interest rates. High-yield online savings accounts typically offer interest rates that are much higher than traditional savings accounts. This means that you can earn more money on your savings.
- No minimum balance requirements. Many high-yield online savings accounts have no minimum balance requirements. This means that you can open an account even if you don’t have a lot of money saved up.
- Free online transfers. High-yield online savings accounts typically offer free online transfers. This means that you can easily move money between your savings account and your checking account.
- Easy access to your money. High-yield online savings accounts are typically accessible through online banking or mobile apps. This means that you can access your money 24/7, from anywhere in the world.
- FDIC insured. High-yield online savings accounts are FDIC insured, up to $250,000. This means that your money is protected if the bank fails.
You get almost no interest from your savings account at your local bank. If you have a savings account at the same bank as your checking account, close it immediately.
Presently, my two favorite high-yield online savings accounts are Ally and Barclays. Both of these banks have no minimum balance to open. At the time of writing this post, Ally has an APY rate of 4.25% and Barclays has an APY rate of 4.35%, which is very competitive. If I had to pick one I would go with Ally because they give you the ability to wire money and Barclays does not have that feature.
Go make a deposit and start earning some compound interest!
2. Start Investing In Your 20s With A 401(k)
If are working and your company offers a 401(k) with matching contributions, I would take full advantage of it as 401(k)s are one of the best investments. A 401(k) is an employer savings plan that allows workers to contribute a portion of their income into a retirement savings account. These plans can come in two different forms: the traditional 401(k) and the Roth 401(k).
Some Benefits Of A 401k Are:
- Tax benefits: Your contributions to a traditional 401(k) are made with pre-tax dollars, which means you save money on your taxes now. You will pay taxes on the money when you withdraw it in retirement, but this may be at a lower tax rate than your current rate.
- Employer match: Many employers offer a matching contribution to their employees’ 401(k) contributions. This is essentially free money that you can use to save for retirement. For example, if your employer matches 50% of your contributions up to 6% of your salary, and you contribute 6% of your salary, your employer will contribute an additional 3% of your salary to your 401(k). This is a great way to boost your retirement savings.
- Automatic contributions: Many 401(k) plans offer automatic contribution features. This means that a certain amount of money will be deducted from your paycheck and deposited into your 401(k) account on a regular basis. This is a great way to save for retirement without having to think about it.
- Investment options: 401(k) plans typically offer a variety of investment options, including mutual funds, exchange-traded funds (ETFs), and individual stocks. This gives you the flexibility to choose investments that meet your risk tolerance and investment goals.
- Portability: If you change jobs, you can usually roll over your 401(k) balance into an IRA or another 401(k) plan. This allows you to keep your retirement savings in a tax-advantaged account.
3. Open And Contribute To A Roth IRA
Everyone should open a Roth IRA (Individual Retirement Account) because it is super easy to do and one of the best ways to begin investing in your 20s. I know it sounds a little intimidating, but it’s not and you don’t need a lot of money to get one going.
A Roth IRA is a retirement savings account that allows you to pay taxes on the money you put into it upfront. Therefore, the money you invest grows tax-free. That means when you are ready to retire and have 1 million dollars in it, that 1 million is all yours. You don’t have to pay taxes on it when you withdraw it.
Some Benefits Of A Roth IRA Are:
- Tax-free contributions: You contribute after-tax dollars to a Roth IRA, so you don’t get to deduct your contributions on your taxes now. However, your earnings grow tax-free and you can withdraw the money tax-free in retirement. This can be a significant advantage if you expect to be in a higher tax bracket in retirement than you are now.
- Tax-free withdrawals: You can withdraw your contributions from a Roth IRA at any time without paying taxes or penalties. However, you can only withdraw your earnings tax-free after you have reached age 59 1/2 and have held the account for at least five years.
- No required minimum distributions: Unlike traditional IRAs, Roth IRAs do not have required minimum distributions (RMDs). This means you can leave your money in your Roth IRA until you die and it will never be taxed.
- Flexibility: You can choose from a variety of investments to put in your Roth IRA, including stocks, bonds, mutual funds, and ETFs. This gives you the flexibility to choose investments that meet your risk tolerance and investment goals.
- Portability: If you change jobs, you can easily transfer your Roth IRA to a new custodian. This allows you to keep your retirement savings in a tax-advantaged account.
The younger you are when you open your IRA, the greater your saving potential because you get that tax-free compounding interest for a longer period. Opening an IRA and investing in it in your 20s is a great way to build wealth.
Vanguard has a great Roth IRA account. They have what is called a “Target Retirement Fund”. This means all you do is pick the year you will retire (typically the year you turn 65) and that’s it, Vanguard does the rest. To start, you’ll need $1,000 to open a Vanguard Target Retirement Fund. Once it’s open you can fund it whenever you have the money.
Make Money With A Side Hustle
When looking for side hustle ideas, it can be easy to feel overwhelmed. There are so many options, and it can be hard to know where to start. Some side hustles take a long time to see earnings, while others can pay you the same day. Try one of these side hustles or jobs to start creating income to invest with.