How to Invest in Your 20s?

One of the reasons the rich get richer, the poor get poorer, and the middle-class struggles in debt is that the subject of money is taught at home and not in school. Schools focus on scholastic and professional skills, but not on financial skills. This explains how smart bankers, doctors, and accountants who earned excellent grades may struggle financially all of their lives.?

Most of us learn about money from our parents. So, what can poor parents tell their child about money? They simply say, “Stay in school and study hard.” The child may graduate with excellent grades, but with a poor person’s financial programming and mindset. I come from a poor-middle-class family and, unfortunately and unsurprisingly, we never really spoke about money management or financial skills at home. Why? Because no one in my family really had a handle on what that meant!?

Luckily, I realized the need to build my financial intelligence and have spent the last 3 years doing exactly that. In the following article, I want to share what I have learned. My goal is to inspire at least one person. Here it goes!

When it comes to investing - the earlier you start the better! Compounding works in such a way that your money grows exponentially on itself. A person who starts investing just a few years earlier could end up with many times more money when it comes time to retire than they would if they started later in life.

Starting at age 23, you need to put away just $14 per day to reach $1 million by age 67. Wait just seven years, until age 30, and you have to increase that amount by 50%. Hold off until age 35 and you’ll have to save more than twice as much as at 23. If an early retirement sounds goods, then it pays to know how to start investing in your 20s. While there's no official playbook to follow, keeping the following nine rules in mind can help with preparing your portfolio for long-term success.

Nine rules for investing in your 20s:

1. Build an emergency fund
2. Pay off student debt
3. Learn value investing
4. Don't miss out on free money
5. Open an individual retirement account (IRA)
6. Create a budget
7. Invest with a plan
8. Get help to manage your money
9. Don't go all-in

More information regarding the nine rules is as follows.

1.Build an emergency fund - first thing’s first, always have an?emergency fund which ensures that you’re covered if an unexpected expense were to arise, like a job loss or natural disaster. Contributing towards this on a set frequency also helps you develop the habit of regularly contributing to a fund. But, how much should you save?

“There’s both the mathematical answer and the emotional answer,” says Claire Beams, financial planner at Rhinevest in Cincinnati. “Mathematically, it’s saving three to six months of your fixed, ongoing expenses. But emotionally, maybe that’s not enough money for you to sleep at night. So, it’s finding that perfect answer for you.” Even if you start with just $100 or $500 in a?high-yield savings account, CDs,?or?money market accounts you can contribute to your fund regularly and build it up over time. Do not invest this money in the stock market or anywhere else. This money is for emergencies and hence you should be able to access it at a moment’s notice.?

2. Pay off student debt – This is almost as important as building your emergency fund. Student debt is such a common burden for people in their 20s. If you still have outstanding student debt, paying it off should be your primary investing goal. In the same way that sound investments grow your wealth exponentially, this debt is also increasing exponentially. It grows larger and larger as the years go by. It's brutal! So, before you wade into the stock market just get out from under that burden every way you can think of. Just start by eliminating that debt because it's going to hold you back in the long term.

3. Learn value investing - There is a family of investors - Ben Graham, Warren Buffett, Charlie Munger, Mohnish Pabrai, and many more that I follow. These guys have an investing strategy that I truly believe is the best in the world! This is where the millionaires and billionaires come from – at least those that remain to stay millionaires and billionaires for a sustainable period of time. You can use the value investing strategy irrespective of whether you're starting your own business, buying a franchise in the form of stocks, or building one. Value investing is the strategy that you should learn as early as possible so that you have your whole life ahead of you to compound money. The best book to get you started is The Intelligent Investor – according to Warren Buffet this is the best book on investing ever written!

https://www.amazon.com/Intelligent-Investor-Definitive-Investing-Essentials/dp/0060555661

Now once you've learned something about how to invest then you want to start getting control of your cash.

4. Don’t miss out on free money - if you're enrolled in a 401(k) or similar plan at work, the next rule for how to invest in your 20s is using your account to its full advantage. "Maximize your tax-deferred, employer-matched investment options first before investing in other options," says Graham Williams, co-founder of Optimist Retirement Group in Scottsdale, Arizona. "The combination of?dollar-cost averaging, tax savings and a potential employer match creates the ultimate compound interest machine." At a minimum, you should consider investing at least enough to get the full match if one is offered. As your income increases year over year, you can increase your contribution rate correspondingly. This, says Williams, is the easiest way to invest on autopilot in your 20s.?

Bankrate’s?401(k) calculator?can help you figure out how much to contribute to your 401(k) in order to build up enough money for retirement.

https://www.bankrate.com/retirement/calculators/401-k-retirement-calculator/

5. Open an individual retirement account (IRA) - Another way to continue your long-term investment strategy is with an individual retirement account, or?IRA. There are two main IRA options: traditional and Roth. Contributions to a?traditional IRA?are similar to a 401(k) in that they go in on a pre-tax basis and are not taxed until withdrawal.?Roth IRA?contributions, on the other hand, go into the account after-tax, and qualified distributions may be withdrawn tax-free. The maximum contribution for 2021 is $6,000; if you’re age 50 or over, it is $7,000. https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp

?Experts generally recommend a Roth IRA over a traditional IRA for 20-somethings because they’re more likely to be in a lower tax bracket than they will be at retirement age.

?6. Create a budget - create a budget and set savings goals so that you are forced into a limited amount of spending. Sticking to it is one of the things that's going to help you get disciplined about your investing. A good rule of thumb is the?50-30-20 budgeting method. With this, you’ll spend 50% of your income on necessities like housing, insurance, and groceries. 30% can be spent on wants which includes your splurges. Finally, the remaining 20% of your income will be stashed away in your savings for long-term financial goals.

It's really important that you do this in your 20s because those dollars you're saving and putting away in your 20s is what turns into millions of dollars later on. This is the power of compounding! A little money in today grows into millions 30 or 40 years from now. Hence, setting a budget is very important to get the money into an investing account before you spend it.

https://www.moneyunder30.com/what-percentage-of-your-income-can-you-use-to-splurge

7. Invest with a plan - In addition to setting a budget and saving money, you also want to set specific investment goals. How much money do you want to have invested by the time you're 30? How much money do you need to invest each month or each year in order to achieve that goal? Look at all the experiences you want to have over your lifetime and then prioritize accordingly. Some people may want to travel every single year or they want to purchase a car in two years and they also want to retire at 65. You will need to craft your investment plan to make sure that those things are possible.

The accounts you use for short-term goals, like travel, will differ from those you open for long-term retirement goals. Most important in your 20s, though, is just starting the habit of saving. You need to stay committed to a specific savings rate and continue to increase that year-after-year. If you set a savings goal and you push yourself to achieve it, you're going to find it much easier to stay motivated and push yourself further.?

8. Get help to manage your money - a financial advisor is a great resource for beginning investors. While it is a more expensive option than investing on your own, they’ll work with you to establish goals, assess risk tolerance, and find the brokerage accounts that best fit your needs. They can help you choose where to direct the funds in your retirement accounts as well. A financial advisor will also use their expertise to steer you in the right investment direction. While it’s easy for some young investors to get caught up in the excitement of daily market highs and lows, a financial advisor understands how the long game works.

9. Don't go all-in - Investing in your 20s means you do have time on your side, so don't rush it. "If you've never invested in the market before, you should ease into it," says Lindsey Bell, chief investment strategist at Ally Invest. "You'll need to get used to it before you feel comfortable with the up and down swings the market can make." Instead of tying up all of your investable assets into a single stock or fund, for example, you might choose to invest a little at a time each month to build up your portfolio. And take time to get to know what you own. "Invest in something you understand," Bell says.

Ready to get started? Think through what your short-term, intermediate, and long-term goals are, and then find the accounts that best fit those needs. Your plans will likely change over time, but getting started with at least a retirement account is one of the most important things you can do for yourself in your 20s. Not only will you ensure your money keeps up with inflation, but you’ll also reap the benefits of decades’ worth of compound interest on your contributions.

And that’s a wrap! I'd love to hear from you guys. Do you have investing goals set for yourself? If not, do you need any help? Leave a comment below with your answer and I'll be sure to follow up with you. Thanks for reading! If you enjoyed the article and feel it was valuable, please leave a like and share it with your friends.?

Sources:?

1. https://www.nerdwallet.com/article/investing/how-to-invest-in-your-20s
2. https://www.bankrate.com/investing/best-ways-to-get-into-investing-in-your-20s/
3. Infographic - https://money.usnews.com/investing/investing-101/articles/2018-07-12/infographic-how-to-start-investing-in-your-20s
4. https://money.usnews.com/investing/investing-101/slideshows/rules-for-investing-in-your-20s?slide=10