Thereâ€™s no question that now is the best time to start investing for your future. How to start, however, can be a bit more overwhelming.
There are many easy ways to invest in your 20s that can pay off in a big way down the line. Even if youâ€™re juggling things like student loan payments and a mortgage, investing just a little now can really add up over the years. Hereâ€™s how to do it.
Yes, it can be difficult to say goodbye to a chunk of change from each paycheck for â€śsomedayâ€ť when you have bills and plenty of other things to pay for today. However, if your employer offers a retirement plan, and especially if it offers to match your contributions, thatâ€™s one of the easiest and most beneficial ways to grow your money.
Most employer-sponsored plans are 401(k)s. These accounts allow you to contribute a portion of your paycheck to an investment account where it will grow tax-deferred (a traditional 401(k)) or tax-free (a Roth 401(k)) until you withdraw the funds during retirement. There are penalties for early withdrawals, but a 401(k) is one of the most reliable ways to invest for your future. Also, because the contributions from your paycheck typically are withdrawn automatically and never hit your bank account, you may not even miss the funds.
Some employers also will match your contributions up to a certain amount. If yours does, you should contribute at least up to that amount. Otherwise, youâ€™re throwing free money straight out the window.
If your employer doesnâ€™t offer a retirement plan or youâ€™re self-employed, then you may want to consider setting up an individual retirement account (IRA) or another plan that provides many of the same benefits as a 401(k).
Any financial expert will tell you that one of the golden rules of investing is diversification. While itâ€™s tempting to sink all your cash into one big bet and hope for a windfall, the fact is that diversified investments help mitigate your risk and are much more likely to pay off in the long run.
One way to diversify with ease is to invest in exchange-traded funds (ETFs) or index funds. These tools allow you to invest money in an account that mirrors an index, such as the S&P 500 or Dow Jones Industrial Average. When the index rises or falls, the value of your portfolio rises and falls with it.
Both typically are â€śpassivelyâ€ť managed, meaning the investment decisions are determined by a computer model (unlike traditional mutual funds, which are managed by a human fund manager and usually are more expensive as a result). ETFs and index funds are relatively low-risk, low-cost ways to diversify your investments. If youâ€™re able to invest in both, even better.
If you choose an investment account beyond your employerâ€™s retirement plan, then you may want to set up automatic deposits on a regular basis (monthly, quarterly, etc.). That way, your investments will feel like other bills you always pay, and you wonâ€™t have to make a decision each time you think about investing (or not investing).
You donâ€™t have to be banking big bucks to invest on the regular. Micro-investing is great option to consider for automatic investments with fewer dollars. It can be done via various apps that take your â€śspare changeâ€ť and invest it for you. The sums are so small you likely wonâ€™t even miss them, but they can add up significantly over time.
Making regular, automatic investments also helps you take advantage of dollar cost averaging, which means that instead of investing one lump sum or trying to time the market, you invest regularly whether the market is down or up. Ultimately, itâ€™s a low-risk way to grow your funds in the long term. You may not see the huge payoffs some lucky folks see when they time the market just right, but you also wonâ€™t lose your shirt if your luck isnâ€™t strong.
While setting and forgetting your investments is a great strategy for the most part, you also want to review your investment strategies periodically and make sure theyâ€™re keeping up with your income. Whenever you get a raise, a promotion or another income increase, consider upping your investment contributions to match your new paycheck.
The more you can invest, the better, largely because of the considerable power of compound interest. In the simplest terms, compound interest means you earn interest on your interest instead of cashing it out, which is how 401(k)s, IRAs and many other investment tools operate.
Whether Albert Einstein called compound interest the eighth wonder of the world is up for the debate, but no one can deny the fact that the more you take advantage of compound interest through your investments, the better off you will be down the road. And the younger you are when you start, the more time you have to realize the fullest advantages of compound interest.
As you earn more and your options for investments increase, you may want to seek the assistance of a professional financial planner. Beyond investment planning, they can help you with other financial issues as well, including retirement planning, debt management, tax and insurance strategies, and more.
While you certainly can tackle the research and do the legwork yourself, thereâ€™s a point at which it may extend beyond your level of knowledge and take more time and energy than you want to expend. Good financial planners also offer a wealth of experience, having walked many other clients through the same steps youâ€™re walking through for the first time, and they can provide valuable insight based on the mistakes and moves others have made.
If you donâ€™t want to sit down with a financial planner but still want a little help guiding your investments, a robo-advisor may be a good option. While robo-advisors donâ€™t offer the personalized service you get from traditional financial planners, they do help guide your investing decisions.
You plug in some information, and robo-advisors invest your money based on how much risk you want to take. Fees usually are low, and robo-advisors typically diversify your investments well between ETFs and mutual funds. You donâ€™t need a ton of cash to get started either. Robo-advisors also offer options like IRAs, solo 401(k)s and trusts. As your finances get more complicated, you may want to seek more professional and personalized assistance, but for beginning investors, robo-advisors are worth considering.
While there are many ways to start investing in your 20s, how you invest isnâ€™t nearly as important as the fact that you get started. This decade is one of the best times to make investing a habit to help you achieve your financial goals now and for decades to come.