Your 20's is the first step into adulthood as you enter the 1st quarter of your life. It's a period where you begin to make more money than you've ever had before and have new responsibilities to worry about.
One of these is what to do with your money. Many young adults use their new earnings to buy a lot of things you don't really need and begin the cycle of working hard and paying bills. That's what normal people in their 20's do. However, if you want to become financially free then you need to be “weird” and start learning how to invest your money. You'll do wonderful financially as long as you avoid common investing mistakes and stay consistent.
In this article, we'll cover several important ways to invest your money in early adulthood so you enter your 30's with tons of money saved up and can pursue early retirement decades before your peers.
1. Plan For Retirement Now
Planning for retirement should be your #1 priority when earning money in your 20's. There will come a day when you either don't want to work anymore or may need to take time off from work due to life circumstances. Saving for retirement in your 20's gives you unbelievable options in your 30's and beyond.
The earlier you start saving for retirement, the more money you will have in the long run.
The graph below shows the power of starting early…
If you begin contributing $10,000 per year to a retirement plan at age 25, with an annual 7% return, you'll have $2,008,829 in your plan by age 65.
But if you delay saving for retirement until age 35, the results are staggering. Let's say you begin saving $15,000 per year at age 35, also with an average annual rate of return of 7%. By the time you're 65, your plan will have only $1,426,427.
That's more than 25% less, even though your annual contributions will be 50% higher.
The power of compound interest rewards you with more money as long as you start early. That's a compelling reason to begin saving for retirement as early as possible.
You don't need to contribute $10,000 either. Contribute as much as you can now and increase the amount as you move forward and your earnings increase.
Best Retirement Plan Options
There are two smart ways to set up your retirement plan: self-managed IRAs and 401 (K) employer sponsored plans.
If your employer offers a company-sponsored retirement plan, this should be your first choice. They'll typically offer either a 401(k) or a 403(b) plan that will let you contribute up to $19,500 per year out of your income.
In addition to the tax deferral discussed above, retirement plan contributions are tax deductible from your current income. A contribution of that size would produce a major tax break.
In addition to your work-sponsored plan, setup a traditional IRA or Roth IRA account to give yourself full control over your future. You can contribute up to $6,000 per year (if you're over 50, it's $7000) and your investment earnings grow tax deferred.
The major difference between the two IRAs is that while contributions to a traditional IRA are tax deductible, contributions to a Roth IRA are not. However, the Roth IRA more than makes up for that lack of tax deductibility.
With a Roth IRA, withdrawals can be taken completely tax free once you reach age 59½ and have been in the plan for at least five years.
2. Invest in High Paying Skills
Your 20's is a good time to learn new skills that can increase your income for the next 10, 20, and 30 years. Don't be afraid to invest money in a college education, professional course, or sector-specific certification. You can continue to use these skills in the future and earn more money as a result.
If your goal is achieve financial freedom then focus on high paying skills like:
- Sales & Marketing
- Personal Finance
- Forex & Stock Trading
- Professional Sports
These industries pay a lot more money than normal low paying jobs so you'll have more money to invest than most people. Choosing a lucrative career is very important to your success as an investor. You need money to invest unless you borrow heavily using debt (which can be a disaster & bankrupt you).
Choose a high paying career then invest your income in assets. That's the easiest way to become financially free in your 30's, 40's, or 50's.
3. Buy Assets While You're Young
Once your money starts rolling in then it's time to think about asset allocation. Asset allocation means what type of investments will you put your savings into. My #1 recommendation for young adults is the stock market and I prefer stocks over index funds because of their superior returns.
Your focus should be on high growth stocks that return at least 15% annually because you have lots of time to watch your investment grow.
Here's a good list of 5 growth stocks for investors in their 20's:
- Apple (AAPL)
- Amazon (AMZN)
- Netflix (NFLX)
- Shopify (SHOP)
- Tesla (TSLA)
Each of these 5 companies are growing fast and have well respected brands known worldwide. If you're starting out with just $1,000 then open a brokerage account at Robinhood and invest in some of these stocks if you'rea complete beginner. If you don't mind risk then you can choose just 1 or 2 stocks then invest your money to grow your stock portfolio faster.
Don't like risk? Go with a S&P 500 index fund to own the entire market (not just one or two stocks). Index funds are better than mutualf funds because they charge lower expense ratios.
Cash is an important asset class to own because you need protection against job loss, illness, or an emergency. The Coronavirus pandemic of 2020 shows just how important a big pile of cash is during tough times.
Start an emergency fund of $1,000 for starters. This money will cover any random expenses and prevent you from going into credit card debt. Once you hit $1,000 then set a bigger goal to set aside 3 to 6 months of monthly expenses in cash. If you spend $2,000 per month then aim for $6,000 to $12,000 for your emergency fund. Open a high yield savings account with Ally or Marcus and start saving cash. These high yile dsavings accounts pay around 1.30% and reduce the volatality of your portfolio.
Bonds are IOUs from the government that pay you interest and serve as a low risk asset class. When you're a young adult, you want to invest aggressively and focus on stocks or index funds. Bonds are like cash so you can consider them short term investments. If you're aggressive then skip bonds and focus on building a massive emergency fund.
Gold & Silver are important asset classes that help reduce the risk of your portfolio and offset any stock market losses in case of a bear market or recession.
When the economy tanks and people get afraid, they run to the safety of gold as a safe haven for their money.
I recommend buying physical gold and silver but some people like to invest in gold ETFs or future.
The reason I like physical gold/silver is because you can sell it quickly in case of an emergency and it's really cool to own.
Apmex & ModernCoinMart are my two favorite places to buy gold & silver. You can have your precious metals delivered to your house or store them in a secure locations like your bank's safety deposit box.
Gold is the #1 physical asset to own because it's been a store of value for thousands of years. Silver is good as well but it can tarnish and is worth a lot less per ounce than gold.
I normally hold around 10% of my investment portfolio in gold and silver and like to buy precious metals when prices are lower (usually during stock market bull runs).
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts are lower yielding, stable investments that boost your overall investing returns over the long run.
When you're young, these REITs can really grow over time so it's important to buy them in your 20's and hold them for decades. Unlike stocks, real estate is a much slower growing asset. Patience is required when dealing in real estate.
You can two different choices when it comes to REITs: REIT stocks or private REIT investments.
REIT stocks have been hammered recently and you'll find many of them trading a lot lower over the last year.
Another choice is investing in crowdfunded REITs through a private company.
I recommend Fundrise as my favorite Real Estate crowdfunding site.
Owning your home offers a lot of benefits in terms of bulding up equity and watching your home value grow in the future. The downside is you become tied to one place and don't have freedom to pack up and move at any moment.
If you love the city you live in then consider purchasing a home over renting because you will pay your own mortage instead of someone else's.
Also, owning a home means it easier to raise a family and provide your kids with enough space to move around and grow.
If you purchase a $200,000 home with just 3% down, that's only $6,000 upfront and your home will most likely grow in value over the long run. Land is a scarce resource and homes in most developed countries increase in value each decade as the dollar loses value.
If you pay off your home alone, you'll have a $200,000 in 15 or 30 years (assuming the value of your home stays flat). You'll also no mortgage payments so now you have a lot more income to invest or enjoy your life.
If you're single then it's more difficult to afford a home on your home but you'll be glad you did as long as you enjoy the city/town and maintain a stable career.
If you're a rolling stone and prefer bouncing around from city to city (country to country) then consider getting a roommate or significant other to reduce your monthly rent.
Your income will increase in your 30's so you can afford to splurge a little and get a nice condo/house. If you're in your 20's then get a rommate, live cheaper, and work hard on your career to earn more money.
4. Become Debt Free
Your next step as you enter your mid to late 20's is to become debt free.
Most people spend a large portion of their income paying student loan debt, credit card debt, mortgage debt, auto loans, and a host of other smaller expenses that eat away at your income.
This type of spending chews up your monthly income and forces you to work longer at your job.
A simple way to boost your saving & investing without increasing your income is to become debt free.
Debt free life is stress free and an exciting way to live. You have no payments so your cost of living becomes super cheap. You don't have to worry about losing everything you own because you have no debt.
No bankruptcy risk or foreclosure fears.
Life becomes easier and some people leave their jobs and pursue their passions!
Use Dave Ramsey's Debt Snowball to get out of debt in just 18 to 24 months. I've used it personally and it works like a charm.
If you follow this method you can become debt free in your 20's and retire in your 30's. Most people nowadays will work well into their 60's because they never get out of debt.
Become debt free then choose your desired lifestyle.
5. Consider FIRE (Financial Independence & Early Retirement)
Once you're debt free then your savings & investments should be large while your expenses are small and managable.
At this point, you're aiming for at least $250,000 in liquid assets & a paid-off mortage if you own your home. Many people achieve this in their late 20's if you follow the steps above, live below your means, and invest aggressively.
It's possible now to consider retiring early (especially if your home is paid off). You may calculate your monthly expenses and realize you can stop working and live off your investment income or simply switch careers and take a lower paying job because you love the work.
Living off your dividends in retirement is a great strategy that many people use in their 30's to retire early. Other people quit their jobs and start a small side business to provide income away from the workplace.
If you do things right in your 20's then you'll have the option to retire early in your 30's.
The financial blueprint above will put you in a wonderful financial situation if you follow it in your 20's.
I also have a few more tips for investing in your 20's to increase your savings and boost your investment returns:
- Keep costs low by owning stocks or index funds. Avoid mutual funds and other expensive investments.
- Invest in what you know. Focus on your strengths and stay away from investments outside of your circle of compteence.
- Track your spending using Mint and know where your money goes each month.
- Watch your circle of friends closely. Sometimes a broke friend can become a negative influence on your finances. Hang around people who are successful and you'll drift in that direction.
- Stay on track. Don't beat yourself up if you're in your 20's and broke. Get back on track and start building up your savings then invest. You'll make progress quickly if you take action and stay consistent.