If you’re in your 20’s, you’re probably enjoying the greatest freedom you’ll ever know. Perhaps you’ve graduated from college and moved on to the next stage of your adult life. You’re gainfully employed, yet you may not have a mortgage to cover, a spouse to please, or children to care for.
In a lot of ways, this decade of your life represents an era of carefree wonder – the last decade you’ll have before you take on the traditional roles and responsibilities of other, older adults like your parents.
But, if you do things right, your 20’s offer more than a time to explore – they offer the chance to set yourself up for life. While investing in your 20’s may sound boring, starting young is easily the best way to get ahead.
8 Smart Investing Tips for Twenty-Somethings
If you’re still young enough to have fun but still ready to lay a foundation for the kind of lifestyle you hope to have in the future, the time to start planning is now. But, where and how should you get started? Here are eight investing tips from top financial planners around the country:
Tip #1: Unleash the power of compound interest by investing early.
When you’re in your 20’s, it’s easy to think you have all kinds of time to get your financial life together. You could easily live another 60 or 70 years, right?. What difference will it make if you put off investing for a while?
Unfortunately, waiting can make a world of difference. Financial advisor Mitchell Bloom of Bloom Financial, LLC offers this example to illustrate what you’ll miss out on if you wait:
Let’s say you invest $300 per month starting at age 20 and don’t stop until you’re 60-years-old. If you managed an 8 percent return during that time, you would have more than $1 million dollars in that account alone. Now let’s say you waited until you were 30 to get started. By the time you reached 60-years-old, you would only have $440,445 in your account. Those first ten years you missed out on would cost you more than $550,000 in returns – even though you only skipped $36,000 and ten years of deposits!
This is the magic of compound interest, a phenomenon Albert Einstein once lauded as the eighth wonder of the world. Compound interest is the type of interest you accrue when the interest you earn on your savings or investments begins to compound on itself.
“Compound interest is the most powerful force in the universe,” says financial planner Jude Wilson of Wilson Group Financial. But, it’s important to note that its power comes with time – time you’ll squander if you don’t start investing when you’re young.
If you want to be financially free in the future, then you have to harness this power and put it to work. If you don’t, you’ll miss out on gains you can never get back.
Tip #2: Consider investing as part of a broader financial plan.
While investing early and often can help anyone in their 20’s begin building wealth, that doesn’t mean investing is the answer to every problem. As Seattle Financial Advisor Josh Brein notes, the best thing any young person can do is consider all aspects of their financial health.
Do you have student loans you need to pay off? Credit cards that just keep growing? A spending habit you just can’t contain?
If you’re spread too thin financially, and especially if you have a habit of overspending, investing may not be the best choice, notes Brein. “You can’t invest your way out of debt or bad spending habits.”
This is why Brein says his best advice for young new clients is to spend less time worrying about the next hot stock and more time worrying about fundamental spending habits, debt, savings, and budgeting. The bottom line: A fully-funded retirement account won’t set you up for life if you’re drowning in debt and don’t have your spending under control.
Tip #3: Realize that money is a tool.
If you’re in your 20’s and ready to build wealth, it all starts with recognizing the money you earn is nothing more than a tool, says financial advisor Eric C. Jansen of AspenCross Wealth Management.
Instead of thinking of the money you earn as the solution to your problems, think of it as a tool you can use to create the life and lifestyle you want via smart choices regarding spending, savings and investing.
“Learning to become a diligent saver and investor early on is the key to being able to live the life you desire,” says Jansen. “While you’re trading your time for money today, in the future you will be able to use your money to give you the time to do more of the things that really matter in life.”
With the money you earn as your tool and guide, Jansen suggests dividing your goals into short-term and long-term buckets and choosing investments that will help you reach them. For short-term investment goals like saving for a house, consider conservative investments such as Bank CD’s, Savings or Money Market Funds.
For long-term goals like retirement and/or financial independence, you will want to invest more aggressively as you have time on your side to withstand the ups and downs of the stock market, he says.
Tip #4: Ramp up your savings as you age.
Your 20’s are a time when there are almost too many goals to save for. You may want to buy a home, purchase a new car, or travel the world – all at a time when you should also save for the future.
That’s why financial advisor Alex Whitehouse of Whitehouse Wealth Management says your best bet is to start investing gradually then ramp it up as you age. This will allow you to save for retirement while also letting you save for other goals.
“Start with just 1 percent of your income, then increase the percentage gradually by 1 percent,” says Whitehouse.
By the time you reach your 30’s you’ll be saving 10 percent of your income. By your 40’s, you’ll be saving 20 percent of your income. And if you get a raise every year, you may not even notice the difference.
Tip #5: Ignore all the Joneses in your life.
“Don’t try to keep up with Joneses… or the Kardashians,” says financial advisor Jamie Pomeroy of FinancialGusto.com. ”Instagram, Facebook, Twitter & Pinterest are full of pictures and stories of your friends and stranger’s unblemished lives.”
Unfortunately, fear of missing out has a way of driving young people to try to keep up. This can lead to spending money you don’t have, racking up debt, and of course putting off “boring” responsibilities like saving and investing for the future.
Your globetrotting friends might look like they have it all, but chances are good their luxurious lifestyles don’t include ample savings for retirement. Their trips to Thailand? They were probably financed with a credit card.
“Tune out the distractions and tune into solid advice to drive you to find money to start investing in your future,” says Pomeroy.
For example, some solid financial advice to consider in your 20′s is to simply start a Roth IRA.
“By starting early on some of that investing advice, you just might find yourself able to go to Thailand someday and paying for it with cash.”
Tip #6: Invest in yourself.
No matter what happens with the stock market or the price of bitcoin, there is one area of your life where you have total control. “The #1 place you have total control with your investments is in yourself,” says Colorado financial advisor Matthew Jackson of Solid Wealth Advisors.
Jackson suggests investing in your personal, professional, and financial growth in whatever ways you see fit. Why? Because investing in your work ethic, skill set, or wealth of knowledge could be the best investment you’ll ever make.
“Read as many books as you can and attend conferences that support your growth,” says Jackson. “More importantly, be sure to apply the best advice to your daily life. Few things can land you an increase in pay or new opportunity quicker than highly developing your skills.”
When you invest in yourself, you simply cannot lose. If you’re in your 20’s, it’s still not too late to go back to school, earn an important certification that could advance your career, or start over in an industry you’ve always admired.
Tip #7: Automate your investments, then learn to live on less.
No matter where you are in your personal finance journey, one of the best steps you can take is automating your investments so they can take care of themselves.
“Setting up an automated savings plan will help condition yourself to save consistently all while paying yourself first without having to decide between delayed gratification and instant gratification,” says financial advisor Anthony T. Reynolds of Coretegic Capital.
For young people in their 20’s, the best – and easiest – way to automate investments is to sign up for a work-sponsored 401(k) plan and have the funds deducted from payroll every month. However, you can also set up automatic investments in a brokerage account or a traditional high-yield savings account.
Once you make all your investments automatic, it’s a lot easier to learn to live on less. It’s also a lot easier to build real wealth when you’ve made saving and investing a priority instead of an afterthought.
The bottom line: If you can get into the habit of saving and investing automatically during your 20’s, you’ll never have to worry about money or retirement savings again.
Tip #8: Let Your Employer Help
If you’re in a new job with an employer who offers a 401(k), make sure to check whether they match employee contributions. If they do, this cash is the closest thing to “free money” you’ll ever find – and you would be a fool to miss out.
“If your company offers a 401(k) with a match, contribute at least as much as they will match,” says financial planner Christopher Clepp of Strategic Financial Group in Chicago. “There is no better way to start building towards retirement than with the free money available through a company 401(k) match.”
Clepp notes that the general rule of thumb states you need to save 20 percent of your income to be financially secure in retirement. If that number seems insurmountable now, don’t get too discouraged. Start by saving as much as you can in your 401(k), then let your employer boost your contributions through their matching program.
If you ramp up your efforts over the years, you will eventually get there. But, saving more is a much easier feat when your employer is willing to help.
The views of the author of this article do not necessarily represent the views of Gradifi.