How to Start Investing in Your 20s

The earlier you begin investing, the better off you’re likely to be in the long term. Here’s how you can get started if you’re still in your 20s. It’s never too early to start investing—as long as you do so wisely. It’s important to make a proper plan so that your investments actually help you reach your goals. Here are six tips you can implement if you want to start investing in your 20s. A financial advisor can help you manage your investment portfolio.

1. Focus on Retirement

Your first investment move should be to use tax-advantaged accounts to save for retirement. Many employers offer 401(k) plans with matching. If you can afford to, max out the match to capture the greatest retirement savings. So if your employer will match 50% of your 401(k) contributions up to 6% of your paycheck, contribute at least 6% to get the full employer match.

If you don’t have retirement savings options through your employer, there are some tax-advantaged options outside of a job. If you’re self-employed, you can set up a solo 401(k) plan. You can also set up a traditional or Roth IRA on your own and contribute up to $6,500 in 2023.

While retirement savings aren’t the sexiest investment option and you won’t normally be able to access the money without a hefty penalty until the age of 59 ½, they are still the best place to start. You can set yourself up for a secure retirement by starting to build your nest egg now. Being able to take advantage of employer matches and saving on your taxes is the icing on the cake.

2. Build Liquid Savings

While investing for the future is important, it’s still wise to have some liquid savings that you can access quickly if needed. Say you lose your job unexpectedly. If your savings are locked up in a CD for another year, you’ll have to pull them out and lose some or all of the interest you had earned.

While this isn’t the end of the world, it does set you back on your investing goals. The same is true if your money is tied up in stocks—you may have to cash out at an inopportune time from an investment perspective, losing earnings.

So after you’ve set up your retirement accounts, start building an emergency fund. A good goal is to save up enough money to cover your expenses for six months. So if you need $3,000 each month for rent, utilities, transportation, food and other necessities, aim to keep $18,000 in liquid savings.

This money should sit in an account where it’s earning interest. Take a look at high-yield savings accounts, money market accounts and money market funds where your funds can generate interest while still remaining instantly accessible.

3. Start Investing With a Brokerage Account

Once you have retirement funds and an emergency savings account, you can start investing in the market. It’s time for you to set up your own brokerage account so you can buy and sell stocks, bonds, exchange-traded funds (ETFs) and mutual funds.

Many brokerage accounts can be set up and managed completely online. Shop around and see which one is right for you. Some important things to consider are whether they require a minimum initial investment, what their fees and commissions may be and whether they offer helpful tools for analyzing investments.

You might start by investing in mutual funds and ETFs, which bundle different kinds of stocks and bonds. Make sure the operating expense ratio of a fund is not excessive, such as more than 1%. You can also buy stocks and bonds directly—but first research the companies you’re considering to see if they’re a solid investment. For example, government bonds are generally a safe investment, but some corporate bonds can be quite risky. And it’s possible for a company’s stock to crash, taking your money with it.

4. Understand the Risk/Reward Trade-Off

For any investor, diversification is the name of the game. Even if you think you’ve found the most profitable stock of all time, you shouldn’t put all your eggs in the same basket. By diversifying the things you invest in, you can set yourself up for lower risk overall.

A strong understanding of risk can help you avoid meme stocks and other unwise investment maneuvers. The younger you are the higher the portion of your portfolio should be in equities, which are riskier than fixed-income securities like bonds. For example, if you’re in your 20s an 80/20 (equities/bonds) allocation might be a reasonable option for you. Use an asset allocation calculator to help you create a diversified portfolio that matches your risk tolerance.

5. Work With an Expert

If tax planning and the other complications of investing leave you with a lot of questions, you might consider working with a financial advisor to get expert advice. While there are plenty of resources out there for a beginning investor, sometimes talking to someone with deep financial knowledge can quickly pay for itself.

6. Let Your Investment Plan Grow and Evolve with You

As you age, your financial needs will change too. Generally speaking, younger investors are advised to take more aggressive and riskier financial positions because they have time to ride out the highs and lows before they’ll need to cash out. On the other hand, older investors are nearing retirement and have less time for their investments to recover if there’s a market downturn.

As you get older, you might have different financial goals than you had at 20. You might be thinking about buying a home, starting a family or starting your own business—any of which would likely change your investment strategy. Take a look at your investment portfolio at least once a year to make sure your strategy is still working for you.

The Bottom Line

Young investors can start by building retirement savings, creating an emergency fund and opening a brokerage account. Savvy investors will understand the risk/reward relationship, revise their investment strategies as their financial needs and goals change and work with a financial advisor when they need expert advice.

Tips on Investing

As you build a portfolio, you might benefit from working with a financial advisor, who can offer both investment insights and tax advice. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Success in investing is partly about your portfolio’s asset allocation. SmartAsset has an asset allocation calculator that will assist you in picking the right asset allocation for you.