How to Invest in Your 20s: 5 Simple Steps to Get Started in 2024

Looking for ways to start investing in your 20s?

First off, congrats! Taking this crucial step to better your financial situation will set you up for success. Time is on your side, my friend, and if you invest regularly in your 20s you’ll be able to retire that much sooner (assuming you want to, of course).

It can seem intimidating when first learning how to invest, and that’s perfectly normal.

You probably have questions like:

• What are the best ways to invest in your 20s?
• How much do you need for retirement?
• How can you save in the first place?

Read on to learn about five of the easiest steps you can take to start investing now.

Figure Out How Much You Can Afford to Invest

If you’re still paying off student loans or have a low salary, it’s understandable to think that you can’t afford to set aside money for retirement.

It’s a no-brainer that you need to be able to pay for your everyday expenses first — including debt — before using any excess cash in a retirement account.

But here’s the awesome part about investing in your 20s: You don’t need a lot of cash!

You’ve got time on your side, so even a little bit helps. Let compound interest do its thing over time.

As for how much money to set aside, that’s up to you and your budget. Of course, the more the better. Even $25 a month is better than nothing.

You’ll want to increase this amount incrementally over time, by either cutting back on expenses or increasing your income.

Have no clue where to start? Here are a few suggestions:

Cutting back expenses

• Start a budget. There are lots of online budgeting tools to play around with.
• Track your spending. See where you’re spending unnecessarily and commit to using that money toward investing instead.
• Challenge yourself to a no-spend month. Put the money you save into a retirement account.
• Cut out discretionary expenses. Reduce activities like dining out, buying new clothes, and going out to the movies to free up your investing budget.

Increasing your income

• Work overtime shifts at your job. You can ask for more shifts to boost your income.
• Talk to your boss. Learn how you can earn a promotion or increase your chances of an annual bonus with your manager or supervisor.
• Start a side hustle. Some ideas include driving for Uber, dog walking, babysitting, and selling crafts on Etsy.
• Sell unused items. Declutter your home and sell things like unused books, toys, and electronics.
• Take advantage of available employee referral programs. Some companies give you a kickback for introducing potential people your employer can hire.

As for the specific amount you’ll need to set aside to start investing, it depends on where and how you invest. We’ll go over some of the best ways you can do so later in this article.

First, you’ll want to understand the types of investments out there.

Investing in Your 20s: Investment Types

Once you have some money set aside, you’ll need to figure out how to invest your cash. Generally speaking, there are two types of retirement accounts:

1. Tax-advantaged
2. Tax-free

Tax-advantaged investments are accounts that let you contribute pre-tax money. You don’t pay taxes now, but you’ll need to pay them once you make withdrawals.

On the other hand, tax-free accounts are funded with post-tax dollars. You pay the taxes upfront, but you don’t need to when you make withdrawals.

Here are a few types of accounts you can consider:

Employer-Sponsored Plans

Get this — your employer may give you money for your retirement funds. This is not a joke.

Depending on your job, your employer may offer a 401(k) or 403(b) plan and match contributions you make up to a certain percentage of your paycheck.

If this is the case, try to contribute as much as you can. Even if you can’t contribute the maximum amount, make it a goal to work your way up to it over time.

In many cases, these types of accounts are tax-advantaged. Check with your employer to see what your options are.

Traditional IRAs

A Traditional IRA is a tax-advantaged individual retirement account, meaning you contribute pre-tax dollars to this investment vehicle. Your money grows tax-deferred — you don’t pay any taxes until you withdraw funds.

Something to keep in mind: If you withdraw money before you’re 59.5 years old, the IRS could slap on a 10% tax penalty in addition to regular taxes.

In 2019, the contribution limit is $6,000 in a calendar year, in addition to any employer-sponsored plans.

Why it’s an attractive choice: You want to reduce your tax bill now. If you expect to earn a high salary and spend less in retirement, you may be able to minimize the taxes you pay overall.

Roth IRAs

You guessed it — a Roth IRA is a tax-free account. As in, you contribute post-tax dollars. The contribution limits are the same as a Traditional IRA — $6,000 per year.

You may owe taxes now on the money you contribute to the individual retirement account but the money grows tax-free. There’s no need to pay taxes when you make withdrawals, even if you’re younger than 59.5 years old.

In some cases you may be taxed (such as if you take out more than you contributed to the account), so check the latest IRS regulations to make sure.

Why it’s an attractive choice: You anticipate paying less taxes now than when you retire. It’s also best for those who don’t currently earn a lot of money, because there are income limits for a Roth IRA — $137,000 for individuals, and $203,000 if you’re filing taxes jointly.

Now that you understand the different types of accounts, let’s move onto how you can invest.

Keep It Simple

As you’re getting your feet wet in investing, it’s best to keep it simple. You don’t want to get so into analysis paralysis figuring out what types of options are best that you end up not investing at all.

Instead of opening a bunch of accounts, consider opening one, learning how it works, and going from there.

All investments need to go through what’s known as a brokerage account. There are big firms, like Ally Invest and Fidelity, which offers a bunch of different options. Some places don’t charge you a fee to open an account, but there may be minimum balance requirements.

Something to consider: Once you meet the minimums, you can make automatic deposits into your account. That way, you don’t have to think about it. If you have extra funds, you can deposit more whenever you see fit.

For those who want more hand-holding through the investment process, consider robo-advisors. They’re automated investing advisors that use advance software and algorithms to create and manage your investments. Services differ among companies, but many also provide a human advisor so you can ask questions.

You may have fewer investment options than if you were to do it yourself through a brokerage like Ally Invest, but you’ll be able to have someone make curated investment recommendations, and it can be more hands-off.

There are also apps that can make investing fun. This is a great entry point for those who may not have a lot to invest initially. These apps don’t require minimum balances and typically “game-ify” the investing process. For example, some apps will round up your purchases and use the difference to invest.

With all of the above options, pay careful attention to fees. Some may charge monthly fees or take a percentage of your investment amount to manage your account. Consider opening a Personal Capital account that calculates these types of fees so you can see what you’re paying.

Decide Where to Start Investing in Your 20s

So you’ve got some cash, understand the types of retirement accounts, and have an idea of what to do. Now comes the fun part: picking a place to stash your retirement funds.

There are many options out there, but here are some places we recommend you start:

Ally Invest is a great choice for those who are new to investing, but who want to eventually learn more advanced investment tactics.

You can start with its free Cash-Enhanced Managed Portfolio, by which Ally’s advisors tailor a plan just for you. The minimum investment is only $100.

Then there’s the self-directed trading option that can help you learn how to trade stocks and ETFs (exchange-traded funds). You’ll pay zero commissions on most trades at Ally Invest, so it’s a great choice for anyone starting out.

Betterment is a robo-advisor company known for its low fees and flexibility in terms of options to invest your money. The company helps you diversify and manages your account using software that works to help you reach your financial goals.

One of the best advantages of investing with Betterment is that you’ll save more in fees the more you invest with the company. Betterment also provides licensed experts in case you want to ask questions.

Acorns is an investment app that helps you invest your spare change. That’s great if you don’t have a lot of money to invest.

You’ll need to link a debit or credit card to the app. Acorns rounds up every purchase you make to the next dollar, and then moves the difference into an investment account. It’ll even recommend a retirement account suited to your preferences.

Start saving with Acorns.

Wealthfront is another robo-advisor. You can choose from different types of investment accounts, including Traditional and Roth IRAs.

Wealthfront uses software to automate your investments based on your financial goals. There’s a minimum requirement of $500 to be able to open an account. Wealthfront also offers Path, a software that gives you personal finance advice, such as if you’re on the right path based on your goals.

Open a Wealthfront investing account.

As with all financial decisions, make sure you do your research and take your needs and preferences into consideration. If you’re unsure, feel free to call the customer service hotline for any of these services to ask questions.

Investing in Your 20s: Consider Taking On More Risk

Are you sick of hearing that time is on your side?

No, really, it is. That’s an amazing advantage.

That’s why you can consider taking on more risk with your investments. You can choose the more aggressive option, meaning investing in options that have more stocks. Even if you sign up with a robo-advisor, you can request a riskier portfolio for your investments.

If you do lose some money, in theory you might be able you recuperate your losses over time. Assuming you’ll leave your retirement funds in the account for the foreseeable future, over the long term, your investments should grow.

Most brokerages will ask you to determine your risk tolerance — a.k.a. how risky you want to be with your investments — before investing any money into an account. Robo-advisors typically ask that you complete an online questionnaire before you start investing so they can give you recommendations.

There are also tons of online questionnaires, like this Investment Risk Tolerance Assessment developed by two financial planning professors from the University of Georgia.

Of course, questionnaires are one of many ways to determine how much risk you’re willing to take. You may want to consider seeking the help of a financial advisor to help guide you and make suggestions if need be.

Ready to Get Started?

Hopefully this guide has shown you some simple ways to start investing in your 20s.

And the fact that you’ve made it this far deserves a round of applause. Go on, pat yourself on the back for taking care of future you.

Now comes the fun part — putting your money away for retirement. Taking action now means you won’t be among the sea of people who regret not investing while they were in their 20s.

Even if you’re not confident about what you’re doing now, you will be once you start small and gain some experience.

Who knows — maybe you’ll be the one teaching your friends and family how to invest their money so they can be a rock star like you.