What is the best way to start investing for a 20-something?
How to get started investing if you’re in your 20s
If you are in your 20’s and just getting started with investing, you should feel pretty good about yourself because if you stay disciplined (read: wait 30 to 40 years) you will likely make a lot money. One thing to consider if you are a younger investor is that focusing on retirement savings instead of prioritizing other financial decisions like buying a house, paying off debt, etc. can hurt your ability to reach your goals over the long term.
Questions you should ask yourself if you are a 20-something looking to start investing:
1. How much debt do I have?
Carrying debt will kill your future investment returns and financial plans because it reduces your returns by sucking out financial resources. The money you are paying to debt today, if invested would compound into a lot of savings later on. You should always start by paying off your debt – especially credit cards, student loans, auto loans and personal loans. You don’t need to pay off all your debt before you can start investing but you should at least have a good plan for how you are going to be debt free in the very near future.
2. How much money do I need to have saved for emergencies?
Most financial advisors reccomend having at least 3-6 months worth of living expenses saved in an easily accesable, liquid savings vehicle like a checking or savings account.
Click here to learn how to get started builing your emergency fund.
Yout can’t start saving for the long-term if you dont have a plan for what to do in the short term because when an emergency comes up, you will go straight to credit cards to pad those expenses instead of cash that you should have in the bank. And this will be a major hurdle in your long term savings goals because it’s tough to get traction or make headway when you have debt.
3. So, what are my investment options?
If you have a 401(k) at work that comes with a match, then this is likely to be your best route to start. 401(k)s are great because they have higher contribution limits than an IRAs. If you don’t have the option of doing a 401(k) at work, then you should look into a Roth IRA. What is great about Roth IRAs is that you can invest up to $5,500 a year into your Roth IRA (with after-tax money) and the money will grow tax-free. And the distributions you take when you retire will be tax-free as well.
Remember that all of these retirement vehicles are long-term savings vehicles, and can cost you unexpected taxes and sometimes penalties if you take your money out too soon.
