Yahoo Finance How to Invest in Your Early 20s
Your 20s are a pivotal time. There's no longer any question that you're an adult. You even clean your own bathroom -- or exercise your right not to -- to prove it. As an adult, the decisions you face are a lot bigger than those of a teen, especially where money is concerned.
Financial decisions for teenagers revolve around how to spend their money: To buy the shoes or not to buy the shoes, that is the only question. As a 20-something, the questions you face are far more complex, like how to invest in your early 20s.
Your 20s are the the best age to begin investing because you have so much time on your side, says Shannah Compton Game, an Los Angeles-based certified financial planner and host of the "Millennial Money Podcast." "You can really build a massive nest egg for yourself," and you don't have to be an expert to do it.
All you need is answers to the right questions. .
Where should I invest? The first question to investing in your 20s is where to invest. If your employer offers a retirement plan with matching funds, start there, says Rich Ramassini, senior vice president at PNC Investments. Always contribute at least enough to get the full match, because that's free money.
If you don't have access to an employer-sponsored plan, Roth IRAs are a great alternative, says Jeanne Fisher, a certified financial planner and senior financial advisor at ARGI Investments in Bowling Green, Kentucky. Unlike a traditional retirement account, Roth contributions are taxed first but withdrawals in retirement aren't, so gains come tax-free.
If you're saving for nearer-term goals, consider a non-retirement brokerage account, Fisher says. These don't provide the tax advantages of retirement accounts but also won't penalize you for taking your money out before retirement.
If you have the resources, do all of the above: contribute to your employer plan up to the company match, then a Roth IRA and non-retirement account.
[See: 7 Investing Lessons Dad Forgot to Teach You.]
Where should I open an investment account? If you're investing outside of your employer plan, you'll need to open a brokerage account to buy investments. The best place to open it depends on the kind of service you're looking for and the fees, Game says.
Big financial services firms like Vanguard, Fidelity and Schwab offer the widest investment selection. Many allow you to open an account for little or no cost but often come with minimum balance requirements. You usually have a few months to reach those minimums.
Robo advisors like Betterment, Wealthfront or Ellevest provide fewer investment options but "more millennial-friendly servicing," Game says. They'll hold your hand through the investment selection process and give curated portfolio recommendations.
Or apps like Acorns, Stash and GoldBean "can be a great entry point to investing [outside of] a 401(k)," Game says. With low or no minimum balances, you can start as small as you like.
Wherever you invest, pay attention to the fees and how they're charged. A $5 monthly fee may sound small, but if your account is only $10, that's a 50 percent charge.
[See: 8 Great Investing Apps and Sites for Millennials.]
How much should I invest? The answer to how much to invest is easy: As much as you can. Take your income, deduct your necessary expenses and invest as much of what remains as possible.
Your savings should dictate how much you spend, not the other way around, Ramassini says. To make this easier, automate your contributions. If you force yourself to decide how much to invest every month, you're more likely not to invest at all, he says. Ideally, you'll increase your contributions each year, too.
What should I invest in? The best investment for you comes down to how much risk you're willing to take, Game says.
In investing, risk and return go hand in hand. Take more risk and you should be rewarded with higher long-term returns. But you may also be pummeled with short-term swings in account value. Hence why you become more conservative as you near retirement to protect your portfolio from short-term losses. Younger investors can usually afford more risk because they have time to weather market ups-and-downs.
There are countless online questionnaires to help you determine your risk tolerance. Most robo advisors require you to complete one before you start investing. A quick Google search will turn up dozens of others.
You manage your risk through the ratio of stock to bond investments in your portfolio, Fisher says. A higher allocation to stocks creates a riskier portfolio.
"Most younger investors are around a 90-to-10 stock-to-bond mix," Game says.
Exchange-traded funds are popular among millennials because they're inexpensive and easy to buy. ETFs are baskets of investments packaged together in bite-sized pieces. Think of a share of an ETF as a slice of a pie: Every slice has the same mix as the whole pie. Because ETFs can hold hundreds of different investments, they make diversification easy.
You don't need a lot of funds, Game says. Typically three will do: a U.S. stock fund like Vanguard's Total Stock Market ETF (ticker: VTI), an international or emerging market stock fund like iShares Core MSCI Total International Stock ETF ( IXUS) and a bond fund like Vanguard's Total Bond Market ETF ( BND).
If you don't feel confident building your own portfolio, target-date funds are a good alternative, Fisher says. You choose the fund aligned with the year you plan to use the money, such as your anticipated retirement date. The portfolio manager then adjusts the fund's allocation to become more conservative as you near that date.
How to make investing easier. Researching investments doesn't have to be complicated. Don't drive yourself crazy studying all the metrics, Game says. A fund's investment objective, past performance and expense ratio are enough to give yourself an idea of what it's all about, all of which are available on U.S. News & World Report's fund overview pages.
For smaller investors, the expense ratio is key. It's the percentage of your money that goes to fees rather than generating returns. "Obviously you want it as close to zero as humanly possible so you're actually getting the gains in those particular funds," Game says.
[See: The Top 10 Investment Portfolio for Millennials.]
Once you set up your portfolio, check-in once or twice a year to make sure it's still allocated appropriately. Sell any funds that have outgrown their intended size and use the proceeds to buy the funds that shrunk to bring everything back in line. And that, dear readers, is how to invest in your early 20s.
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