When you’re in your twenties, you don’t want to think about retirement. After all, thinking about retirement means thinking about your own mortality, and that’s a major bummer.
Yet if you spend every penny you have on going out to eat, settling bar tabs, and getting festival passes to Coachella before they announce the lineup, you’re going to have a bad time in the future. You don’t want to work forever, and you want something to sustain your future self’s lifestyle, but those resources don’t just magically appear.
Take it from me. Up until a few years ago, I was reckless with my income and didn’t have a clue about how I could possibly retire when I was older. To be honest, the thought never crossed my mind. Now at 29, I’m contributing money to a work retirement fund, making long-term investments on the stock market, and watching my spending. Just by starting late, however, I set my retirement back quite a bit.
That’s why I put together these simple tips on how to invest when you’re in your twenties. When you start investing early, you’ll save more money for the future, and who doesn’t like that idea?
Pay off your debts first.
Don’t invest until your personal debts are settled. This includes credit card debt, medical debt, and anything that accumulates interest the longer you don’t pay it. If you pay your debts now, you’ll be on the hook for less later.
Student loans, however, are different. If you can settle your other debts, afford the monthly payment on your student loans, and fork over a little extra, then you can also consider investing. The less debt you have, the less likely you will be to sell any investments to pay them off.
Don’t keep all your money in a savings account.
Fun fact: you can sell most stocks and exchange-traded funds whenever the market is open. That’s not all that great, though, since you want to keep them until you retire or need them later in life. Plus, you’ll have to pay taxes on any gains you make (which you also have to do on interest earned in a savings account).
Yet putting money into things like index funds can earn you significantly more than you’d ever make in your savings account. We’re talking tens and hundreds of dollars more, and a lot more than that over time.
Don’t spend everything you earn.
You might want to spend as much as you can before you “settle down” and your ability to do so is limited by children and a mortgage, but consider each purchase before you make them. A few years ago, I bought a new iPhone, a 4K TV, and a Marshall amplifier for a whopping $3,000. These were wants, not needs, and though I could technically afford to pay rent, bills, and the rest, I ended the year with nothing added to my savings or investments.
That $3,000 I spent would have been handy in an emergency. Plus, if I invested that money in popular index funds instead, I would have made approximately $240. Marshall half-stacks are nice and all, but I can’t pay for retirement with a tube amp.
Don’t buy bonds.
Bonds come with little to no risk, but with little risk comes with little reward. If you’re in your twenties, you can afford more risk than, say, someone nearing retirement age. With higher risk comes higher reward, and investing in the stock market (like the aforementioned index funds) can often yield higher returns than anything you’d get with a bond. You can buy bonds when you’re older.
Avoid penny stocks like the plague.
If a friend gives you a hot tip on a stock trading on the over-the-counter market, smile and nod…and don’t take their advice. Penny stocks on the OTC market are subjected to less oversight and regulation, which means they’re highly susceptible to fraud. If you want to lose money, this might be the best way to do it.
Put as much as you can in your 401k.
Do you have a 401k retirement plan through work? If so, you should have your HR rep set aside a percentage of each paycheck for that plan. The cool thing about 401ks is that all contributions you make are pre-tax, or before all the federal, state, and social security taxes are taken out. This means you get to keep a bit more and invest it for the future.
Get a Roth IRA.
If you don’t have a 401k, get a Roth IRA. Unlike a traditional IRA, Roth IRAs tax your contributions now rather than when you withdraw them. When you retire and want to withdraw from that Roth IRA, you don’t have to pay taxes on those withdrawals. After all, it’s better to pay taxes now then when you’re on a fixed income.
If you want to invest and you go to pretty much every brokerage, they’ll charge you a fee on top of your investment. So if you’re investing $500 in a stock, you’ll have to pay $500 plus whatever fees and commissions the brokerage asks for. Robinhood, however, charges no such fees or commissions. They don’t even have an account minimum, which is something many brokerages and investment firms have. They’re as safe and effective as any online broker, but cut out all the fees, which is why I can’t recommend them enough.
Put money into index funds.
If you want to buy stocks outside of your retirement funds, this is where to start. You might not want to invest in a mutual fund due to the usual 1% fee they incur and the minimum amount required to join them. That’s why ETFs are your friend. Index funds like $QQQ and $SPY own all the stocks on the Nasdaq and S&P 500, respectively, which means you basically own small portions of numerous companies for a small(ish) cost per share.
The bulk of my portfolio consists of simple index funds that follow different exchanges. So if the Nasdaq or S&P go up, my portfolio goes up, and vice versa. Historically, the stock market has gone up, and the most popular index funds have made pretty decent gains since the beginning of the year (7% or higher). You won’t see Apple-like increases on your investment here, but it’s a bit safer.
If you pay off your debts, contribute to retirement funds, buy on the index, and avoid making bad decisions with your money in your twenties, you’ll be on your way to building a nice nest egg for your retirement. Sure, you don’t want to even think about retirement now, but with these tips, you pretty much don’t have to. Just invest when you can and let your money get better with age.
Share this with your friends below, and maybe think again about buying stuff on Black Friday.