How to Invest in Your 20s (And Why It’s a Smart Time to Start)

It’s never too early to learn how to invest — your 20s is the perfect time to start investing.

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Updated May 13, 2024
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With the stock market booming and Reddit driving new ideas for investing, it’s no surprise that many people are wondering how to start investing. For young investors, though, the idea of investing could feel intimidating.

The good news is that learning how to invest in your 20s doesn’t have to be challenging. You don’t need a lot of money, and there are choices for investing that are simple and straightforward. Let’s take a look at some of the knowledge and tools you can use to learn how to invest money in your 20s.

In this article

Why it makes sense to start investing early

The earlier you start investing money, the better off your portfolio is likely to be. When you have a longer time horizon to grow your wealth, you might not need to invest as much money to meet your goals as you would need to if you start later in life.

For example, let’s say your goal is to be a millionaire by age 65. Assuming an 8% annualized rate of return, you would need to invest $350 per month if you start at age 25. However, if you waited until you reach age 35 to start investing, you’d need to set aside $750 per month to reach that millionaire status.

While all investments come with the risk of loss and past performance isn’t a guarantee of future success, generally speaking, the earlier you start investing, the longer compound interest has to work on your behalf. When investing for long-term goals, the stock market could be one of the most effective ways to build wealth over time.

While a savings account can be a good place to park your money short term, you won’t see the returns that you might see when you invest. And a savings account alone might not help you reach your long-term goals, like retirement, in a timely manner. The average APY on a traditional savings account is just 0.04% (as of March 9, 2021), so the potential growth simply isn’t there.

Finally, even though there’s always the risk of loss when you invest, the stock market as a whole has yet to see negative returns in any given 20-year period. As a result, even though you might see losses year-to-year, it could be unlikely that you’ll see permanent long-term losses that will damage your overall financial goals.

How to invest in your 20s

Once you know how beneficial it can be to start investing in your 20s, the next step is to actually begin moving forward. Whether you have $500 to invest or just a few bucks to start, here are some of the easiest ways to start investing.

Employer-sponsored retirement savings plan

If you work for a company that offers a retirement plan, this can be one of the easiest ways to get started with investing. Private companies often offer 401(k)s and there are similar employer-sponsored plans available for nonprofits.

With a 401(k), you usually make pre-tax contributions straight from your paycheck. You can contribute up to $22,500 if you're younger than 50 or up to $30,000 if you're 50 or older in 2023. The limits in 2024 are $23,000 or up to $30,500 if you’re 50 or older. You contribute regularly to the retirement account with money that you haven’t paid taxes on, and it’s usually the same amount each pay period. Contributions are tax-deferred. Later, when you withdraw money from your account, you’ll be expected to pay taxes.

Depending on your employer, you may also get the benefit of matching contributions, where your employer matches your own 401(k) contributions up to a certain percentage. According to Fidelity, the average employer contribution match was 4.7% in 2019. An employer match is essentially like free money, so it's typically worth it to contribute enough to get the full percentage match from your employer.

For example, let’s say you have a starting salary of $45,000 and contribute 4.7% of your paycheck to a 401(k). At the end of your first year of employment, your contribution would total $2,115. If your employer matches your contribution at a 4.7% rate, that amount would double to $4,230. Taking advantage of this match can make it easier to grow your retirement nest egg from an early age.

It’s also worth noting that some employers offer a Roth option on your 401(k), allowing you to use after-tax dollars to make your contributions. With a Roth 401(k), your money may grow tax-free until you withdraw it from your account in retirement. You won’t have to pay taxes when you receive your distributions, assuming your account has been open for at least five years and you’re over age 59 ½. However, any matching contributions your employer makes will go into a traditional 401(k) account.

Finally, make sure you understand some of the rules surrounding the 401(k). If you try to withdraw money from your 401(k) before you reach 59 ½, you might be subject to a 10% early withdrawal penalty on top of the taxes you owe. There are some exceptions to this rule, but in general, it’s a good idea to plan on not accessing your money until you reach that age. Do be aware that when you reach age 72, you’ll be required to take distributions, whether you need them or not.

Roth retirement savings account

Another potential choice for investing money in your 20s is to use a Roth individual retirement account (IRA). A Roth IRA has a much lower contribution limit than a 401(k). The limit in 2023 is $6,500 if you're under 50 or $7,500 if you're 50 or older. In 2024, the limit is $7,000 if you're under 50 or $8,000 if you're 50 or older. With a Roth IRA, you make after-tax contributions, so your money can potentially grow tax-free and you won’t have to pay taxes when you withdraw later.

One of the benefits of a Roth IRA is that you can withdraw your contributions at any time without penalty. If you dip into your earnings before age 59 ½, you’ll be subject to a penalty (with some exceptions), but as long as you stick to your contributions, that money is available to you — although once it’s out of your account you miss the time in the market. With a Roth IRA, there is no required minimum distribution at age 72, either.

While in your 20s, you might have a lower tax bill today, so funding your account with after-tax dollars can make sense. You might be in a low tax bracket (or even pay no income tax) with your first job, so opening a Roth IRA can be a good option. Later, as you earn more and a tax break for contributions becomes more attractive, you might consider shifting more of your retirement contributions to a Traditional IRA or increasing your 401(k) contribution.

Note that you can usually contribute to both a Roth IRA and a 401(k). If your company offers a match, it might make sense to consider getting the maximum match and then putting additional contributions into a Roth IRA, depending on your situation and potential tax treatment.

Online broker or robo-advisor

You don’t have to use a tax-advantaged retirement account when you’re ready to learn how to invest in your 20s, although that can be an efficient way to grow your wealth over time. You can also open a taxable investment account with one of the best online brokers or robo-advisors. (Note: Many online brokers and robo-advisors can also help you with an IRA.)

A robo-advisor like Betterment, Wealthfront, or Acorns can be a good choice if you’re interested in a set-it-and-forget-it approach. These tools are often relatively low-cost and can help create a portfolio for you based on your risk tolerance and investment strategy. Many also rebalance your portfolio over time so it stays aligned with your ideal asset allocations. Often, you can set short-term and long-term goals for your money, and your portfolio will be managed accordingly. Robo-advisors can be great for beginners who want to start investing and earn compounding returns, but aren’t quite ready to pick their own stocks.

If you’re more interested in individual stocks and managing your own account, you can use online brokers like Robinhood, Stash, or M1 Finance. No matter which broker you use, it’s important to note that you generally pay taxes when you sell your investments. So if you sell, withdraw the money, and end up with a gain, you’ll pay taxes on that amount. If you’ve held the investment for a year or less, you end up paying taxes at your regular rate. However, if you hold the investment for more than a year, you can take advantage of paying a lower capital gains tax rate.

Carefully consider the tax implications of your investment moves before making a decision. A tax professional or financial advisor may be able to help if you have questions.

7 types of investments and how they work

As you get started with investing money in your 20s, there are common types of investments you’re likely to run into. An investment is an asset that has the potential to gain in value or provide income. Assets are often divided into different classes or investment vehicle types. Here are some common investments.

1. Stocks

A stock is a share of ownership in a company. When you own a stock, you own a piece of the company. If the stock price increases, you benefit from that. If the company pays a dividend, you get a portion of those profits based on the number of shares you own.

Stocks are fairly easy to buy and sell on an exchange. All you need is a brokerage account and you can usually start buying and selling stocks. It’s worth noting that brokerage accounts may come with certain fees, so that’s worth researching if you’re interested in going this route.

It’s also possible to buy portions of stocks. When you buy a portion of a stock instead of the whole stock, it’s called buying a fractional share. Buying fractional shares can be one way to build an investment portfolio when you don’t have a lot of money.

2. Bonds

With a bond, you’re essentially making a loan to an organization. You purchase the bond and you’re paid regular interest. At the end of the bond’s term, when it matures, you get the face value of the bond.

You have the option to buy corporate bonds or government bonds. Many traditional brokers can help you buy corporate bonds. If you want to buy U.S. government bonds, is the place to go. Finally, there are municipal bonds offered by state and local governments to fund their projects. Municipal bonds often come with tax advantages. While you pay federal taxes at your regular income rate on the interest received from corporate and Treasury bonds, the federal government doesn’t tax the interest on municipal bonds.

3. Mutual funds

If you’re concerned about picking individual stocks or bonds, it can make sense to buy shares of mutual funds instead. A mutual fund is a collection of assets that share certain characteristics. When you buy a share of a mutual fund, you own a piece of everything included. So, if you buy a share of a mutual fund that focuses on 200 growth stocks, you own a piece of each of the 200 stocks in the fund, but you only have to make one purchase.

Mutual funds can include bonds as well. It’s possible to get an inflation-protected bond mutual fund that includes certain U.S. Treasuries with different maturities, as well as other bonds.

Investing in a mutual fund can be a good option if you’re interested in diversification, which spreads your investments out across several assets. In fact, some people create investment portfolios made entirely of mutual funds, with a percentage in stock mutual funds and a percentage in bond mutual funds. Mutual funds may help spread out the risk, so you aren’t relying too heavily on a single stock.

4. Index funds

Index funds are actually a type of mutual fund. Rather than investments sharing certain characteristics chosen by a manager, the assets within an index fund are chosen because their value tracks a specific index. For example, if you invest in a mutual fund that includes companies listed on the S&P 500 index, you own a piece of every company or a sample of companies on the index. There are also bond index funds.

Whenever you invest in a fund, whether it’s a “regular” managed mutual fund or an index fund, you’ll pay what’s called an expense ratio. This is expressed as an annual percentage of the value of the amount of money you have in the fund. In general, index funds have lower expense ratios and other fees than you might see with mutual funds.

No matter what type of fund you get, though, it can make sense to compare expense ratios and fees since these are costs that eat into your real returns. Typical annual expense ratios for actively-managed mutual funds can range from about 0.50% to 1.00% of assets under management. Average annual expense ratios may be lower, around 0.20%, for passively-managed funds.

5. Exchange-traded funds

Exchange-traded funds (ETFs) are a little different. You don’t actually own what’s in the ETF, like you would with a mutual (or index) fund. Instead, ETFs are created as a way to provide a certain exposure to a collection of investments, but you own the ETF, not the underlying assets.

Because of this distinction, an ETF trades on the market like a regular stock. Mutual (and index) fund transactions can only be completed once a day, and everything owned in the fund has to be settled at that time. An ETF, though, can be traded any time of day, and you can make a market order, just as you would with a stock.

ETFs are sort of hybrids because you get the diversity that comes with a mutual fund, but the ease of trading that comes with a stock. There are also index ETFs, just as there are index mutual funds. ETFs have expense ratios just as mutual funds do, and if the broker you’re using charges a transaction fee on trades, you have to pay that as well, just as you would with a stock transaction.

6. Real estate investment trusts

If you’re hoping for real estate exposure but don’t have the capital to buy property, a real estate investment trust (REIT) could potentially be an option for you. REITs hold various properties and pay dividends to their shareholders. These are also exchange-traded assets, so you can usually find a ticker symbol and buy a REIT through a brokerage.

Alternatively, some real estate crowdfunding platforms like Fundrise offer their own REITs and allow you to start investing with as little as $10.

7. Alternative assets

Alternative assets are investments that are considered a little beyond the normal risk. They also might be harder to buy and sell, or might have a lower amount of liquidity. In some cases, they might also be relatively new assets. Some examples of alternative investments include:

  • Commodities
  • Precious metals
  • Cryptocurrency
  • Collectibles
  • Art
  • Tax liens
  • Private funds
  • Master limited partnerships

All of these can be interesting additions to your portfolio, but it’s important to be careful and evaluate your risk tolerance before investing in alternative assets. A general rule of thumb is to avoid putting more than 10% of your portfolio in alternative assets. For example, about 5% of my portfolio is in cryptocurrencies. While they’ve provided growth, I’m not comfortable putting too much there, in case there are big losses later.

FAQs about investing in your 20s

What's the best way to start investing in your 20s?

The best investment strategy is the one that works best for you. One of the easiest ways to start investing in your 20s is to contribute to an employer-sponsored retirement plan, since the money comes out of your paycheck regularly and can offer tax benefits. However, you also have other options if you’re interested in investing elsewhere.

How can you start investing with little money?

Consider using the simple strategy of dollar-cost averaging to get started. Dollar-cost averaging involves putting a set amount of money into a certain asset regularly, with the goal of reducing the effects of market volatility on your investment. Decide how much you can invest each week or month and be consistent. Even if it’s only $5 per week, you can get started investing with various apps like Acorns and Stash and begin buying fractional shares to build a portfolio.

How much should a 25-year-old have saved for retirement?

What you save will depend upon your income, debt level, and other factors. Rather than focusing on an amount in your portfolio, consider trying to set aside between 10% and 15% of your income for retirement.

The bottom line

Learning how to invest in your 20s can potentially help you set yourself up for long-term financial success. You don’t need a lot of money to get started, so it makes sense to begin as soon as possible to take advantage of compounding returns.

There are plenty of places to get started. If you want to open an account and start investing, check out our list of best brokerage accounts.


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Author Details

Miranda Marquit

Miranda Marquit has covered personal finance for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.