When you’re in your 20s and 30s, investing may not be exactly top of mind. And while you have tons to juggle – such as paying off student loans, saving for a down payment on your first home or growing a family – it’s also essential to prioritize saving money for the long-term. After all, while you can take a loan out to hit many of the other major life milestones, the one thing you can’t borrow for is your retirement.
Here are some tips on investing in your 20s and 30s:
Create a Game Plan
Whether it’s doing research on the different kinds of existing investment tools and resources or automating your investments so you’re making steady contributions, keep yourself in check with a specific, actionable plan. Not sure where to start? Try working backward by visualizing where you want to be in five, 10 and 20 years. Create both short- and long-term goals from that vision, then parse them down into bite-size steps. Remember: It doesn’t have to be perfect. You can always tweak your plan later.
Develop Solid Financial Habits
Because it’s a prime time for you to lay the groundwork for a solid financial foundation, develop solid money habits now. Create a budget and stick to it, save your beans, and start investing, even if it’s a small amount. “If we want to establish good lifelong habits, this is the time to do it – which is why one thing young people should focus on is developing the habit of saving and investing, however modestly,” says Jason Kirsch, Certified Financial PlannerTM and author of “The Millennial Advantage: How Millennials Can (and Must) Be the Next Great Generation of Investors.”
Save as Much as You Can
You can think of a comfortable retirement as something that used to rest on a three-legged stool, says Kirsch. This three-legged stool is made of the safety net provided by Social Security and Medicare, your employer’s pension plan and your own savings. But as pension plans are vanishing, that stool is now a bit wobbly. “Fortifying that stool, and stabilizing your future, is your responsibility,” says Kirsch. By saving as much as you can now, you’ll ensure you have enough to comfortably retire on.
Also, by starting now, you’ll tap into the power of compound interest. When you’re young, time is on your side. Money you invest at a younger age will grow so much more than if you save that same amount later. For instance, if you sock away $2,000 when you’re 25, at a 7% average return rate, then when you hit 65, your money will have grown to $29,948.92. But if you wait until you’re 35 to save that $2,000, you’ll only have $15,224.51 at 65. Yes, that’s nearly half, so take full advantage by saving as much as you can now.
Invest in Your Employer’s 401(k) Plan
If your employer offers a 401(k) plan, your contributions will be pre-tax, which means you’re socking away money before taxes. “Your employer’s 401(k) is the best place to start investing, especially if they offer a match,” says Noa Rodriguez-Hoffman, Certified Financial PlannerTM and founder of Socialyte Capital.
However, if your employer doesn’t offer a 401(k) plan, Rodriguez-Hoffman recommends opening a Roth IRA. Contributions made to your Roth IRA are pre-taxed, which means you pay the tax on your contributions and won’t have to pay taxes when you start to make withdrawals. If you’re under 50, you can contribute up to $5,500 a year to your Roth IRA, and the limit rises to $6,500 annually if you’re 50 or older. Another option is to invest in a traditional IRA. While the contribution limits are the same as Roth IRAs, traditional IRAs are tax-deferred accounts, which means you owe the taxes on them when you start to take money out.
Pay Off High-Interest Debt First
Rodriguez-Hoffman suggests that before you start to seriously invest, you should ideally pay off any debts that have anything higher than a 7% interest rate. This includes everything from high-interest credit cards to student loans. That’s because if the average rate of return on your investments is 7% over time, your high-interest debt will eat up any returns you’ve made on your investments. To help maximize your earnings, tackle that high-interest debt first.
Be Comfortable with Risk
Because time is on your side, you can ride out the inevitable ups and downs of the stock market. Asset allocation – or your mix of investments, which includes bonds, stocks and cash – is a time-tested investment strategy designed to protect you against risk. Your asset allocation depends on things such as your timeline and comfort with risk.
If you’re younger and can bear more risk, your mix of investments can have more stocks and fewer bonds. As you get closer to your target retirement date, you can shift your asset allocation to fewer of the riskier investments and more of the lower-risk ones.
Consider ETFs and Mutual Funds
For those who are getting their feet wet with investing in the stock market, Rodriguez-Hoffman suggests using low-cost, broadly diversified index mutual funds and ETFs. “This strategy enables an investor to get the returns of the market without the extra expenses associated with active management,” Rodriguez-Hoffman explains. “Since the funds and ETFs spread their investing dollars across a diverse number of options, it also exposes the investor to less volatility.”
By getting a jump on investing in your 20s and 30s, you’ll be taking advantage of the fact that there’s a lot of time for your investments to grow. You’ll be laying the foundation and developing the solid financial habits that are likely to ensure you have enough to retire on. If you have specific questions, reach out to a trusted financial professional.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.