Hello, my awesome reader! In today’s post, I want to discuss how to invest in your 20s – because I’m sure many of us in our 20s (I won’t be anymore in a couple of years, sob) will at least have a thought on how exactly to allocate our money for investment.
It’s definitely a question that I have asked myself a lot of times “Hmm, what should I invest in my 20s NOW so I won’t regret once I turn 30?”
If you’ve been having the same thought but haven’t taken any action yet, well this post is for you mi amiga! 🙂
I got a lot of inspiration on investment from personal finance books that I’ve read. And I will link to those books below if you’d like to get a copy and read them yourself.
I do encourage you to read as many personal finance books as possible when you’re still in your 20s. Not only because you’ll be a lot better at managing your money but it’s also for you not to miss out on the investments that might not be as lucrative if you were to start late.
Honestly, personal finance books, as dry as it might sound, are not particularly boring.
Some authors can actually make it very fun and funny.
There are also some books where instead of reading them, I just listen to them as an audiobook on Audible. And I’ll listen to them during my work commute, back when I still in my corporate job.
If you want to try Audible, you can click here to get a 30-day FREE trial: Try Audible Premium Plus and Get Up to Two Free Audiobooks
And check out my all-time favorite personal finance books here.
Now without further ado, let’s grow our money! 😊
More Related Posts from Me:
– 24 Steps I Did To Stop Being Broke
– Creating Your Own Budgeting Template In 2021 (FREE Template)
– Learn How To Calculate Your Wealth
Why You Should Invest In Your 20s
Before we get into the post, I want to draw up an example of the difference in the returns you will get if you were to invest early vs investing later with a higher amount.
This is so you will have a better idea on why you should invest in your 20s, as early as possible.
|Age 18 – 28||Invest $1,000 every year||Didn’t Invest|
|Age 29 – 65||Didn’t Invest||Invest $1,000 every year|
|Total Return (Assume 10% compounding annually)||$596,128||$363,043|
From the example you can see that Mary, even though she had stopped investing at the age of 29, she still got a higher investment return simply because she had invested early.
This just shows how important it is to start investing today even with small amount. If you want to really understand how I come up with the calculation, comment on this post below and I’ll show you!
Now that we’re all capiche when it comes to why you should invest early, let’s get to where and how to starting investing in your 20s.
1. Setting Up An Emergency Fund
Before we get into the nitty-gritty of investments that you can do, let’s first start with the very basic that everyone should have – an emergency fund.
It’s specifically for emergency and it’s usually being placed in another account so it won’t get mixed with your normal bank amount balance.
I admit that when I first started “having” an emergency fund, I just thought that as long as I have my bank account balance at a certain amount, I’ll be good.
When I know that I still have an X amount in my bank account, I’ll just start spending even though they are not for emergencies. Although at one time I told myself getting La Senza’s underwear on sales is considered an emergency – it’s not.
Don’t be like me, really rule out what consider as an emergency and what’s not. And the best way to avoid spending your emergency fund is to NOT have it in the same bank account as your normal checking or savings account.
Tricks you can do today to build your emergency fund:
a) Start small
Aim for $1,000 first. Once it gets to $1,000, aim for 3 months’ worth of expenses. And once you reach that number, aim for 6 months’ and even up till a year’s worth.
But don’t get too carried away on only building your emergency fund.
If you’ve reached a $1,000, maybe you want to lower down your contribution so you can use the remaining to invest in other places.
b) Set up an automatic payment every month
This is the best and most effective way for me to set up my money aside for an emergency fund. And I’m sure it will be for many of you as well.
It’s much better not to think about moving the money yourself (cause you’ll probably be very hesitant) and just let the system takes care of it for you.
c) Create another high-yield bank account
Since you won’t be touching your emergency fund every time, it’s best for you to let it grow in a high-yield bank account.
My favorite short-term savings or investment account would be a money market account. Simply because the rate is usually higher than a normal savings account.
And if you go with CIT Bank (which I recommend), you will get a fixed APY with MMA instead of a tiered one with a savings account.
You can check out CIT Bank’s Money Market Account and see the comparison with their savings account. Also, it only requires $100 minimum to open a money market account with CIT Bank.
2. Planning Retirement Savings
The reaction that I always get from my friends whenever I talk about retirement plans would be “Ummm, isn’t it too early to talk about retirement, Wina? How about YOLO and travels? Woot woot!”
That was the exact response that I got from one of my friends – not to bash but I’m sure that is the common perception to many of us in our 20s.
I’ve shown you why investing money early is crucial to get better returns even with a small amount so I’m not going to repeat myself again here.
When it comes to investing for your retirement (or investing in general), you need to be mindful of the tax. To me, I always like my contribution to be taxed straight away from my contribution so that the return that I’ll get later in the future will be tax-free.
If you’re in a developed country (US, Canada, Europe – usually Western countries), you will be taxed in many if not all investments that you make.
But if you’re in developing countries, many of the investment vehicles will be tax-free.
Depending on where you are, you always want to keep in mind which investments have a high tax rate and when exactly you’re going to be taxed. For example, REIT is taxed at a higher rate than your stocks or ETF dividends. If you want to know why you can read my post here.
Here is an article on Tax Basics for you to read.
Now that you have a bit more idea of how tax comes about with your investments, it’s time to know how much exactly you will need to allocate for your retirement.
I’ve actually written down a step-by-step in my personal finance guide that you can read here under the retirement section.
It will need you to sit down and really calculate how much you will need for retirement – it’s a bit of an exercise to do but at least you’ll have an idea of just how much you will need to start investing now 😊
Now I’ll discuss the retirement savings that you can do that’s a must for all and other investments that you can do to supplement any shortage that you have or just to get bigger retirement savings overall.
a) Retirement (A Must)
This is the minimum retirement savings that you can do, usually from an employer-sponsored plan. These are usually accounts that will only let you withdraw when you reach certain retirement age at 55, 59 and a half, or even 60.
It’s definitely different for each country and the state of your country whether it’s developed or developing.
If you’re in the US, this will be your 401k. It’s the best way for you to contribute a percentage of your salary to your retirement savings with a tax benefit and get a company’s match. If you want to learn more on everything you need to know on 401k, you can watch the video below:
Once you get the company’s match on 401k, you can additionally open up an IRA (Individual Retirement Account) account.
ROTH or not, it’s up to you but I prefer it to be ROTH.
If you’re not sure what IRA is all about or what’s the difference between ROTH and non-ROTH, you can check out the video below. I think they did a good job explaining how IRA works to normal employees and freelancers like me! 🙂
If you’re lazy (which I can be too) when it comes to setting up your retirement account, I really recommend reading Ramit Sethi’s book: I Will Teach You to Be Rich, Second Edition: No Guilt. No Excuses. No BS. Just a 6-Week Program That Works where he tells you on how to create a lazy portfolio of low cost index funds with Vanguard.
401k and IRA “retirement formula” is not only being used in the US. Each country will have its own government-tax-incentivized retirement accounts, even in developing countries.
So even if you read personal finance books that mainly talk about the financial ecosystem in the US, that doesn’t mean you can’t find what’s being offered in your country.
b) Retirement (Supplement)
Now that you’ve taken care of the must-do retirement accounts, you can branch out to other investments to supplement your retirement savings.
Usually the basic retirement accounts like 401k or IRA are NOT enough for retirement.
Many underestimate on how much they will need in their retirement years. You can read more from below articles:
- Millions of Seniors Can’t Even Afford the Basics in Retirement
- 64% of Americans Aren’t Prepared For Retirement — and 48% Don’t Care
- Here’s how many Americans have nothing saved for retirement
To be honest, even when I did the exercise to figure out how much I’d need for retirement, my retirement savings accounts are not going to cut it.
I still need to invest aggressively to reach my retirement savings goal.
And this is where you and I can continue investing outside of our retirement savings account. I do want to note though, you would want to maximize your contribution to must-do retirement accounts first before starting with this supplement section.
There are different ways you can invest:
– Buy individual company’s stock (per share or fraction of shares): I usually opt for fraction of shares so I can diversify my portfolio further. If you want to get started, you can check out Betterment or Wealthfront. To supplement your knowledge on buying an individual company’s stock, you can read this book: The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)
You can check out the video below to learn more about the difference between Betterment vs Wealthfront. You can start at 3:00.
– Unit trust/ETF: You can invest in unit trusts via robo-advisors or through a unit trust agent. You will pay a higher fee with a unit trust agent, of course. I personally invest in equity funds both domestic and international. Depending on your risk appetite, you might have different asset allocations than I.
In 2021, I invest primarily in consumer-products, health and technology companies.
– REIT: You can invest in REIT aka Real Estate Investment Trust if you want to get into real estate but don’t really want to spend a large capital. You can read more on my post here on how to invest in real estate with very little money.
I still have money invested in REIT, though at this moment not as much as I’ve been allocating to my unit trusts. Even though the market is still showing a positive sign with real estate, I just don’t want to take the extra risk by putting too much emphasis on it for now, because well, covid..
– Bonds: I personally haven’t invested in bonds yet because I’m still a pretty high-risk taker and bonds are usually for people with a lower risk appetite. But when I put my money in the money market account, it’s being invested in short-term bonds anyway!
You can look into bonds if you have low-risk tolerance, but usually, people will start buying bonds when they are nearing the retirement age.
3. Getting A Life Insurance Policy
When I was looking at other resources on how to invest in your 20s, I realize that many don’t actually talk about getting a life insurance policy.
I think life insurance is something that you need to do along with setting up your emergency fund. It’s protecting you far better than an emergency fund can.
Life insurance policy, other than making sure you’re protected if something bad were to happen to you (touchwood!), it can also give you another savings account that you (or your dependants) can use.
This won’t be given to you if you take a term-life plan by the way. If you want to know more about this, you can read my personal finance guide here where I touch on the different life insurance policies that you can take.
Another thing is that with life insurance company, you can also get an annuity – a periodic payment after certain time, maybe after you retire from your job or if something were happen to you (again, touchwood!).
I personally haven’t purchased any annuities yet because it’s just not aligned with my financial goals at the moment. If you want to learn more about the pros and cons of annuities, you can go here.
4. Learning Short Term Investments
This is not something that you have to do but if you want to take a step further with your money in your 20s, you can try learning trading skills.
To me, it’s good to equip yourself with this knowledge because most if not all wealthy people I’ve come across in my life know how to trade.
And even though the skill can be a bit hard to pick up and learn, I know it’s not impossible and it will be much easier for me to pick up when I’m still very young.
This can be trading for stocks, ETF, gold, forex or even crypto.
I’m still very much in the learning phase on trading and currently more focused on forex since it’s the largest liquid market in the world. And I just find that it’s much easier to grasp.
But I do have some money parked in Bitcoin – money that I’m okay to lose!
I want to also make a disclaimer that you don’t need to master trading to become rich. It’s not a must but it’s something that I’m currently doing 😊
5. Investing in Properties
If you have the means and the capital, you can go for this.
Also, buying a property for your own stay to me is not considered as investing, even though the value of the house can grow over time. If that’s something you want to do, you can read my post here whether it makes sense for you to buy a house now.
I just prefer to buy a property to rent out so that I can get better return, fast.
I bought a property when I was 25 years old and now has rented out that house. Currently, I’m getting a positive cash flow from the unit and my plan is to hold that unit for as long as possible as the location is still developing.
If you want to know how I did it, you can read more on my how to buy a house in your 20s post!
Here is a set of questions to ask when you’re buying a house – if you really want to buy a property for investment.
6. Getting Rid of Bad Debt
To me, there’s a distinction between good debt and bad debt.
I know a lot of bloggers and a lot of other financial gurus like Dave Ramsey have been advocating in getting rid of debt fast but I just can’t totally agree with them.
If you have a credit card debt, yes, get rid of them as soon as possible. You can check out my post here on how to get rid of your credit card in 18 simple ways.
But if you’re buying a house for investment (like how I did it), it’s not necessarily a bad debt. I let my rental income pay for my mortgage.
If it’s for your college education, I don’t take that as a bad debt because you’re investing in yourself and for your future.
Have a balanced mindset on debt. The rich and wealthy people actually don’t detest debt. They leverage on debt. So learn how to take advantage of loans when they give an advantage to you.
That being said, you don’t want to accumulate too much debt that it’s eating more than 40% of your take-home pay. Because then, you won’t have enough room to pay for other things.
Invest the time to learn about debt and invest the time finding ways to get rid of bad debt.
7. Creating A Will
You might think that this is too early for you to think of, but trust me it’s never too early.
Especially when you’ve started building wealth, you need to figure out to whom you want to give your wealth to.
If you have a family and children, please take this seriously. You want to make sure your family is protected.
If you don’t have any children yet, make sure you’ve assigned a beneficiary to all of the investment accounts you have.
To me, since I’m still single, I actually put my sister as the beneficiary to all my money because I trust her to use that money wisely either for the family or to give to charity.
I have the feeling she will give it to charities so I can still have some good deeds even after I die.
8. Investing In Your Personal Growth
I know it’s pretty cliché but don’t forget to invest in your personal growth.
Learn to invest your money on things that will make you grow like reading more books, signing up for online courses, and joining entrepreneurial seminars.
This can be in terms of wanting to make more money by maybe getting a higher paying job or doing a side hustle like me blogging here, or maybe learning a new language.
Don’t stop growing and don’t stop being curious.
Here are some of the things that I’ve invested for my own personal growth:
- Kindle – Kindle Paperwhite – Now Waterproof with 2x the Storage – Ad-Supported (the best investment ever. Zero waste & helps me keep my room tidier)
- Non-fiction books from Kindle Unlimited Membership Plans (history, personal finance, productivity)
- An ergonomic chair for work – NOBLEWELL Ergonomic Office Chair High Back Mesh Computer Chair with Lumbar Support Adjustable Armrest, Backrest and Headrest,BIFMA Certified (my back thanks me every day)
- Big whiteboard – DexBoard 48 x 36 Inch Large Magnetic Dry Erase Board with Pen Tray| Wall-Mounted Aluminum Portable Message Presentation White Board for Kids, Students & Teachers(helps me a lot with my work!)
- Online courses (many on blogging courses cause I have 3 different blogs!)
- Career coach (I was able to quit my 9-5 and become more confident to freelance)
- Good mattress (it’s life-changing, trust me)
- A good yoga mat – Alo Yoga Mat 10% OFF (it makes me want to show up for yoga every single day)
- Lotioning my body every day (it’s an act but it takes time, thus it’s a time investment)
Don’t Be Afraid To Make Mistakes
20s is the perfect time to learn something new and make mistakes.
But try not to get into those get-rich-quick schemes.
Don’t box yourself on what you think you need to become just yet. Experiment with yourself and your money.
You’ll probably waste or lose money here and there (I’ve been there too!) but as long as you are aware of your own patterns, it’s much easier to fix!
So these are how I invest in my 20s, how about you?
If you find this post helpful, don’t forget to share it with others too! 😊