Smart Investment Decisions to
Make in Your 20’s
I often find that most of my friends don’t know what to do with the discretionary income that they’re earning in their 20’s. They’ll stash it in a savings account or vaguely “save for retirement”, which is something we’re all told to do, but never really taught how. I strongly believe personal finance should be a subject taught in high school, but that’s a blog topic for another day.
Investing in your 20’s (or as early as you can start) will help you protect your hard-earned cash from decreasing in value due to inflation, and will also set you up for financial success long-term. You’ll also be saving money on taxes by utilizing certain retirement accounts! Here are some smart investment decisions that you should consider making as soonas possible:
Contribute to a Roth IRA
With a Roth IRA, you contribute after-tax money to your account, invest the money within that account in a broad-based index fund, and all the distributions from that account will be tax-free once you hit retirement age (currently 59.5). This means that you won’t have to pay any tax on all the gains that accumulate in your account! As of 2020, you can contribute up to $6,000 per year to a Roth IRA. Contributing as little as $100/month can really make a dent in your retirement savings goals!
Check out thisBankrate calculatorto see how much you can save by using a Roth IRA!
Purchase shares in a broad-based index fund or ETF
The key to smart investing is to have a diversified portfolio; in other words, don’t put all your eggs in one basket. You want to own stock in many different companies, industries, and regions. That way, if one company or industry is not performing well, your entire portfolio doesn’t have to suffer. The easiest way to do this is to invest in an index fund or ETF. Take iShares S&P 500 Index (IVV) for example. This fund invests in 500 of the largest cap U.S. stocks and has a .03% expense ratio (expense ratio is the fee you pay to iShares for managing the fund). This means that when investing in this fund, you are investing in each of those 500 companies. This offers diversification with little to no effort for you. Just sit back and watch your money grow with the market!
To invest in an index fund or ETF, you need to have a brokerage account. I use RobinHood because of their $0 trade commissions and their sleek user interface.Use this referral link to get 1 free stock added to your account once you deposit $10!
Contribute to your company’s 401(k)
If you work for a company that offers a 401(k) with company match, this should be a no-brainer. By offering a 401(k) match, your company is basically offering you free money to incentivize you to save for your retirement. So say your company offers a 50% 401(k) match, up to 6% of your paycheck. This means that if you contribute 6% of your paycheck to your 401(k), your company will also contribute 50% of that amount. Who doesn’t love free money?!?!
You will also get a tax deduction for the amount that you contribute to your 401(k) each year, up to $19,500. Therefore, you will save $ on taxes too! Most companies that offer a 401(k) will allow you to set up automatic paycheck deductions, so you just have to select how much you want to contribute each pay period & that’s it! The money within your 401(k) account should be invested in a broad-based fund, such as Fidelity Freedom 2055 Fund (FDEEX), so that it will grow over time.
Keep your emergency fund in a high-interest savings account
Surprisingly, this is one that I see most people forget about. You see, most of the commercial banks offer HORRIBLE interest rates on savings accounts. At the time of writing, Wells Fargo is offering a whopping 0.01% interest rates on their basic savings accounts. Meaning, if you hold $10,000 in that account for an entire year, you would earn a whole $1 in interest. FOR THE ENTIRE YEAR.
This is why you should do your research and find a savings account that fits your needs AND offers you a return on your money. Personally, I use Ally Bank’s online savings account. Ally Bank doesn’t currently have any branch locations, so your savings account would be 100% online and their interface is very easy to use. Currently, they are offering a 1.00% interest rate on savings accounts which is one of the most competitive rates in the market. I’ve also seen their savings interest rate get over 2.00%, but then the pandemic hit & the federal reserve lowered their interest rates so Ally Bank followed suit.
Some other options for higher-interest savings accounts are CIBC Bank, Vio Bank, and American Express National Bank. Interest rates can change at any time, so make sure you do your research before opening an account!
Pay off high-interest debt early
If you’re like me, you hate the idea of paying more for something than it’s worth. That’s what you end up doing when you have to take out a loan or increase credit card debt to buy something. Take a car, for instance. If you purchase a $20,000 car but have to take out a $15,000 loan at 4% interest & repay it over 4 years, you’ll end up paying $1,257 in interest! While loans are typically necessary for large purchases, such as a house or a car, you should consider making extra payments when you can to decrease the amount of interest you’ll pay & pay off the loan a little early. And ALWAYS pay your credit cards off first & don’t carry a balance as credit cards typically have the highest interest rates.
We’re currently in the middle of the COVID-19 pandemic (I’m writing this in August 2020), so markets are volatile and it’s hard to predict how markets will move in the coming months. So if you are a risk-averse investor (meaning you prefer low-risk investments), paying off debt early offers a guaranteed return (by not having to pay 4% interest on that money, it’s essentially like making a 4% return) with absolutely no risk!
Invest in real estate
This investment is definitely more hands-on than the others, but investing in real estate is one of the best ways that you can earn passive income. Personally, my goal is to own at least one rental property by the time I’m 30. The idea is that you purchase a property and rent it out so that your rental income covers the monthly cost of the mortgage. You should also aim to have some cash flow left over after the mortgage is paid (so if you charge $2,200/month for rent and your mortgage is $1,800/month, that’s $400 positive cash flow to you). By doing this, you are not only earning that cash flow, but you are also increasing your equity in the property and holding the property as it increases in value. Keep in mind that there are a lot of expenses associated with owning a rental property (repairs, property taxes, closing costs, etc.) and it’s definitely easier said than done, but as long as you do your research (A LOT of research) & have a sufficient down payment, investing in real estate could provide substantial passive income.
I hope you find this information useful & can apply some of it to your life. Do you have specific savings or investing goals? Let me know in the comments down below!
Disclaimer: I am not a financial advisor and this is not personalized financial advice. Do your research before making any investing decisions.
