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5 Tips for Making Smart Investments in Your 20s

date September 30, 2021 time 5 min read 594 views

When you are in your early 20s, deciding how to invest your money seems to be overwhelming since there are a bunch of many different opinions that make you be not sure where to start. However, remember that the sooner you begin investing, the sooner you can obtain your financial goals due to the power of compounding. This is the period that you can ensure to be wealthy in the future and achieve your financial goals. Here are five tips for making smart investments in your 20s and investment trends in 2022 you should consider applying to your financial strategy.

Know your personal risk tolerance

The first rule you should remember when making smart investments in your 20s is that time is on your side. You could allow yourself to challenge and take some risks with your compound investments to recover from loss and achieve higher rewards despite the volatility of the market. If you only decide to make your portfolio too safe when you are young,  you might miss out on significant investment returns over time.

Before starting investments, you should take time to identify types of investment risks that help you decide how to make smart investments in your 20s. Besides, you can understand how risk tolerance matches up with your risk capacity. Risk tolerance refers to the amount of loss you are prepared to handle while risk capacity is the level of risk you need to take to reach your goals. 

Before starting investments, you should take time to identify types of investment risks.
Before starting investments, you should take time to identify types of investment risks. (Source: Unsplash)

Invest in yourself

“The #1 place you have total control with your investments is in yourself,” says Colorado financial advisor Matthew Jackson of Solid Wealth Advisors. When you invest in yourself, you can not easily fail or lose. Investing in yourself means improving your work ethic, skill set, or wealth of knowledge that could advance your career, or start over in an industry you have always admired.

As you are young, it is never too late to go back to school to acquire any skills or earn an important certification you need for your career. Your enneagram core motivations and enneagram types core motivations might affect how you treat money and the way you manage your finances. You may also think about additional skills to prepare you for either a higher-paying job or maybe even for changing careers later on.

Investing in yourself will cost you money, but it can substantially increase your income in the long term. Hence, it is an absolutely desirable and smart investment to guide your investment portfolio management toward your financial goals in the future.

Invest early to unleash the power of compounding

The most important thing you should realize as soon as possible is the power of compound interest investment. There is a fact that Warren Buffet started investing when he was 11 years old. Currently, he has a net worth of around 103 billion dollars. Surprisingly, around 100 out of the 103 billion dollars came after his 65th birthday.

The power of compound interest investment.
The power of compound interest investment. (Source: Pixabay)

Let’s take another example to give you a whole picture of the benefits of compounding. The first investor starts investing $300 per month at age 20 and does not stop until they are 60 years old. If you managed an 8% return during that time, you would have more than 1 million dollars in this investment. 

The second investor gets started at the age of 30. By the time they have reached 60-years-old, they would only have $440,445 in their account. Those first ten years they missed out on would cost them more than $550,000 in returns, even though they only skipped $36,000 and ten years of deposits.

The above example proves that the most potent combination for wealth creation is time and the power of compounding. In other ways, the magic of compound interest shows that time has the power to turn small habits into incredible results. Hence, instead of waiting, start investing as soon as possible!

Open a retirement plan

A simple tip for making smart investments in your 20s is enrolling in your retirement plan. “The combination of dollar-cost averaging, tax savings and a potential employer match creates the ultimate compound interest machine.”, says Graham Williams, co-founder of Optimist Retirement Group in Scottsdale, Arizona.

One of the best places to start may be investing enough in your employer-sponsored retirement plan to earn a match. If you have an employer-funded account, like 401k and 403b, set up regular contributions as soon as possible. 

A great tip to make smart investments in your 20s is enrolling in your retirement plan.
A great tip to make smart investments in your 20s is enrolling in your retirement plan. (Source: pekinhardy.com)

Consider contributing at least to get the full company match if your employer offers one. Otherwise, increasing your salary deferral percentage gradually can help you work your way up to it.

You can choose a traditional IRA or Roth IRA in case you have no workplace retirement plan. However, contribution limits for these retirement plans are much lower than they are for 401k 2022 contribution limit irs plans. 

Decide where to invest

When looking for smart investments in your 20s, you should research three options: Equity, Debt, and Alternative investments to find the best funds to start your investment strategy.  

Equity investment can be done via direct stocks or mutual funds. Investing in direct stocks is very complicated and tricky which requires a lot of financial knowledge. For starters, you should consider an equity mutual fund for ease of access. There are two types of MFs: Passive Funds (index funds) and Active Funds that you can explore more.

Another tip for smart investments in your 20s is that if you want to be more hands-on with your investing but do not afford to buy full shares of a stock or an ETF, you can consider fractional shares. This allows you to buy a portion of stock for a fraction of the price. 

For example, if you can’t afford $140 to buy one Apple share, you can invest $30 and buy just a little bit of that one share. In other ways, you still own a portion of the company by holding fractional shares. 

The key lesson is that making smart investments in your 20s is not an impossible puzzle for you to solve.
The key lesson is that making smart investments in your 20s is not an impossible puzzle for you to solve. (Source: Pixabay)

Debt investment is not advisable for retail investors since the minimum amount required to invest is pretty high. You can consider investing in a five-year-Debt mutual fund instead which is better to get the overall risk of the portfolio down.

In addition to equity and debt investments, you can consider alternative investment options such as Gold, cryptocurrency, REITs, etc. It is recommended that your investment in alternative options would be around 10-20% of your portfolio.

Invest with MyConstant

The key lesson is that making smart investments in your 20s is not an impossible puzzle for you to solve. It is always a good idea to diversify and build a portfolio rather than putting all your eggs in one basket. 

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George Schooling

George Schooling

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