The leap from college to your career in the post-grad life is huge. I don’t know about you, but I was never taught where to put my money once I started making it. I had no idea what investments to make and how to go about it.
Thankfully, my company offers their employees financial counseling with the help of third-party advisors (through a Goldman Sachs-owned company!). The first few weeks of my career also included long hours on the phone with my advisor, who had the patience to walk me through almost everything I would need to know. From that, I’ve compiled a list of 5 investments to make in your 20’s to help you out.
Not all of these suggestions are set in stone. You don’t have to do anything at all, but these investments are highly recommended.
Studies have found that while 70% of millennials have a savings account, a whopping 58% of them have less than $5,000.
To add to that, 45% of millennials and 50% of Gen Xers have a retirement account, but only about 35% of those individuals are actively contributing to it. If you’re starting, that’s already put you ahead of the curve!
Here are 5 investments to make in your 20’s:
Not the most exciting investment to make in your 20’s, but this is one of the most important. Retirement savings grow at a compounded rate, meaning that when you start saving is more important than how much you save.
Many retirement planners estimate that the average 401(k) return is between 5-8%.
For example, if you save $5,000 every year starting at age 20 at a compound interest rate of 7%, then you’ll have $1,142,611 by the time you’re 60 years old. You’ll be a millionaire!
BUT if you start at age 30 with the same amount of money, you’ll only have $540,741 by the time you’re 60 years old.
The big difference there is the 10 more years you’ll have to invest and grow your money BECAUSE you started early.
A 401(k) is a qualified retirement plan that enables employees of a company to contribute part of their income on a tax-deferred basis.
You’ll likely have a choice between a traditional 401(k) and a Roth 401(k).
|Trad. 401(k)||Roth 401(k)|
|Contributions with tax-deferred dollars. You’ll be taxed on your withdrawals based on your current (at time of withdrawal) tax bracket and state taxes.||Contributions taxed before it goes into account. You won’t be taxed upon retrieving your money. |
(A great option if you’re young and you think you’ll be in a higher tax bracket when you’re retiring.)
*There is a penalty if you withdraw your money before age 59 1/2, with certain exceptions.
If you’re working for a company, you’ll likely have an employer-sponsored 401(k). If your employer matches your contribution (free money!), you should at least max. it out (for example, if your employer matches up to 5%, then you should contribute at least 5%).
The annual contribution limit in 2020 is $19,500.
You don’t have to contribute hundreds a month, but even small amounts will make a difference.
A Roth IRA is an individual retirement account that lets your post-tax contributions grow tax-free, with tax-free withdrawals once you’ve retired. Many people have both the Roth IRA and a 401(k)!
The annual contribution limit in 2020 is $6,000 if you’re under age 50, $7,500 if you’re over.
If you’re under age 59 1/2, you can also withdraw your contributions without penalty after having your account for 5 years (you can’t withdraw the profit/growth without penalty).
*There are many exceptions to withdrawing money without penalties as well, such as buying a house!*
Many people move money from their high interest savings account into a Roth IRA at the end of the year if they don’t need that portion of it. This account grows in compound interest like your 401(k).
For both your 401(k) and Roth IRA, you have to select your investment portfolio in order for your money to grow.
There are many options, including Target-Day Retirement Funds, which automatically take into consideration your age and target retirement year when selecting index funds. The fund will automatically adjust as you grow older to be more conservative, so your money/savings are not at risk closer to your retirement. It’s more aggressive in its investments when you’re younger, to ensure best possible growth.
2. Emergency Funds
COVID-19 has really hammered in the importance of having sufficient emergency funds. You’ll never know what’s going to happen, and it’s going to be safer to always have a bit of cash to fall back on.
Emergency fund sizes are going to depend on your personal living situation (pets, children, etc.). A good rule of thumb is to save 3-6 months worth of living expenses.
When it comes to emergency funds, it’s recommended that you put this money in a high-interest savings account. A high-interest savings account will earn you interest at a rate above 1%. It doesn’t sound like that much, but compared to the rates of savings accounts for many major banks (such as Chase, at 0.04% APY), it’s quite good.
Keep in mind that the % APY will change throughout the year based on the economy. The Federal Reserve will increase rates when the economy is good, and decrease rates when the economy isn’t doing as well.
While your money is in a high-interest savings account, it won’t depreciate with inflation. It’ll also earn you a little more just for adding money to it!
Here is a list to help you get started (APY as of June 2020):
|Marcus by Goldman Sachs||1.05% APY||$0 min. balance|
|American Express National Bank Personal Savings||1.00% APY||$0 min. balance|
|Barclays Online Savings Account||1.15% APY||$0 min. balance|
|Capital One 360 Performance Savings||1.00% APY||$0 min. balance|
|HSBC Direct Savings||1.01%||$1 min. balance|
3. Your Health
Even if you might be young and healthy now, you should begin investing in your health.
If you’re not visiting the doctor’s office too much each year, an HSA could be a great option for you.
An HSA (Health Savings Account) is a tax-advantaged medical savings account for individuals or families enrolled in a high-deductible health plan. The contributions you make to your HSA are not taxed.
The annual contribution limit for individuals is $3,550 and for families is $7,100.
The money you save up in your HSA can be used for medical expenses before you turn 65 years old. After you turn 65, you can withdraw the money for any reasons you want to.
*If you withdraw money for non-medical expenses before age 65, you’ll have to pay a 20% penalty AND taxes for that amount!
Keep receipts for all your medical expenses! You can reimburse yourself with your HSA at any time. To see what qualifies, just google IRS Publication 502 (menstrual cups count!).
The best way to contribute to your HSA is through payroll. Some companies will also give you a certain sum of money for your HSA if you open an account.
*Make sure you have enough money in your savings (for easy access) to cover the entire high deductible of your health plan before you start putting money into your HSA.
4. Your Education/Experiences
Now we’re getting into the fun stuff! While it’s important to be saving for retirement, health, and emergency situations, you’ll also want to have some money set aside for yourself, if you can.
I’m a huge advocate for living below your means so that you can save up, but I also believe it’s important to create valuable memories and learn.
Your education and experiences are huge in shaping who you are. If you see an opportunity that you believe will help you grow, take it!
Some ways that you can invest in yourself are: classes, travel, painting, new foods, business opportunities, scuba diving, skydiving–anything!
This one is definitely optional and up to you. It’s also largely dependent on your personal preferences when it comes to making investments outside of your retirement and health savings accounts. BUT I wanted to include it as an option.
A regular brokerage account (through Charles Schwab, Vanguard, Fidelity, etc.) is a great option for 5-10 year money goals. There’s no phase-out, annual contribution limit, or income limit.
A brokerage account is taxable. BUT if you hold your investment securities for over one year, then you’ll pay the lower long-term capital gains rate (15%).
A brokerage account is recommended if you’re saving up for short-term goals, such as buying a car or putting a down payment on a house. Just make sure you choose low-risk investments. Check out total stock market index funds or bonds!
I hope this post has been helpful for you to get a better picture of where your money should be going in your 20’s. The investments to make will be unique to each individual and their situation, so make sure you do more research along the way to figure out what’s best for you. Good luck!