How to invest in your 20s: 7 tips for long-term success

These nine not-to-miss tips can help you—and your Gen Z net-worth-building friends—to start smart and set yourself up for investing success.

Investing in your 20s: 9 moves to make now

Before you dive into the seven tips below for investing in your 20s, take a deep breath. It can feel like there’s a lot of pressure around getting things correct right out of the gate. But here’s a tip: Life changes and plans can change with it. 

Your goal is to make the strongest moves possible with where your life is today. Then, when your salary, job, geography, and other life bits change, you can change your plan to fit your upleveled life.

1. Start with a plan

The very first step to plotting out your success is setting up a plan. Don’t worry if it’s not perfect. The goal is to know where you want to go so you can start moving in that direction. Mapping out your short-term and long-term goals can help you prioritize monthly spending and saving.

Don’t worry if your plan isn’t perfect. As life changes, your plan can change along with it.

2. Make a monthly budget

Once you know what you want to achieve, you can build a monthly budget to help you do it.

A budget looks at your total income and expenses, plus savings and debt-payoff goals, then helps you organize your money to ensure you prioritize working toward your goals. Lots of budgeting methods exist to help you manage money in a way that works for you, including:

• Envelope budgeting, which uses physical or digital envelopes to separate funds for every type of expense, such as groceries, clothes, entertainment, and eating out.
• Zero-based budgeting, which assigns an expense to every dollar of your income.
• Pay yourself first or “reverse budgeting,” which feeds your savings and debt payoff first, then covers your bills, and then lets you spend what’s left over.
• 50/20/30 budget, which puts your money into larger pools instead of detailed envelopes or giving every dollar a specific job. Of your income, this rule says 50% can go toward “needs,” 30% toward “wants,” and 20% toward savings and debt payoff.

Your budgeting plan can help you set financial goals based on your available income as well as see the income levels you need to reach to achieve the financial goals you want to achieve.

3. Build an emergency fund

Your monthly budget plan should include an emergency fund, says Ross Hamilton, a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and vice president of wealth management at Raymond James. Starting an emergency fund in your 20s can prevent having to tap your retirement savings for unexpected expenses. It can also act as a buffer to help avoid taking on credit card debt.

4. Make managing your debt your top priority

A lot of twentysomethings can feel overburdened with debt from student loans and credit cards that got them through the early years of adulthood. That’s why a top investing move today is to slay your debt so you have more cash to invest in the years ahead. 

Here’s what you need to remember about debt: Every dollar spent on debt repayment could have been used to further one of your other financial goals. So, the key to future financial freedom is paying down your debt as quickly as possible to avoid overpaying as it grows with interest. But which debts should you prioritize? 

From a mathematical perspective, you should pay down your “bad” debt first, which are generally debts with interest rates of 8% or higher. Credit card debt is the biggest offender in this category, with interest rates that can be between 16% and 35%. Some other consumer debt, such as personal loans or some auto loans, might also come with interest rates in the higher range. By paying this off quickly, you’ll save on interest and fees, and free up money to invest elsewhere. 

Paying down high-interest debt also puts you in the position to take on and manage “good debt.” Debts considered “good” generally have low interest rates, such as mortgages and student loans. Good debt can also be a springboard to improve your earning potential (student loans) or net worth (a home).

Given that the average student loan borrower graduates with nearly $21,000 of debt from their undergraduate studies and the cost of buying a home continues to rise, these good debts will likely make up a sizable portion of your monthly budget, even though they’re not as harmful as high-interest debts. Your monthly budget will need to balance paying off these debts with investing for retirement.

Generally, experts recommend choosing how to allocate your money toward debt vs. investing goals by looking at the interest associated with each. For example, you could likely earn an average of 7% on investment savings, but you’d only save 4% by repaying student loans faster, the investment is the way to optimize your assets. Consider this detail when you have extra money to spend beyond the minimum monthly payments on your debt.

5. Start your retirement savings today

Why start saving for retirement in your 20s if you have student debt and are getting your feet wet in the job market? Because the longer your money has to grow, the more time your money has to make money. Invested funds benefit from compounding, which means you earn a return on the full amount in your savings, including the money that was already added through returns. Compounding is a way for your money to grow even faster than you can save it.

Plus, investing early builds good muscle memory, says Keith Beverly, a CFA, CFP, and chief investment officer (CIO) at Re-Envision Wealth. “Developing that muscle memory when you’re young can put you in a better position when you’re in your 30s and 40s,” he adds.

For instance, if you invest $6,500 each year in an individual retirement account such as a Roth individual retirement account (IRA) from age 25 to 50, your $162,500 investment would be worth more than $900,000 based on the stock market’s performance over the last 25 years. (See the deadline to contribute to an IRA for this year.)

You can kick-start your retirement savings in two ways: Via your employer’s retirement plan (or similar self-employed plan) and an IRA. 

Employer-sponsored retirement plans, such as 401(k)s or 403(b)s, are a great place to start saving. Under the current rules, you can contribute up to an annual limit set by the IRS, plus earn additional retirement savings from your employer if they match your contributions (more on those in a minute).  

You can also save for retirement using a personal retirement plan called an IRA. These accounts let you save up to a smaller limit each year until age 50 when contribution limits bump up to help you “catch up” with savings. No matter which type of account you choose or how much money you have to invest today, saving what you can in your 20s lets you enjoy the power of compound interest as long as possible during your working years. 

6. Don’t miss out on your employer’s free money

To attract and retain talent, some employers offer matching contributions to the money you contribute to your 401(k), which can offer a serious boost to your retirement savings. Here’s how employer matches work.

Say your employer offers a dollar-for-dollar match up to 3% of your salary. If you contribute 1% of your salary, your employer matches that 1%. But if you contribute 3% of your salary, you get the full 3% match. If you contribute 6% of your salary, you still get the 3% match, but your savings will grow faster with your own money. “Make sure you are contributing enough to at least get the full match,” says Hamilton. 

To see what this means money-wise, here’s how a 3% employer match can boost your savings with a $75,000 annual salary. 

But how much should you try to save in your employer’s plan in your 20s? Experts suggest 15% of your annual income, but the majority of twentysomethings don’t contribute that much. Only 47% of Gen Zers say they contribute to a retirement plan at all, and Vanguard data shows the median retirement savings for savers under 25 is less than $2,000.

“If [15 percent] isn’t achievable, pick a number that is achievable and work up to that goal of 15 percent,” says Hamilton. 

To help boost your savings, some employers let you increase contributions automatically by 1% each year, which eases you toward the 15% benchmark over time, ideally as your salary also ticks up. 

7. Keep things simple

You’ve got a lot going on in your 20s, and that’s why it makes sense to keep your investments simple. Using index funds to build your portfolio can help, especially since even seasoned professionals can find it difficult to select individual securities that’ll grow faster than an index fund, says Hamilton.

Index funds are low-cost baskets of securities built to mimic the performance of a broader market index, such as the S&P 500, which represents the top 500 companies in the U.S. Investing this way spreads your money across all of these companies, rather than putting in individual, hand-picked stocks. A single index fund or combination of two to three could set you up with a diversified portfolio quickly and set your savings on autopilot. If you’d rather have some help picking funds, you can always set up your IRA with a robo-advisor. 

Robo-advisors are automated investment platforms that help you build a portfolio tailored to your goals and preferences. With low investment minimums and low to no annual costs aside from fees built into investment funds, you can contribute the money and let the algorithm do the rest. Fortune Recommends™ even has a curated list of the best robo-advisors on the market for a wide range of investor types to ease your search.  

Whether you go the DIY or robo-advisor route, the essential move is to invest regularly—with each paycheck, if possible. Even small amounts could create big savings in the long term. 

8. Skip the hype

While meme stocks, cryptocurrency, and nonfungible tokens (NFTs) have gained their share of headlines in recent years, your portfolio will likely be better off if you avoid the hype. Just because an investment is trending doesn’t mean it should have a significant foothold in your portfolio. 

These types of investments are volatile, and putting too much of your retirement nest egg into any one of these baskets opens you up to major losses when their values drop. Cryptocurrency and NFTs are relatively new and untested, so they don’t come with the decades of history analysts rely on to choose stocks and build funds that are likely to grow steadily over the next 25 to 30 years. All of these investments gain value based on popularity, so you’re not likely to get a very good deal from jumping on an investment that’s already trending. These investments are more akin to gambling than strategic long-term saving.

Investing in your 20s is about building a solid foundation for the decades ahead. Each financial step you take should serve one of your short-term or long-term financial goals, which is something that investing trends generally can’t accomplish. Does that mean you can’t carve out a little cash and have some fun with the markets? No, but that cash should be money you’re willing to lose if the gamble doesn’t pay off long-term.

For instance, GameStop, which led the entire meme stock craze, once had an intraday trading price as high as $483 per share. It’s also traded at less than $30 per share. 

9. Ask for help

If you need help with your financial decisions as you start your investing journey, there’s zero shame in asking for it. A more experienced family member or a financial advisor are terrific places to start. A significant plus to asking for help with your finances in your 20s is the chance to build a long-term relationship with an expert you trust. 

While TikTok might have flashy videos, the most trustworthy advice will always come from a credentialed financial professional. Look for certifications, such as CFP from the CFP Board, or seek referrals to advisors from friends and family. You can also look to robo-advisors for low to no-cost financial planning assistance. Many offer à la carte access to CFPs for a fixed fee.

The takeaway

Navigating through your 20s can be similar to stepping onto a roller coaster. Life’s ups and downs are inevitable, but with a dash of discipline and patience, you can turn this journey into a rewarding ride. Your greatest asset is time, so use the must-make investing moves above to use it wisely.