Preparing to Invest in Your Twenties
When preparing to invest in your twenties, it is important to consider how much you can afford to invest. To determine the amount, you can create a budget that includes your income and living expenses such as rent, utilities, and food. The budget can be used as a guide to start finding some flexibility in your finances for investment.
Maintaining an Emergency Fund
Investing involves more than just buying stocks or opening an Individual Retirement Account (IRA) or joining your employer’s 401(k) plan. Like any major life decision, investing requires preparation for life’s uncertainties. The U.S. Securities and Exchange Commission (SEC) advises taking several steps with your personal finances before investing, including establishing an emergency fund.
Paying Off Debt
One of the best approaches to investing in your twenties is paying off high-interest debt. If you owe money on credit cards, it may be beneficial to pay down the balance before investing. Think about it: if you are paying 25% interest on a credit card balance or loan and only earning an 8% return on investment, you are benefiting less each month.
Factors to Consider When Investing in Your Twenties
By preparing to invest, you may have positioned yourself in the best personal financial situation possible. With lower living costs, a fully-funded emergency fund, and debt paid off or managed realistically, you are already in a better situation than most people, let alone most people in their twenties. Now that you are ready to invest, consider the following factors.
Risk Level
You often hear that the younger you are, the more risk you can take in investing. While this is generally true, it is not specifically (or circumstantially) true for everyone. It really depends on your risk level – your ability and willingness to lose part or all of your investment in exchange for the potential for greater returns.
Time Horizons
As a person in your twenties, your time horizons – the time you need to invest to reach your financial goal – are automatically longer than someone in their fifties. If you have shorter time horizons, you are likely to take on less risk. It is important to consider the time horizons and financial goals you are trying to achieve through investing. A short-term financial goal might include saving for a new car, which is likely to be better served by a savings account or relatively low-risk money market fund. However, a long-term financial goal, such as retirement or buying a home in ten years, may allow you to take on more risk since you have a longer time horizon to recover from any market downturns. Developing both short-term and long-term financial goals can help keep you on track with your saving and investment strategy and allow you to build wealth in your twenties and beyond.
Tax Benefits
It is also important to consider taxes. If you keep your money in a regular online brokerage account without a tax-friendly designation, you will pay taxes on earnings and returns. With this in mind, you should always look at tax-advantaged investment tools, such as IRAs and 401(k) plans at work. The earlier you start saving for retirement, the better.
Choosing Investment Options in Your Twenties
Your investment portfolio in your twenties will likely involve achieving diversification, which is a key aspect of an investment strategy. By diversifying, you will spread your money across different types of investments to reduce risk. To achieve diversification, it is important to understand the level of risk associated with each type of investment, according to the U.S. Securities and Exchange Commission (SEC).
The most
Danger: Individual stocks, relatively active mutual funds or ETFs, real estate. Risky: Mutual funds or Exchange-Traded Funds (ETFs) that track broad stock market indexes such as S&P 500, Nasdaq 100, and Dow Jones Industrial Average (DJIA). Less risky: Bonds and bond funds.
Most investors achieve diversification by keeping their money in a
Source: https://www.thebalancemoney.com/investing-tips-for-twenty-somethings-5180527
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