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Saving throughout your 20s puts you at an advantage on the road to retirement. If you’re able to put away just $14 per day starting at age 23, your money could reach $1 million by age 67. However, if you wait just seven years until age 30 to start saving, you’ll need to increase that amount by 50%. Hold off until age 35, and you’d have to save more than twice as much as at 23. The investing lessons here? Invest as early as you can.
Here are five investing tips to help you grow your money in your 20s.
» Ready to get started? Here are the best brokers for beginning investors
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1. Accept any 401K match you’re eligible for
Some employers offer 401 (k) plans that give you money just for saving for retirement. A 401(k) is a tax-advantaged retirement account, which means you can contribute directly from your paycheck pretax. Employers that offer this benefit often also match contributions up to a certain percentage of your salary.
If your company offers a match, consider contributing enough to get the maximum or working your way up to that.
If a 401(k) isn't an option, or you’re already earning a match, see if you meet the income requirements for a Roth IRA. Unlike a traditional IRA or a 401(k), it won’t give you a tax break on contributions. Still, it offers something potentially better: Typically, you won’t pay federal taxes when you pull money out in retirement. That’s right, your contributions and investment earnings grow tax-free.
One other note: Some companies offer a Roth version of the 401(k). If yours is one of them, you may want to take advantage.
THE PAYOFF
Want a million dollars? Let’s say you earn $35,000 a year, and your employer matches half of your 401(k) contributions, up to 6% of your total salary.
If you start contributing 6% at age 22, you’ll have over $1.2 million by 65, assuming a 7% return and annual salary increases of 3%. Without that employer match, you’d have just $800,000. And without contributions to a 401(k), you’d have — $0, of course.
» Interested in a Roth IRA? Here are the best brokers for that
2. Make risk your friend
Many investors make the mistake of avoiding risk even though it helps them over a long time frame. Reaching a million would require a reasonable allocation to stocks, and while investing in stocks can be riskier than putting your money in a savings account over the long run, stocks have shown to be a much more rewarding investment.
» Learn more: How to invest in stocks
When you invest in stocks, you'll likely see drops in the short term. That's why the market is generally a no-go if you need the money within five to 10 years. But history shows us that, in the end, you’ll come out ahead for long-term financial goals such as retirement.
Investing in your 20s can have such an outsized impact because you’re investing over a very long time, allowing you to capitalize on all that growth and compound interest. Bonds can be generally lower-risk, lower-return investments that can counter the risk of stocks.
» Learn more: What to invest in
THE PAYOFF
Investing may also help protect your portfolio from the effects of inflation, which can cause your money to lose value over time. Use our inflation calculator to see how.
» Dive deeper: Learn what inflation is and why it matters
3. Invest in low-cost index funds or ETFs
One good way to invest in stocks or bonds is through index funds or exchange-traded funds. These funds hold pieces of many investments, and they're designed to mimic the performance of an index. An index tracks the performance of a portion of the stock market; for example, the S&P 500 tracks 500 of the largest companies in the U.S.
Instead of buying the stocks of all of those companies — or even purchasing individual stocks, period, which takes more time and research than most of us want to commit — you can buy into an S&P 500 index fund with shares of those stocks.
The idea is to invest in several of these funds within your 401(k) or IRA to build a diversified portfolio that includes U.S. stocks, international stocks and a small allocation of bonds. You’ll pay an expense ratio for each fund, which covers the cost of running the fund.
A 401(k) will have a small, curated list of fund choices. In general, you can decide between two funds in a category — an example of a category would be U.S. large-cap, or large company, stocks — by going with the one with the lowest expenses.
A tough roadblock for new IRA investors is index fund minimums, which sometimes require minimum investments of $1,000 or more. A 401(k) allows you to avoid that. An IRA workaround: ETFs don't have minimum investment requirements. These funds trade like stocks throughout the day and are purchased for a share price, which can be as low as $50 for some funds. That can get you through several ETFs for very little money. (Here are NerdWallet's best brokers for ETFs.)
THE PAYOFF
Not to question your stock-picking skills, but researching, selecting and managing individual stocks is challenging — even the pros can screw this up. Going with index funds could easily save you a few hours a week.
» Need guidance? Here's how to open a brokerage account
4. Get help managing your money
An index fund makes investing easier, but if you still need help, you’re lucky to be living in an age when you can get financial advice for cheap.
With a 401(k), that help is typically available through a target-date fund. This type of fund adjusts to take less risk as you age. You can pick one by using the date in its name, which is supposed to line up as closely as possible to when you plan to retire. So if you’re 25 now, you'd add around 40 years and pick a fund tagged 2055 or 2060.
You’ll generally pay higher expenses in a target-date fund, but some investors find the simplicity is worth it. Keep in mind that you can always swap to a different fund later.
If you’re investing in an IRA, you could open that account with a robo-advisor, which is a computer-based investment management company. These companies charge a percentage of your account balance for their services and investing tips. Many big players, such as Wealthfront and Betterment, cost less than 0.50%, and that includes investment expenses and management fees.
THE PAYOFF
A little oversight and a buffer against your own mistakes earns you peace of mind, which could be well worth it.
» Get started: Learn how to choose the right financial advisor for you
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5. Incrementally raise your savings rate
Starting where you are is just fine, and if that means contributing $100 or less per month, at least you’re putting away something. But the last of our general investing tips is that you need to save more.
To figure out how much you should shoot for, use a retirement calculator, preferably one that gives you a monthly savings goal. Then, work your way there in little jumps. One of the easiest ways to do that is to increase your savings rate every time you get a raise.
THE PAYOFF
Carrying through that 401(k) example, if you also increase your savings rate by half of every 3% annual raise, your balance at age 65 could be closer to $3 million.
