In Your 20s: Should You Consider Investing?

Your 20s go fast. You may be focused on finishing school, starting your career, dating, or adjusting to living on your own and becoming independent. It's so easy to let this decade go by without developing a focused financial plan. Then, one day you could wake up and realize "What just happened? I'm 30 and have no money saved!"

My niece recently turned 30 and faced this type of financial reckoning. Her 20s flew by in a flash, without any financial focus. She was contributing the minimum to her 401k, but she also got into credit card debt and had no other savings. Suddenly, she turned 30. She developed a serious relationship, and they had the money talk. They both realized that if they wanted to take their relationship to the next level, they needed to start "adulting" financially. She asked me for ideas on how to get started. So, we sat down together and did a deep dive on her money beliefs, financial goals, spending and saving activity, and understanding of investing concepts and solutions.

My niece realized that she let her 20s go by without being purposeful. Here's what she could have done differently to potentially maximize her future, and ideas for you to consider.

I get it. When you are in your 20s, you probably aren't thinking about retirement. Try looking at it this way: Consider investing now so you can live your dream life later. You are saving and investing for flexibility and choice in your future.

I know you may have multiple financial priorities, and it can be hard to pay off student loans, cover everyday living costs, and try to save for a car or home, let alone set aside a percentage of your paycheck for retirement.

So, this is what I told my niece. Consider prioritizing investing now­ because the earlier you start, the less you have to save each year due to the power of compound growth.

Here's an example of how compound growth could help you. In these scenarios, we use a 6% annual growth rate on investments. The below example is for illustrative purposes only.

• Madison starts investing $5,000 a year when she's 20 years old. She does this for 45 years, earning an average of 6% annually. When Madison turns 65, she will have accumulated over a million dollars—or $1,063,717.57, to be exact.
• Hannah doesn't start saving until she's 40. In order to achieve a million-dollar nest egg by age 65, she would need to save $20,000 a year, also earning an annual average of 6% to accumulate $1,097,290.24.

If you don't have one, create a monthly spending plan so you can be intentional in how you save and spend your hard-earned cash. To get a handle on your cash flow, itemize and add up your monthly expenses, then subtract them from your income. Are you overspending regularly? If yes, then it's time to prioritize and figure out what you really need to spend your money on and where you can cut back. If you have credit card debt, make it a goal to pay off this nondeductible, high-interest-rate debt. If you don't have an emergency fund, create a savings account to cover at least three months of essential living expenses.

You may think your friend or your brother is a great investor because all they talk about is their winners. But they may have different goals, different risk tolerance, and possibly many more losses than you know. Educate yourself instead of relying on friends and family. Or, if your parents have a financial advisor, reach out to them, and ask if they can spend an hour with you as a start.

When you're in your 20s, time may be your most valuable asset. Consider saving 10% to 15% of your pre-tax income for retirement, but even if you only have a smaller amount to invest each month, it may still be worth it. Time in the market is key. Get started as soon as you can. Consider automating as much as possible so that you don't have to test yourself and your discipline each month. And don't leave money on the table—consider contributing to your company's retirement plan up to the maximum match.

Diversification means don't put all your eggs in one basket. In investing, you can spread your risk by adding different types of investments to your portfolio that aren't likely to go up or down at the same time. In practice, this means owning a variety of investment asset classes.

Asset allocation refers to the way you divvy up your money between various asset classes, such as stocks, bonds, and cash. Your asset allocation could range from aggressive to conservative and will help determine both your level of risk and your potential for gain. Here's a couple of examples of different types of asset allocation:

• Conservative asset allocation: This type of portfolio primarily holds investments that have less risk of loss, as well as lower potential for growth. These include investments like U.S. Treasury bonds, CDs, or other types of fixed income investments that can be more stable than stocks. 
• Aggressive asset allocation: This type of portfolio is made up largely of stocks, which can carry significant risk of loss—and higher volatility—but also the potential for growth. This could be appropriate for someone young and saving for retirement because they can keep their money invested for the long term and potentially ride out market ups and downs.

When you are in your 20s, explore your comfort level with taking a more aggressive approach and embracing risk. If you have a higher risk tolerance, you could be able to take bigger risks than you would if you were closer to retirement, though investors should consider their own individual circumstances. Yes, you could end up having bigger losses when the market falls, but you also have more time to potentially make up for those losses. History shows that over longer periods of time, aggressive, stock-centric investment portfolios far outpace more conservative or moderate portfolio allocations over time.

Check out the expense ratio of any fund before you invest. An expense ratio is the percentage of fund assets taken out each year to cover fund expenses. A small difference in annual expenses can add up over time.

Be tax aware. Check out what your tax rate is, and explore how investment and retirement accounts are taxed. Make the most tax-aware decision for you.

Each year, consider bumping up your savings rate. Whenever you get a pay raise, consider carving off as much of that pay increase as possible to bump up your savings and to increase the amount you are contributing to your company 401(k) plan. Pay yourself first.

Talk to older people and ask them what financial mistakes they made when they were young. Many will say, "I thought I had all the time in the world." Today, many Americans don't have enough money saved for retirement—because they thought they had all the time in the world.

If you are overwhelmed, start small. Right now, in your 20s, you have time on your side to create positive financial habits and potentially compounded wealth. Investing in your 20s can increase the likelihood of reaching your financial goals and giving yourself choice and flexibility. Your future self will thank you.