Proper planning is one of the keys to meeting your financial goals, whether it's buying a new home in a few years or retiring while you're still in good health. When you start investing in your 20s, achieving those objectives could become a lot more realistic.
If you're new to the world of stocks and bonds, just getting started can seem like a daunting task. Fortunately, that can be solved with the proper information and insights. Here are some important considerations to bear in mind as you learn how to invest in your 20s.
Start Early
One of the key factors in achieving your investment goals is starting as soon as possible. While positive market returns are never guaranteed from year to year, investing early can help you grow your wealth over longer stretches of time. One reason a head start matters is the concept of compounding.
Imagine that a 25-year-old makes an initial investment of $10,000 in a mix of different securities:
- If the portfolio gains 5% during the first year, that investment will be worth $10,500.
- If the portfolio again returns 5% the next year, it will grow by $525, even without additional contributions.
That’s because market returns apply not only to the initial balance but to any earnings thereafter, too.
The Long-Term Effect of Compounding
Compounding can potentially create a snowball effect where your assets have the opportunity to increase over time. Assuming continual 5% growth, the account would increase in value by $2,058 in Year 30 alone, resulting in a balance of $43,219 from the initial investment.
In reality, the market doesn’t perform consistently from one year to the next - some years can have negative returns - but the effects of compounding still apply over the long term.
Note: Investments cannot guarantee growth or sustainment of principal value; they may lose value over time. Past performance is not an indication of future results.
Why Investing Early Matters
Starting early can make a significant difference in your long-term investment growth. The example below shows how two investors with the same monthly contributions can end up with very different outcomes depending on when they start:
| Investor | Starting Age | Monthly Contribution (After-Tax) | Annual Rate of Return | Balance at Age 65 |
|---|---|---|---|---|
| Investor A | 25 | $500 | 7% | $1,200,000 |
| Investor B | 35 | $500 | 7% | $570,571 |
Returns can fluctuate from year to year, and some years may have negative results, but starting early still provides a meaningful advantage.
Balancing Long-Term Goals With Short-Term Needs
Starting early makes it easier to reach your financial goals while contributing a manageable percentage of your salary. Those who begin investing later often have to contribute more to achieve the same balance at the same age. Our Retirement Calculator can help you determine what portion of your earnings you may need to invest now for your needs later in life.
However, while building your investment portfolio is important, it shouldn’t come at the expense of your short-term needs. You may need to reconsider how much you contribute to a retirement account if it prevents you from building an emergency fund that covers three to six months’ worth of expenses. Once you’ve established that safety net, it becomes easier to focus on your longer-range investment goals.
Build an Age-Appropriate Portfolio
Choosing individual securities or mutual funds typically involves a trade-off between risk and reward. High-grade bonds, including government bonds, can lose value in a bear market, although they have historically been more stable than stocks and stock-oriented mutual funds. However, though historical results are never guaranteed to repeat, past occurrences suggest that stocks may have a greater potential for long-term growth.
Long-Term Investment Approach
For those with a long-term investment horizon - such as young workers saving for retirement - experts often recommend portfolios weighted more heavily toward stocks or equity funds. Your asset allocation should reflect your risk tolerence and your financial goals. It may help to speak with a financial professional to determine what mix best fits your needs.
Importance of Diversification
No matter which asset classes you choose, diversification plays an important role in managing downside risk, especially if you’re investing in your 20s. Some of the benefits of diversification are:
- Investing across multiple asset classes can help reduce the impact of market downturns.
- Mutual funds provide built-in diversification.
- A mix of funds - such as large-cap, small-cap, and international stock funds - can further lower your risk.
Considering Fixed-Income Investments
On the fixed-income side, you may also think about developing a blend of short-term and long-term bond and bond fund holdings in order to mitigate the potential effects of interest rate changes. Keep in mind, however, that diversification cannot guarantee profit or protection against loss in a declining market.
Build a portfolio designed for long-term growth with smart investing. Invest In My Future
Investing Options to Consider
These are just a few considerations for those who want to understand how to invest in your 20s. If you're looking to build a strategy that meets your unique needs, you may want to speak with a financial professional who can take a closer look at your finances and help you create a plan tailored to your specific needs.
401(k) Plans
When figuring out how to invest in your 20s, one way to help maximize your long-term returns is by using tax-advantaged accounts. If you have access to a 401(k) plan through your employer, it’s often a good place to start for several reasons.
These plans offer valuable tax benefits and, in many cases, employer contributions that can accelerate your savings growth.
| 401(k) Type | How It Works | Tax Treatment | Withdrawals | Benefit |
|---|---|---|---|---|
| Traditional 401(k) | Pre-tax contributions grow tax-deferred. | Taxes paid at withdrawal (after age 59½). | Early withdrawals may face taxes and penalties. | Lowers taxable income now. |
| Roth 401(k) | After-tax contributions grow tax-free. | No taxes on qualified withdrawals after age 59½. | Must hold at least five years for tax-free status. | Tax-free income in retirement. |
| Employer Match | Employer adds funds based on your contributions. | Grows tax-deferred. | Same withdrawal rules as your own funds. | Free money that compounds over time. |
Even small contributions in your 20s - especially with an employer match - can grow significantly through compounding over time.
Individual Retirement Accounts (IRAs)
A 401(k) plan isn’t the only way to invest in a tax-advantaged account. Individuals with earned income can also contribute to an individual retirement accounts, available through:
- Mutual fund companies
- Brokerage firms
- Insurance providers
- Banks
Like 401(k)s and other workplace plans, contributions to a traditional IRA are tax-deductible up to allowable limits, and assets are tax-deferred until you reach age 59½. For 2026, tax filers under age 50 can contribute up to $7,500 in traditional and Roth IRAs. This amount is typically updated each year by the IRS.1
IRAs may also be appealing to workers who have maxed out their 401(k) contributions for the year. To boost tax-deferred investments, employees under age 50 are allowed to put $24,500 into workplace plans in 2026.1 These accounts also offer greater investment flexibility compared with workplace plans, where you're typically limited to a menu of pre-selected mutual funds, exchange-traded funds and target-date funds.
Brokerage Accounts
Perhaps you've exceeded the contribution limits for tax-advantaged accounts, or you need the ability to withdraw your money before reaching retirement age. For these and other reasons, you may want to open an investment account through a brokerage house or investment services firm. Some key features are:
| Aspect | What It Means for You |
|---|---|
| Funding | You'll invest after-tax dollars. |
| Taxes | You’ll pay applicable taxes on any earnings generated in the account. |
| Flexibility | You can access funds almost anytime you want. |
| Investment Options | A wide range of investments is available - from stocks and bonds to mutual funds and ETFs. |
| Ease of Opening | Opening a brokerage account is now easier than ever. |
Even when investing through brokerage accounts, there are strategies to help minimize how much you owe the IRS:
- Consider passive investments like index funds and ETFs, which typically buy and sell less frequently. Fewer trades often mean fewer short-term capital gains, which are taxed at higher rates.
- Choose funds with low management fees to help you keep more of what your investments earn over time.
Traditional vs. Roth Accounts
Both traditional and Roth 401(k)s and IRAs offer tax advantages compared to other retirement savings options. However, their benefits differ and those differences matter, especially for younger investors. Here is a breakdown of how both accounts differ:
| Feature | Traditional 401(k)/IRA | Roth 401(k)/IRA |
|---|---|---|
| Tax Timing | Tax benefit upfront | Tax benefit later |
| Contributions | Made with pre-tax dollars | Made with after-tax dollars |
| Withdrawals After Age 59½ | Taxed as regular income | Not subject to federal tax (if qualified) |
| Qualified Withdrawal Requirements | Must be at least 59½ | Must be at least 59½ and account held for 5+ years |
| Early Withdrawals | May face income tax and penalties | Withdrawals before 5 years may incur a 10% penalty and possible taxes |
Determining which account provides a better tax benefit depends on your current and expected future tax rates:
- Roth Account: If your tax rate is lower today than you expect it to be in retirement, consider paying taxes now with a Roth account.
- Traditional Account: If you anticipate being in a lower tax bracket after you retire, a traditional account may offer a greater benefit.
Workers in their 20s often earn less than they will later in their careers, so many opt for Roth IRAs or Roth 401(k)s when available. Some employers also let you split contributions between a traditional and Roth account - offering a balanced approach that combines the advantages of both.
Automate Your Savings
When it comes to making investment contributions, practicing consistency may help you reach your financial objectives faster. One of the easiest ways to do that may be by automating your contributions.
How to Automate Your Savings
For employer-based plans (like 401(k)s): Most employers allow you to automatically deduct a specific dollar amount or percentage of income from each paycheck.This process makes saving effortless and consistent over time.
For investments outside of work: You can set up automatic drafts from your bank account. This helps make sure funds are regularly directed to your investment account without extra effort.
Adjusting Contributions Over Time
If you're slightly behind in terms of your investment goals, you may want to consider making gradual increases in your contribution amount to help catch up. When deferrals are made automatically, it can be easier to avoid the temptation to use that money for short-term wants instead of long-term needs.
Conclusion
Starting early can help set a strong foundation for your financial future, giving your investments more time to grow and compound. With thoughtful planning, consistent contributions, and smart portfolio choices, you can work toward your long-term goals more confidently. The earlier you begin, the more opportunities you’ll have to build lasting financial stability.
Starting early in investing helps set a solid foundation for your financial future. Invest In My Future
Sources
- 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500.
