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Investing in one’s twenties is one of the best decisions that one can make regarding his or her financial future.
It can get a bit overwhelming at first but the benefits that come with it especially with the concept of compound interest can be quite impressive. This article will explain 7 ways through which one can invest in their 20s in order to create the future of their choice.
1. Begin with an Emergency Fund
First, there is one important rule that should be followed before investing – to create an emergency fund. This serves as a financial safety net that provides you with a means of raising funds in case of an emergency such as a medical crisis or loss of a job. The ideal goal is to have three to six months’ worth of living expenses in a high-interest savings account that is easily accessible.
For instance, if you spend $2,000 each month then you should aim at having $6,000 – $12,000 in the bank. This way, you will not have to touch your investments or even get into debt during the case of an emergency.
2. Take Advantage of Your Employer’s Retirement Plans
If your company offers a 401(k) or 403(b) retirement plan, you should definitely sign up for it! Some of these plans match your contributions, which means your employer is paying for some of your investment in your future – that’s free money!
For instance, if an employer pays 50% of the contributions up to 6% of the salary and the employee has a salary of $50,000, then the employee should contribute at least 6% that is $3,000 to get $1,500 from the employer. This can greatly increase your retirement funds in the future.
3. The Theory and Practice of Investing
It is always important to avoid putting all your eggs in one basket – diversification reduces risks. You should invest across different asset classes – equities, fixed income, real estate and even cryptocurrencies or peer-to-peer lending.
This way, if one of your investments is negative, the others may still be positive. For instance, when the stock market is down, your real estate properties can still generate income and help stabilize your investment portfolio.
4. Invest in Low Cost Index Funds
Index funds are popular among beginners because they are cheap and provide a diversification across a large segment of the market. These funds aim to mirror a specific market index for example the S&P 500. As they require less trading frequency, they eliminate the need to make frequent decisions and investments, and studies show that actively managed funds rarely outperform their benchmark indices over the years. It is possible to aim for the market returns with low expenses by investing in index funds.
5. Invest in Individual Stocks for the Long Term
While index funds give you a general market exposure, individual stocks can provide higher returns in the potential. However, it is advised that one should always know what they are investing in before actually investing.
Look for companies with good financials and healthy growth prospects in the past. It can also be useful to invest in sectors that you are familiar with and have confidence in. However, it is important not to put all your eggs in one basket and therefore have a diverse stock portfolio.
