Your 20s are a wild ride. At first, you realize how hard “adulting” really is. By the end, you feel like an entirely different person — thanks to the mistakes you’ve learned along the way.
But your personal growth isn’t the only growth you can experience from this decade. If you start Investing in your 20s, you will see major financial growth in the decades that follow, too.
As a 20-something young adult, knowing where to start can be tricky. But I’m here to help by breaking down the basics of financial planning in your 20s.
Erika Taught Me
- In your 20s, you should learn how to budget, build an emergency fund, and pay off high-interest debt.
- Take advantage of your employer’s 401(k) match, if offered. If not offered, open a Roth IRA, which is a tax-advantaged retirement account.
- In your 20s, you have a longer time horizon, allowing you to make riskier investments.
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Learn How To Budget
One of your first financial goals in your 20s should be to learn how to budget.
So, make a money date with yourself! On this date, take the time to set a budget that can help you manage your money.
First, look at all of your income: money you make from your job and any side hustles. Then, look at your expenses, both fixed and variable:
- Fixed expenses are recurring monthly expenses like your rent, utilities, cellphone, and internet.
- Variable expenses will vary month to month and are things like groceries, gas, entertainment, and one-time special expenses like travel.
Once you have a picture of what your income and expenses look like, you’ll be able to identify extra cash available for things like saving and investing.
If budgeting is making your head spin, try to apply a methodology. I personally love the 50/30/20 rule. This simple rule divides your budget into three categories: 50% needs, 30% wants, and 20% savings/investments.
Start an Emergency Fund
What happens if your car suddenly breaks down? Or if your dog eats something he is absolutely not supposed to? What if you are caught in a round of layoffs at your job?
Life is full of surprises, and sometimes these surprises have a price tag.
Having an emergency fund will help with those random car repairs and emergency vet bills. And if you lose your job unexpectedly, your emergency fund will spot you next month’s rent.
Aim to save three to six months of your living expenses as your safety net.
A good place to stash your emergency fund is a high-yield savings account (HYSA). This way, you can earn interest on it, while still being able to access it immediately if an emergency comes up.
HYSAs earn you way more in interest than a traditional savings account. For example, the SoFi Checking and Savings Account earns up to 4.30% and the CIT Bank Platinum Savings has interest rates as high as 4.70%.
COMPARE: Best High-Yield Savings Accounts
Pay Down High-Interest Debt
Killing your high-interest debt is a must — and the sooner you can do it, the better.
The reason is that the longer you have high-interest debt, the more money you pay in interest and fees to maintain the debt. So, you are not only losing actual money you have earned but possible future returns from investing.
In general, anything with a rate over 7% is considered high interest. Think credit cards, student loans, car loans, and other forms of personal/title loans.
Credit cards have some of the highest interest rates and student loans are notoriously crippling, too.
READ MORE: How To Pay Off Credit Card Debt
Sign Up For a 401(k) Employer Match (If Offered)
A good place to start investing is to sign up for your employer's 401(k) plan.
401(k) plans are employer-sponsored defined contribution plans. With traditional 401(k)s, your contributions are made pre-tax, making these accounts tax-advantaged. And sometimes, your employer will match what you put in — it’s quite literally free money.
With an employer match, your employer contributes money to your retirement account, typically at a certain percentage of your contributions, up to a percentage of your salary amount.
Confusing? Here’s an example.
Let's say you earn a $50,000 annual salary and your employer matches 50% of your contributions up to 6%.
That means your employer would give you half of what you contribute until you contribute more than 6%. At that point, they will only match the total at 6%.
| Employee contribution | Monthly contribution (monthly salary = $4,167) | Annual contribution (annual salary = $50,000) |
|---|---|---|
| 2% (not meeting full match) | Your contribution: $83 Employer contribution: $41 | Your contribution: $1,000 Employer contribution: $500 |
| 6% (meeting full match) | Your contribution: $250 Employer contribution: $125 | Your contribution: $3,000 Employer contribution: $1,500 |
| 10% (contributing above match) | Your contribution: $417 Employer contribution: $125 | Your contribution: $5,000 Employer Contribution: $1,500 |
Know that you aren’t limited to only contributing the full match. You can contribute as much as you want and feel comfortable with, up to the annual limit.
Also, make sure to check out your employer’s vesting schedule to know when the matches are yours to keep.
No Option for a 401(k)? Open an IRA
If your employer doesn’t offer a 401(k), or if you are an entrepreneur, you have other options when it comes to retirement accounts.
Individual retirement accounts (IRAs) are another type of tax-favored retirement investment. To open an IRA, you work with a bank, financial institution, insurance company, or broker. You can even open one online through an investing app like Webull.
The beauty of IRAs is that you have flexibility in choosing where you open your account. You also can be hands-on with selecting your investments — just remember to actually elect to invest your contributions so they will compound and grow.
There are many types of IRAs, but the most common type is the Roth IRA.
Roth IRAs are funded with post-tax dollars, meaning you have already paid taxes on your contributions. It’ll feel pretty sweet come retirement time when you don’t have to worry about paying taxes again.
IRAs also have annual contribution limits.
READ MORE: Roth IRA vs. Traditional IRA: What’s the Difference?
Get Comfortable With Risk
Let’s say you decide to go to work (or class) on three hours of sleep after a night out. The risk? You may feel like a shell of a human the next morning, mainlining caffeine just to function. The reward? You made priceless memories by staying out until 3am with your friends.
We assess risk versus reward in many facets of life, but this principle can also be applied to your investments. The younger you are, the more time works in your favor — you can make riskier investments since you have more time to recover from any losses.
Typically, the market will always trend upward, especially over a period of 30 or 40 years. But there is a vast range of annual returns on more volatile growth stocks — sometimes lower, but sometimes higher than the market average.
You can afford to consider more aggressive investments in your 20s because your risk tolerance is greater.
Think of it this way: You may not be able to tolerate a long night of partying in your 50s as easily as you can in your 20s. Similarly, an annual loss of 20% on your portfolio will be much harder to recover from if you need to retire in 10 years compared to 40.
READ MORE: Where to Start Investing: Effective Money Growth for Beginners
Take Advantage of Compounding Interest
Investing in your 20s gives you a longer time horizon, allowing you to reap the benefits of compound interest.
Compounding interest means that your investments earn interest on both the initial contribution and the interest already earned. Interest on interest, essentially.
Because of compound interest, if you invest $400 a month starting at age 20, you can expect to retire with over $1.5 million when you are 65. This is assuming a 7% rate of return.
However, if you wait to start investing when you are 30, you will only have around $720,000 when you are 65, assuming the same return rate and monthly contribution. You’d have to invest around $850 a month to get to the same $1.5 million!
FAQs
What are the best investments to make in your 20s?
Low-cost index funds, individual stocks, and exchange-traded funds (ETFs) are among the best investments to make in your 20s. Retirement accounts like 401(k)s and IRAs are also a good starting point.
At what age can you start investing?
You can start investing on your own when you become a legal adult, which is 18 years old in the United States. So, if you’re an adult, now is the time to start!
How much should you have saved in your 20s?
How much you should have saved depends on your situation and lifestyle, but start with an emergency fund of three to six months of living expenses. Beyond that, many experts suggest having one times your salary saved before you turn 30.
TL;DR: Investing In Your 20s
Your 20s are when you should learn the ropes of money management. Start by learning how to budget, then build an emergency fund and pay off high-interest debt. Finally, invest in a tax-advantaged retirement account.
And since you have more time in your 20s, you can take advantage of compounding interest and recover any losses — so get comfortable with risk!
But also give yourself grace as you establish your financial goals. You won’t become a millionaire overnight, but there are steps you can take now to make it a real possibility in your future.
For more financial advice for beginners, check out these episodes of the Erika Taught Me Podcast:
- How To Budget for Beginners
- How To Invest for Beginners (Step by Step)
- Investing in the Stock Market Explained: A Guide for Beginners
Learn With Erika
- Free 5 Day Investing Challenge
- Learn how to get started as a beginner investor and make your first $10,000
- Free 5 Day Savings Challenge
- Discover how you can save $1,000 without penny pinching or making major life sacrifices
- Join Erika Kullberg Insiders
- Ask investing questions, share successes and participate in monthly challenges and expert workshops
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