Investing may be the furthest thing from your mind financially when you are in your 20s. Adjusting to the workforce and life after college tends to be a shock. Your expenses increase, and you may have student loans and other debt. But your young adult years are the best time to start planning for the future. There is no magic investment that is guaranteed to make you rich. Instead, focus on investments that are low cost and will build in value over time. If you start investing by the time you are 25, you will have considerably more money when you are 65 than if you wait until you are 30 to start investing.
When you are young and do not have much extra money, exchange-traded funds are a way to get your foot in the investing door. ETFs usually have lower barriers to entry. For example, you may need a minimum of several thousand dollars to invest in a mutual fund. The minimum is considerably lower or non-existent for an ETF. The cost of commission is also lower, since you pay per trade instead of a maintenance fee. If the cost per trade is $10, and you invest $1,000 at a time, you only pay a commission of 1 percent. Some ETFs do not have a commission at all. An ETF is a wise choice if you plan on keeping the investment for a long time, instead of selling it quickly.
Your 20s are the time to start saving for retirement. If you have a job that offers a 401(k) plan, start investing in it. Many employers match your contributions up to a certain percentage. Check with your employer to see if it offers a match and up to how much. The matching contribution is free money for your future. The money you put in a 401(k) is not taxed, so you will save money on your income tax bill as well. When you start withdrawing at the faraway age after 59 1/2, you'll have to give the IRS its due.
If your employer does not offer a 401(k) plan or you are self-employed, you can start saving for retirement by opening an IRA, or individual retirement arrangement, also called individual retirement account. You have two options for an IRA, traditional or Roth. You pay tax on the money you invest in a Roth IRA in the year you earn the money. You do not pay tax on the original amount or the earnings when the time comes for you to withdraw the money. You do not pay tax on the money you invest in a traditional IRA in the year you earn it. Instead, you are taxed on it after you start taking distributions. You can invest your money in an IRA in mutual funds, stocks or certificates of deposit.
In some cases, you may be better off focusing on paying down debt rather than investing in your 20s. If you owe on a credit card that has an interest rate of 15, 18 or 20 percent, paying the balance off will provide a better return than investing in an ETF that has a rate of return of 6, 8 or 10 percent. Focus on paying off consumer debt or any debt with a high interest rate first, then turn your focus to investing for the future.
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