Not too many people in their 20s are focused on investing their money, simply because they’re “too young”. But investing is not a matter of being the right age, but starting as soon as you can. While its benefits may not be seen during the earlier years of having a job, saving money and investing it in the right places paves the way to financial freedom and stability.
With so many things you need to spend for, like food, rent, transport, going out or partying with friends, and overseas trips, you will need to have a plan so you can really allocate money for investing while at the same time being able to pay for your basic needs and a few indulgences.
Here are top 3 things people in their 20s can start investing on and some tips on how you can make it happen:
As the old cliché goes, we always need to “save for a rainy day”. It is always more convenient to use your credit card to pay for unexpected repairs or replacements, but that will only add up as more debt to pay for with increasing interest, which won’t help you save and grow your money at all. Instead, start saving an emergency fund and use the cash during the times you need to pay for a car repair or to replace the phone you got soaked on the beach. Make it a goal to set aside at least $1,000 for your emergency fund. The more liquid you are, the better. You’ll find that this extra cushion of cash can help you go a long way in achieving your long term financial goals.
You’ve probably heard this so many times already and you may have gotten so tired of this cliché, but it is true – time is your biggest ally when investing. And yes, the best time to invest is always now. Actually, the soonest possible time is always best. But unless you can time travel, the only best option we all have is now.
Starting early with retirement pays off big time further down the road. If your job offers a 401(k) plan, go ahead and sign up. If your employer offers 401(k) matching, contribute at least the minimum amount for which you are eligible to receive matching funds. If you can contribute more, that’s definitely better.
If your job does not offer a 401(k) or if you are self-employed, open up a Roth IRA account instead which you can finance with index funds. It is likely that your bank offers one, or you can use an online broker service like Fidelity or Vanguard. Contribute at least 5% of your gross income to retirement.
Student Loans Payment
Put in place a plan to pay off the rest of your debt, which is made up primarily of student loans. College debt may discourage young people from pursuing their major life goals, such as getting married and buying a home. So allow yourself to achieve financial flexibility by creating a plan to pay off your college debt as quickly as possible.
Pay off any private variable loans first. While the interest rate on these loans might be lower than federally backed student loans, interest rate on these loans could climb up to 6% if the Fed decides to hike interest rates in the future, making it difficult to manage your payments on those loans.
For your federally-backed student loans, there are seven repayment plans you can choose from. While most people would be choosing the plan with the smallest monthly payment, this would lead to paying more on interest over the loan’s lifespan. If you are in a position to be aggressive with your student repayment, focus on diverting your savings and income towards paying off your debt as quickly as possible. If you’re not in a position to be aggressive with your loan repayment, aim to at least put 10% of your gross income towards student loan debt. Then increase the amount of money you use to pay down your debt as you earn more money.