How to Invest in Early 20s (Finance for Savvy Women)

By Gary S | Strong Female Leaders

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How to Invest in Early 20s (Finance for Savvy Women)
If you are in your 20s, the most important thing you will learn from this article is that the next 10 years could be crucial to your financial well-being. Here's why: suppose that at age 25 you begin to save $1,500 per year in a tax-deferred account for 10 years and then completely stop saving at age 35. With an annual return of 7 percent, your savings would grow to $169,000 by age 65 even though you only contributed a measly $15,000. This is due to a financial principle known as the compounding effect.

However, if you begin saving that same $1,500 per year at age 35 and continue to do so for the next 30 years, your savings will only be $151,500 even though you contributed three times as much as in the previous example. Needless to say, that is a huge difference. It is obvious, then, that you need to learn how to invest in early 20s. To assist you with that, here are 10 tips that will help you understand how to invest to retire early:
1. Live on a budget
Living on a budget is considered to be one of the primary building blocks in establishing an investment program. A budget is like a roadmap. It acts as a guide that lets you compare your income to your expenses. That way, you can make sure that you have enough money to pay your bills. By budgeting expenditures in advance, you will have plenty of time to make adjustments as necessary. Paying your bills on time will also help you to avoid late fees and keep your credit rating intact. Additionally, a budget will help you see where you might be able to cut expenses in order to save money.
2. Set up an emergency fund
Life is unpredictable. You never know when you might need medical attention or emergency car repairs. Such emergencies can completely destroy your budget unless you have money set aside for that purpose. Many financial advisers recommended saving enough money to cover six months of expenses. If you have debt, though, financial guru Dave Ramsey recommends that you save $1,000 and then work on paying off your debt. Once your debt is paid off, you can continue to build up your emergency fund to six months of expenses.
3. Pay off credit card debt
Typical credit card interest rates vary from about 16 percent to around 25 percent. This can totally wreck your budget and keep you from beginning an investment program. Because of this, you should try to pay off your credit cards as soon as possible. Begin by paying as much as you can on the card that carries the highest interest rate. Once that card is paid off, start paying what you can on the card with the next highest interest rate. If you follow this pattern, you will see a snowball effect, and your credit card debt will be paid off much faster than what it otherwise would have been. This will free up money that you can use for investment purposes.

4. Obtain adequate health coverage
You need to have adequate health coverage in case of a medical emergency. Hopefully, you can obtain subsidized health coverage through your employer. If not, you should be able to get coverage through the Affordable Care Act (ACA). You don't necessarily need to cover every single expense. What you are looking for is to cover major expenses that could drain your savings and prevent you from being able to invest.
5. Make the most of pay raises
Perhaps you are expecting a pay raise or bonus this year. If so, you could use a substantial portion of it to pay off debt or contribute to your retirement program. If you have no pay raise coming but feel like you deserve one, you may want to consider asking for one. You could also consider changing jobs or going back to school to improve your skills in order to make more money. Some employers even offer reimbursement for certain tuition expenses.

6. Establish a retirement plan
Many young people make the mistake of thinking that retirement is a long way off and that they don't need to plan for it yet—they will do that when the time comes. However, you may find it easier to contribute to a retirement plan while you are in your 20s because you do not have a mortgage or a family to support. In any event, you should set up a retirement plan and begin contributing to it as soon as possible. That way, you will be able to take full advantage of the compounding effect previously mentioned.
7. Save for a home
A home can be a wonderful investment. After all, you need a place to live, and you may as well be making mortgage payments instead of paying rent to your landlord. In most cases, you can deduct mortgage interest and property taxes on your federal income tax return. You will also benefit financially if your home increases in value. Consider this: if you buy your home in your 20s with a 30-year mortgage, you can own your home free and clear when you are in your fifty's. You will no longer have to make mortgage payments although you will still have to pay taxes and upkeep. By eliminating your mortgage payments, you will have more money to invest toward retirement.
8. Invest in the stock market
The stock market can provide an annual rate of return on your money that cannot be duplicated with typical savings accounts. Over a long period of time, the stock market returns an average of approximately 10 percent per year while typical savings accounts pay less than 2 percent per year. The difference in those two values over a long period of time could mean a huge difference in the amount of your retirement savings.

9. Take advantage of employer-sponsored retirement programs
Many employers offer some type of retirement program, typically a 401k savings plan with matching funds. 401k plans operate on a tax-deferred basis, meaning that your contributions are not subject to income tax. Therefore, your contributions will be larger than what they otherwise would have been, and this allows your principal balance to grow at a much faster rate. However, you will have to pay taxes on withdrawals. If your employer offers a 401k with matching funds, you should participate in the plan because the employer’s contribution is basically free money.
10. Open an individual retirement account (IRA)
In addition to participating in your employer’s retirement plan, you can also open your own individual retirement account (IRA). You will be able to choose between a traditional IRA and a Roth IRA. A traditional IRA operates in much the same way as a 401k, meaning that your contributions are not taxed. Roth contributions are taxed, but withdrawals are distributed tax-free. If you are in your 20s, a Roth IRA is generally preferred because you are more likely to be in a lower tax bracket once you retire.
Parting Words
Sometimes it pays to get help. This is especially true when it comes to knowing how to invest to retire early. As this article demonstrates, there are many things to consider in order to adequately plan for retirement. Unless you are extremely knowledgeable when it comes to such financial matters, you should consider hiring a professional who could give you advice on how to invest in early 20s.



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