Best ways to invest money in your 20s
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Learn how to invest money in your 20s and avoid the biggest mistakes.
The best ways to invest money in your 20s might not be what you thought. Young investors love to chase stocks and those high returns but the best investments might be right in front of your nose.
In this video, I’ll show you three investing rules and investments that will leverage your age to set you up for big returns, not only in your portfolio but in your life.
In fact, I’m revealing the strategy the rich use to make money regardless of age. I'll give you a hint, it's not in stocks.
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Making Your Money Work in Your 20s
I’m excited for this video. Us old-timers think back to the investing mistakes we made in our 20s and how much we could have by now. For those of you in your 20s now, it just feels like a huge opportunity to get it right, to invest and make your money work for you.
We’re not stopping there though. Over the next couple of videos, I’m going to be highlighting the best ways to invest in your 30s and 40s so even if you’re not there yet, make sure you check those out because it’s going to give you that perspective and those ideas you’ll need to keep your money working for you.
In this video, we’ll first look at those strategic ways to invest in your 20s, how your age plays with different types of investments and how you can invest. Then we’ll talk about some specific investments you can make to take advantage of that.
Investing Rules in Your 20s
Let’s get some of those investing basics as well as some of the lies you hear about starting investing out of the way though. I hear a lot of these on other channels and it just makes me die a little inside because it’s such horrible advice. So let’s start with three rules to finances in your 20s to break these myths going around.
First is probably the biggest myth right now and one of the most dangerous for someone in their 20s. It’s the idea that you have to pay off all your debt and student loans before you do anything else and it’s complete bullshit.
Now if you’ve got high-interest credit card debt then pay it off as fast as you can. Get rid of it because it’s just going to be a burden on your entire life. But if you’ve got debt with a rate below 8% or maybe even a little higher, it just makes financial sense to balance that debt payoff with investing.
First of all, those tax benefits to investing in a Roth or even better getting that free money from your employer in a 401K plan, mean a return on your investments well over that eight or ten percent. It makes no sense to not take advantage of a 20% investment so you can save 8% in interest. All these bloggers and YouTubers that cry about debt, it just makes no sense.
Second though, and this might be more important, is that even if you’re getting the same return on your investments as that rate on your debt. Let’s say you’re paying 8% on a student loan and making 8% on your investments. You’re still creating that habit of saving and investing and that is more powerful than you know.
Most people get to their 30s or 40s and they’ve never invested a dime. They got in that hamster wheel, that single-minded focus of paying down debt and never created that habit of investing. Now they’re screwed because they don’t know how to start and they don’t have much time to make their money work anyway.
So pay down any debt with a rate over 15% or so, make regular payments on the rest but get started investing NOW!
Retirement Investing in Your 20s
Another rule to investing in your 20s is to max out those retirement accounts. I know it sucks that your money is locked up for 40 years in these accounts but this is by far the best investing you’ll ever do. It always amazes me how many people don’t max out their employer match in a 401K plan. That’s free money. If your employer is matching half of your contributions, that’s an instant 50% return and nobody gets that in the market. Not Lynch, not Icahn, not even Buffett.
After maxing out your employer match in a 401K, your best bet here is investing in a Roth IRA account. Now the Roth won’t get you that immediate deduction on your income taxes like a regular IRA but you’re not paying that much in income taxes now anyway.
With a Roth, you get to take all your money tax-free in retirement. That means you never pay taxes on those investment returns and that makes it a much better investment compared to a regular IRA or just an ordinary investment account.
How to Invest in Yourself
One last rule for investing before we get to that strategy of how to invest in your 20s and its going to be to always invest in yourself, in your skills and your business ideas. Investing in any kind of education or skills, even if its just an internet course, is going to make you an asset to any company. That’s going to get you more money and keep you earning.
More important though, and this is something we’ll talk about in that investing strategy as well, is go after those business ideas. Now that doesn’t mean quit your job and put everything into your idea for the next Kardashian card.
There are lots of business ideas and models you can start from home with just a few hours a week. Now is the time to take a chance on a business, start a side hustle that could become a seven-figure business, before you’ve got a family and no time to do it.
Check out this mega-list of 20 side hustle ideas in five videos. I guarantee there will be at least one that will work for you!
Investing Strategies in Your 20s
Now let’s talk about that investing strategy and most 20-year olds have kind of an ironic problem here, they have this great opportunity where their money is going to be growing for 30 plus years but they don’t have any money to invest. It’s the opposite problem as you get older, right?
By your 50s, you’re making lots of money but that money only has maybe a decade to be invested.
Fidelity reports the average 401K balance for investors in their 20s is just under $10,000 while those in their 60s have about $168,000 on average. The red bars here are how many times your salary Fidelity recommends having saved by each decade. So by your early 30s you should have about two-times your salary saved and by the time you retire, about nine-times your annual salary.
So not much money to invest but decades to make it grow. You still need to know how much stress you feel from big portfolio changes but for most investors, that’s going to mean a very high risk tolerance.
This all translates into being able to go after those riskier investments and asset classes. You’ve got lots of time for some of these riskier ideas we’ll talk about to turn higher and those double-digit returns are going to be compounding for years.
So instead of just thinking about a stocks and bonds portfolio, you really need to be thinking outside the box as an investor in your 20s. I’m talking alternative investments, business ideas and house hacking.
Business Ideas for Your 20s
Now we already talked a little about going after those business ideas and one of the most surprising things people see when they look at how the rich get rich, it’s not in stocks. In fact, a survey of over 2,500 millionaires found that they had just 17% of their money in stocks and actually had more in cash. More than 40% of their wealth is wrapped up in their own business, alternative investments and investing directly in startups.
Going after those business ideas in your 20s isn’t just about making boatloads of money either. It’s about learning, about making mistakes early. The average millionaire business owner has failed in at least two business ideas. That’s something you never hear in these success stories. Everyone assumes that successful people went straight to the top or just got lucky. In fact, most have to learn from those mistakes until finally getting to their seven-figure payday.
Going after those business ideas in your 20s when you don’t have that much money to lose anyway teaches you to work through the failures. That way, even if that first idea doesn’t make you rich, you won’t make the same mistakes later in life when you’ve got more at stake.
Our next type of investment to start, and I’ve seen this one create real estate empires, is the house hacking strategy. This is such a great investment for people in their 20s because I know a lot of you want to get into real estate. The problem is you don’t have the credit or the bankroll to buy investment property.
What you can do though, with this house hacking strategy, is you buy a duplex or triplex. Since you’re going to be living in one of the units, you can get cheap FHA loans which only require a credit score of 580 and as little as 3.5% down payment.
Let’s look at this because the economics really come out great. If you buy a three-unit house for $230,000 with eight grand down and finance the rest, your monthly expenses including a reserve for maintenance and property taxes is just under two thousand dollars.
On the other side, you’re collecting rent from two of the units, paying off the mortgage and getting that appreciation every year. That puts you in the green and doesn’t even account for the free rent you banked.
That’s going to give you more money to start investing, put into your business or eventually even buy more properties. I’ve seen investors turn this simple house hacking strategy into dozens of rental properties before the age of 30.
Next on our list of investments for your 20s are those alternative investments I talked about earlier. These are called alternative because they’re not like stocks and bonds. They’re usually riskier, maybe your money is locked up for a couple of years and they aren’t as well known.
So we’re talking here about things like startup investing, peer-to-peer lending, and even (and I can’t believe I’m saying this) but things like bitcoin. These types of investments are risky but they have the potential to make 10 and 20-times your money.
For someone in their 40s or 50s, the risk isn’t worth it. They’ve got families and bills and they need to start thinking about protecting the money they have saved for retirement.
For someone in their 20s though, this is the perfect time to be taking that risk. Even if you have just 10% of your money in one of these alternative types of investments, and this is an important point because you shouldn’t have more than 20% or maybe a quarter of your investment money in these. But even if you have just 10% of your money in alternatives, if the investment jumps ten-fold then you’ve just doubled your wealth.
It doesn’t even matter what return you got on that other 90% of your investments, you’ve doubled your money by taking that risk in just a small slice of your wealth.
Stocks for Your 20s
You can take this idea of going a little further on risk into stocks and bonds as well. Within your stock portfolio, you can invest in the riskier, more cyclical sectors like tech stocks and biotech. You can invest in individual stocks or you can still get that high upside growth from funds that hold stocks in those themes.
Want more in stocks? Check out our 2019 Stock Market Challenge portfolio, already up more than 25% on the year. See how I picked this portfolio of dividend stocks here.
So here I like the Technology Select Sector SPDR ETF, ticker XLK, which invests in 68 companies in that fast-growing tech sector including Apple and Intel. For biotech, you’ve got the iShares Nasdaq Biotechnology fund, ticker IBB, which holds stock in 223 companies in drug development and healthcare.
Another theme that’s great for investors in their 20s is small cap stocks. These are companies with a market cap of between $300 million to two billion. That might seem like a big company but it’s dwarfed by these trillion dollar mega-cap stocks and these smaller companies are the ones that seen the fastest growth.
A good fund here is the iShares Russell 2000, ticker IWM, which holds thousands of companies in that small cap theme and has produced a 12% annual return over the last decade.
It's these investing strategies, those investing rules and investments that are going to leverage that time you have as a young investor. These are the very best ways to invest money in your 20s and will set you up for success later down the road.
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