Investing in Your 20s: Best Investment Ideas for Young Adults

If you're in your 20s and don't know where to start investing, here are our top tips to get started.

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You're always being told to invest your money, even when the stock market is volatile. Some even say now is the best time to invest because of low prices. But exactly what should you be investing in your 20s?

Below are eight investment ideas you should consider while you're young. You certainly don't have to invest in all of them. But by picking just two or three and steadily funding each, your wealth will begin to grow quickly.

Important Considerations For Young Investors

Before we dive into some of the best assets to buy in your 20s, there are a few considerations young investors should keep in mind before putting their money to work:

  1. Timeframe: Are you investing for the long-term or do you need your cash within the next few months or years? For long-term investing, young investors can typically take on a bit more risk and trust that time and compound interest will work in their favor. In contrast, short-term investing generally means picking safer investments.
  2. Investing Goals: Are you investing for income, growth, or some combination? Again, young investors can generally aim for higher growth opportunities since time is on their side, whereas older investors tend to favor fixed income.
  3. Active vs. Passive Investing: How much time are you willing to spend on your investing portfolio? Some investors prefer to stay hands-off and simply dollar-cost average into various index funds and ETFs. But for others, researching individual stocks and sectors might be more enjoyable.

There's no cookie-cutter solution for the perfect investing style or philosophy. But the more you read and think about your goals, the more confident you'll become as an investor.

The Best Investments For Young Adults In Their 20s

With those considerations out of the way, it's time to explore some of the best investments to make in your 20s to set you up for success at a young age.

1. Invest in the S&P 500 Index Funds

Invest in S&P 500As a young investor, your investments should be concentrated on growth-oriented assets. That's because in the decades ahead of you, you can take advantage of compounding of much higher rates of return on growth investments than you can get on safe, interest-bearing ones.

The S&P 500 index has provided an average annual rate of 10% return going all the way back to 1926. That's an incredibly powerful source of compound earnings.

While the stock market is rather volatile these days due to concern over the coronavirus's rapid spread, stocks are still a good choice if you're young. You can take advantage of low prices for top stocks. Plus, you have plenty of time to weather the current stock market lows. Just be sure only to invest money that you don't currently need.

As an example, if you were to invest $10,000 at age 25 in safe certificates of deposit (CDs) paying an average annual rate of return of 2%, you'd have $22,080 by age 65.

But if you invest the same $10,000 at age 25 in S&P 500 index funds producing an average annual rate of return of 10%, you'll have $452,592 by age 65. That's more than 20 times as much as you would have if you invest the same amount of money in CDs!

We recommend investing in the S&P 500 index funds using one of the following stock brokers:

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This isn't an argument against cash. You should have a sufficient amount of cash sitting in an emergency fund to cover at least three months of living expenses. That gives you a cash cushion should you either lose your job or be hit by a bunch of unexpected expenses. The other advantage of an emergency fund is that having one will keep you from liquidating your investment assets.

However, when investing in S&P 500 index funds, be aware that the figure of 10% per year is an average over more than 90 years. It has fluctuated dramatically. For example, you may lose 20% one year and gain 35% the next. But when you're young, this is a risk you can easily afford to take. You'll miss out on plenty if you don't.

2. Invest in Real Estate Investment Trusts (REITs)

What Are Non-traded REITsReal estate is another growth-type investment strategy, and you absolutely can't get enough of those when you're young.

  • Investing in a REIT (real estate investment trust) REIT is an opportunity to hold a portfolio of commercial real estate. This can be more valuable than owning a single investment property because the portfolio is invested in different types of property in various geographic locations. That gives you greater diversification than you can get with a single property.
  • Another significant advantage is that you can invest in a REIT with just a couple of thousand dollars. Buying an investment property outright would require a much larger amount of capital just for the down payment. We can also add that you don't need to actively manage a REIT the way you would with an investment property.
  • REITs have the advantage of investing in commercial real estate, which often outperforms residential properties.

There's even an argument that REITs have outperformed stocks in the past few decades. But even if the returns are no better than equal to those of the S&P 500 index, a REIT is still a valuable hold for young investors.

  1. First, real estate has been a strong performer over at least the past half-century.
  2. Second and perhaps more important, real estate — and commercial real estate in particular — often moves independently of the stock market.

For example, a real estate investment trust may continue to provide positive returns even when the stock market is falling. This is not only because REITs pay regular dividends but also because commercial real estate may continue to rise in value when the stock market is falling.

Perhaps more than anything, REITs are a way of diversifying your growth assets beyond stocks. We recommend investing in REITs using crowdfunding sites like Fundrise and Streitwise, as it allows almost anyone to invest in private real estate deals for just $5,000.

3. Invest Using Robo Advisors

Robo AdvisorsWe've already discussed investing in stocks through S&P 500 index funds or commercial real estate through REITs. But if you're not familiar or comfortable with investing on your own, you can always do so through a robo advisor.

That's an online, automated investment platform that does all the investing for you. It includes creating your portfolio, then managing it from now on. They even reinvest dividends, periodically rebalance your portfolio and offer various tax strategies to minimize your taxable investment gains.

What's more, you can use a robo advisor for either a taxable investment account or a retirement account, particularly IRAs. It's hands-off investing at its best. All you need to do is fund your account and the robo advisor handles all the details for you. And they typically invest in a mix of stocks and bonds. Many also offer funds that focus on ESG stocks.

Here at Investor Junkie, we like Wealthfront and Betterment, which are the two largest independent robo advisors. Both offer an incredible range of investment benefits and are on the cutting edge of the industry.

We made a comprehensive comparison between Betterment and Wealthfront right here.

4. Buy Fractional Shares of a Stock or ETF

You don't have to buy full shares of a stock or an ETF these days. If you want to be more hands-on with your investing but can't afford a lot of stock, consider fractional shares. This is when you buy a portion of a stock for a fraction of the price. For example, if you want to buy Netflix shares, but can't afford $500 to buy one share. You can invest $20 instead and buy just a little bit of that one share. With fractional shares, you still own a portion of the company.

Not every investing app or broker will let you buy fractional shares. One great app that will also allow you to buy a portion of shares is Public.com, as it's a commission-free stock and ETF trading app for iOS and Android. It also supports fractional share investing in stocks and ETFs.

5. Buy a Home

single family homesThis one's kind of a mixed bag. On the positive side, owning a home lets you build substantial equity over many years. This is done by a combination of gradually paying down your mortgage and the value of the property increasing.

Owning a home also has the advantage of leverage. Since you can buy a home with as little as 3% down (or no down payment at all with a VA loan), you can get the benefit of appreciation on a $300,000 property with an out-of-pocket investment of just $9,000.

Even if you do nothing more than simply pay off the mortgage in 30 years, your $9,000 investment will grow to $300,000. That will increase your initial investment by a factor of 33. But price appreciation of the property can make that number a lot higher.

The downside to buying a home when you're young is that you may not be at a point in your life when the relative permanence of homeownership will work to your advantage. For example, being early in your career, you may need to make a geographic move in the near future. If you do, owning your own home could make that move more challenging.

If you're single, owning a home forces you to pay for more housing than you actually need. And of course, a future marriage could also hold the possibility of making a geographic move or needing to purchase a different home.

Owning your own home is definitely an excellent investment when you're young. But you'll have to do some serious analysis to determine if it's the right choice at this point in your life.

6. Open a Retirement Plan — Any Retirement Plan

There are two primary reasons for doing this: getting an early jump on retirement savings and tax deferral.

Getting an early jump on Retirement Savings

If you begin contributing $10,000 per year to a retirement plan beginning at age 25, with an annual return of 7% (blended between stocks and bonds), you'll have $2,008,829 in your plan by age 65. Being on that kind of fast track may even enable you to retire a few years early.

But if you delay saving for retirement until age 35, the results are not as encouraging. Let's say you begin saving $15,000 per year at age 35, also with an average annual rate of return of 7%. By the time you're 65, your plan will have only $1,426,427.

That's more than 25% less, even though your annual contributions will be 50% higher. That's a compelling reason to begin saving for retirement as early as possible. You don't need to contribute $10,000 either. Contribute as much as you can now and increase the amount as you move forward and your earnings increase.

Tax Deferral

The tax deferral angle is just as magical. In the above example, we showed how investing $10,000 per year beginning at age 25 will give you a retirement portfolio of over $2 million by age 65. A big part of the reason why that's possible is because of tax deferral.

But let's say you choose to make the same investment each year in a taxable investment account. You have a combined federal and state income tax marginal rate of 25%. That will lower the effective return on investment to just 5.25%.

What will the results look like after 40 years at the reduced after-tax investment return?

You'll have just $1,290,747. That's more than 35% less, due entirely to taxes.

Retirement Plan Options

If your employer offers a company-sponsored retirement plan, this should be your first choice. They'll typically provide either a 401(k) or a 403(b) plan that will let you contribute up to $19,000 per year out of your income.

In addition to the tax deferral discussed above, retirement plan contributions are tax-deductible from your current income. A contribution of that size would produce a significant tax break.

If you don't have a plan at work, consider either a traditional or a Roth IRA. Either will allow you to contribute up to $6,000 per year and provide tax deferral on your investment earnings.

The major difference between the two IRAs is that while contributions to a traditional IRA are tax-deductible, contributions to a Roth IRA are not. However, the Roth IRA more than makes up for that lack of tax deductibility.

With a Roth IRA, withdrawals can be taken completely tax-free once you reach age 59½ and have been in the plan for at least five years.

7. Pay Off Your Debt

Payoff DebtOne of the major investment complications for young people is debt. Student loan debt alone is a major issue, with the average loan amount at nearly $38,000 for 2021. But many young people also have car loans and more than a little bit of credit card debt.

The problem with debt is that it reduces your cash flow. If you earn $5,000 per month and $800 is going out for debt payments, you really have only $4,200 per month.

In a perfect world, you would have no debt at all. But this isn't an ideal world, and you probably do.

If you do have debt and you also want to invest, you're going to have to find a way to create a workable balance. It would be great to say that you'll just make your minimum debt payments and throw everything else into investments. That will certainly allow you to take advantage of the compounding of income that investments provide.

But at the same time, there's an imbalance. Investment returns are not guaranteed, but the interest you pay on loans is fixed. Put another way, even if you lose 10% on your investments, you'll still be required to pay 4% on your car loan, 6% on your student loan debt, and 20% or more on your credit cards.

One of the best investments you can make early in life then is to begin paying down your debts. Credit card debt is a good first target. They're usually the smallest debts you have but carry the highest interest rates. If you're paying 20% on a credit card, you won't be able to get that kind of return consistently with your investments. Paying off those credit cards is the best debt reduction strategy you can make.

8. Improve Your Skills

Learn InvestmentsMost people don't think of improving their skills as an investment. But as a young investor, that can actually be one of the very best investments you can make. After all, the income you earn over your lifetime will be your single greatest asset. The more you can increase it, the more valuable it will be.

Plan to invest at least a small amount of money and time in acquiring any skills you need in your career. You may also think about skills you want to add to prepare you for either a higher-paying job or even for changing careers later on.

You can take additional college courses, order online courses, or enroll in various programs that will add to your skillset. Sure, it will cost you money in the short run. But if it will increase your income substantially in the future, it'll be some of the best money you ever spent. And that's an investment in the truest sense.

>>Further Reading: How to Invest Money Beginners' Guide

Final Thoughts

Because of income limits, it's not likely you'll be able to spread your money into all of these investments. But you should pick at least two or three and charge forward. Investing works best when it's done early in life. That will let your money grow, giving you more options in the future.

InvestorJunkie receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. InvestorJunkie is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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3 Comments

  1. What is your recommendation of a book I can give my 20 year old as a Christmas present on investing? His goal is to make more money than me (which will not be a stretch-I have loads of life satisfaction to offset my modest nest egg).
    Thanks so much,
    Heather

  2. Error: (You said in #1 If you earn 7% from 25 to 65 you would have $2,008,829 but then in the next section you said if you earn 10% from age 25 -65 you would have $452,592)

    From #1 “A Retirement Plan”…
    “If you begin contributing $10,000 per year to a retirement plan beginning at age 25, with an annual return of 7% (blended between stocks and bonds), you’ll have $2,008,829 in your plan by age 65. Being on that kind of fast track may even enable you to retire a few years early.”

    From #2 “S&P Index Funds”…
    “But if you invest the same $10,000 at age 25 in S&P 500 index funds producing an average annual rate of return of 10%, you’ll have $452,592 by age 65. That’s more than 20 times as much as you would have if you invest the same amount of money in CDs!”

    1. Hi Therese, thanks for the comment. I am Moriah Costa, one of the editors at Investor Junkie. The first scenario is if you contribute $10,000 each year… the second scenario is if you were to make a one-time contribution of $10,000.

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