I’m in my 20s — How should I approach investing?
- Create a spending and saving plan
- Think about your money in buckets—right away, short-term, medium-term, and long-term
- Consider maximizing your returns while minimizing your costs and risk
For many, your 20s are often the first time that you have some cash on hand. And it can be hard to know what to do—how much to spend, whether to pay back loans, and how much (if anything) to save for the future.
Between building your career and spending time with friends, investing often takes a backseat. It can be stressful to tackle, and you might not know what your goals are yet—if you want to buy a home, get married, or go back to school.
But like learning to cook a decent meal, building your money management skills can help you take care of yourself and your loved ones. So, just as you might go grocery shopping before whipping up a meal, you can take concrete steps to prepare for your investing journey.
At Robinhood, we’ve got a BOMB acronym to help you think about your financial life. So, here are four tips on how to Budget, Organize, Maximize, and Balance your finances to help tee up your investing journey.
1. Budget. Forget about pinching pennies. A budget shouldn’t make you cringe—it should be something dynamic and sustainable, a tool that helps you lead the life you want. You might think of this as a “spending plan,” but a budget just helps you keep track of your money. At a high level, it captures two numbers: How much do you earn? And how much do you spend?
If you’ve ever heard the term “balanced budget,” that means that those numbers are equal—or you might even have some extra income to spend as you please. Ideally, it’s nice to have some extra cash (aka a “surplus”). You might use that to buy a new guitar, or maybe to start investing.
For most people, a basic budget probably contains similar items, such as rent, health insurance, food, and transportation. Those are some of the bare necessities. Others might include clothes and entertainment. (We realize not everybody considers Netflix an “essential.”)
2. Organize. Your 20s can be an exciting time to socialize and explore. They’re also a great time to start thinking seriously about your goals—and more specifically, how your money can help you achieve them.
This is important because any money you have left over (after covering your monthly expenses) could be put to work in others ways. Many financial advisors suggest thinking about your money in distinct buckets, each targeted toward a general purpose. Here are some useful categories:
Right-now money: What bills are due? This money is for everything you need immediately—to buy food, pay your rent, and cover your medical care. Most people keep this kind of money in a readily accessible checking account.
An emergency fund: In case you experience changes in your living situation, work, health, or family, it’s good to ensure you have some savings which can help you through a rough patch. This could be anywhere from three to six months of living expenses. Building a cash cushion can help alleviate anxiety about running into a situation where you aren’t able to cover your bills.
Medium-term money: What do you plan to do in the next about 3-7 years? Is marriage in the cards, or maybe buying a home? For your near-term goals, you might seek a bit more stability. Depending on your time horizon and risk tolerance, this money may belong in a high-yield savings account, a money market account, or certificates of deposit.
Long-term money: Investing for the long-term often means that a person can seek greater risks and rewards. For instance, if you’re saving for retirement—through a 401(k), Roth IRA, or another plan—you might invest in stocks, bonds, or real estate. This is where you might consider a brokerage account. (More on that in a minute. Also, for full transparency, Robinhood is a broker.)
3. Maximize… and Minimize. Nearly every investment has a cost—and the more you pay in fees, the less you get to keep. While your income will probably grow and your tastes might become more expensive (maybe pho instead of microwavable ramen), you’ll probably want to find ways to maximize your ability to save and invest. These are some steps you could take.
Retirement matching: Most companies that offer retirement plans use a 401(k), a tax-deferred retirement savings account. A major perk is that employers often “match” your contribution up to a certain amount. For instance, if you save 3% of your salary, your company might contribute an equivalent amount on your behalf. This is a fantastic deal—your boss essentially pays you extra, and that money goes directly toward your retirement. Almost universally, financial planners say to take advantage of your company’s 401(k), contributing at least up to the match, and perhaps beyond. 401(k) accounts tend to be straightforward, allowing you to adjust your contribution rate, with money taken directly from your paycheck.
Note: The 401(k) contribution limit usually changes year to year. For tax year 2019, the maximum was $19,000, not counting the “employer match.” In 2020, the limit is $19,500.
Compounding: Instead of simple interest, where you receive interest only on the initial amount sum you invest, compounding provides investors with interest on both the principal and any interest you accumulate. Over the course of decades, that can make a world of difference. It also means that it’s better to start saving and investing as soon as possible!
Automation: If you’re looking for tools that can help automate longer-term investing, robo-advisors can sometimes be worth exploring . Robo-advisors can help you manage a brokerage account, where you might invest in things like stocks, bonds, or exchange-traded funds (ETFs). Robo advisors can do much of the work once handled by more traditional advisors, but at a lower cost. These services use algorithms to automate money management for people who don’t want to spend a lot but still want to be thoughtful about how they invest. (Bear in mind, these accounts are generally designed for simpler portfolio needs versus more sophisticated, in-person planning with a professional.) One feature you might seek in a robo advisor is the ability to make automatic deposits from your bank account. That means you can contribute to your account with minimal effort. For individualized advice on what account type makes the most sense for you, please consult an appropriate professional.
4. Balance. As a foundation in your investing life, you’ve probably heard of something called a diversified portfolio. It’s an important thing to consider in your 20s. The idea is to balance what you’re investing in, ideally to keep things growing without exposing yourself to too much risk. Diversifying your investments does not eliminate risk but it can help mitigate the damage wrought by bear markets.
To construct a balanced portfolio, you might want to invest in a mixture of some higher-risk investments, such as stocks, and lower-risk investments, such as bonds. You might even decide to diversify within asset classes, for instance investing in smaller and larger companies, or in technology and pharmaceutical companies.
Consider the balance you’re aiming to achieve across your investments. Note that diversification means that, by design, your various investments will probably grow and fall at different rates. While there’s no official timeline to rebalance your portfolio, once a year could be a good cadence to start.
Thinking about investing can feel pretty overwhelming, and the challenging, unprecedented conditions people are experiencing in today’s markets around the world don’t make it easier. When you are ready to take steps toward managing and investing your money, the BOMB framework can help you start your investing journey on the right foot.
Diversification does not ensure a profit or eliminate the risk of investment losses.