How to Start Investing in Your 20s (The Complete Beginner's Plan)

You have time on your side when making investment decisions, so if you are 18 to 20 years old, you need to consider that when you make your decisions. Saving in your 20s is the best quick fix to financial stability.

If I could go back in time to be 20 years old, I wouldn't go to the lottery or bet on a team if I had to. I would sit myself down, give her a cup of coffee and say, “Don't wait for a promotion; don't wait for next year, do it now.”

Looking back, I don't regret that I didn't take a job or spend more money, I regret the way that I spent my time! I didn't realize that every time I was spending money on something that I didn't need, I was taking a thousand units off of my future self. In the investment world, the time to make investments to build wealth early is now.

The greatest gift you can give is time. You're about 20 years old and you've got a financial treasure chest in your hands, even Warren Buffett would be jealous. This guide is written to make sure you don't make the same mistakes that I made and to help you find the path to retirement early, by making some of the smart choices you're making today.

It's the Power of Compounding: Buffett's Secret Weapon

Compound interest is one of the greatest wonders of the world, as is famously noted by one of the greatest investors of all time, Warren Buffett. What does this imply for you?

The process of compounding is when your income generates more income. We're in a domino effect. In your 20s, the hill that you have to climb for that financial snowball is very long, with the hill getting bigger and steeper by the year.

The Math of Starting Early

One of the classic examples of an investing mindset for a beginner that will create massive wealth over time is to invest in index funds:

• Investor A starts at age 20. She invests $200 each month in a low-cost index fund earning an average of 8% per year. By age 60, she has approximately $630,000.
• Investor B starts investing at the age of 30. He puts up the same amount of $200 per month, and the same return of 8%. By age 60, he has only about $270,000.

By foregoing those 10 years, Investor B only "saved" $24,000 of his own money, and lost more than $360,000 of wealth! That's the reason the cost of waiting is so high. The 20s are the best time to build wealth.

3. Investing Money Where Your Mouth is: The 'Core Four' for Beginners

It is not necessary to have the mind of a genius of Wall Street to win with money. The only thing you need to do is to make sure you are consistent and make your habits automatic. This is where you should be going with the rock solid principles of Dave Ramsey and Warren Buffett:

A. High-Yield Savings Accounts (HYSA)

You don't want to risk your short term funds in the market before you have a safe haven for them. A High-Yield Savings Account offers up to 10-12 times more interest than a typical bank account. This is the ideal and risk-free alternative to park your savings and cash reserves.

B. Low-Cost S&P 500 Index Funds & ETFs

Warren Buffett's best stock investing tips for everyday investors are to invest in an inexpensive S&P 500 index fund. You get a portion of the top 500 U.S. companies, which also comprise Apple, Amazon and Microsoft. It's diversified, safe and historically has yielded an average return of 10% a year over long periods of time.

C. Total Stock Market Funds

For additional diversification beyond the top 500 companies, a Total Stock Market index fund lets you invest in thousands of small, medium and large companies in one go. It has a similar growth pattern as the S&P 500 but its management fees are extremely low.

D. Tax-Advantaged Accounts (DTA)

The government offers special "tax-free buckets" for the benefit of young professionals, to encourage wealth building. These should definitely be used:

For US Residents:

• 401(k) Matching: If your employer offers a match, save it right away. This is actually 100% money back and a free cash gift. Never turn it down.
• Roth IRA: Taxes are paid on investments when they're deposited in the account but all growth is tax-free, and all withdrawals are tax-free at retirement.

For UK Residents:

• ISA (Individual Savings Account): This is a way to invest up to £20,000 per year and all investment gains are completely tax free.
• Lifetime ISA (LISA): If you are under 40, the government will match up to £1,000 of free money a year to your contributions towards your first home or retirement.

Need to do compound interest calculations yourself, or monitor your savings targets without the help of a professional? Learn how to use AI as your personal money coach by reading our article about the reasons you don't need a financial advisor.

4. Practice Dave Ramsey's Rule: Safety First

I'm a huge fan of Warren Buffett's growth theory, and I'm a huge fan of Dave Ramsey's financial peace theory. Investing in stocks is an exciting prospect for a first timer, and you want to make sure you're not making your financial home in the sand.

The "No-Debt" Foundation

Having high interest credit card debt is a financial emergency. Index funds don't have any guaranteed returns, but your credit card company guarantees that you'll be getting at least 20% interest. Assess all the high interest consumer debt and pay it off first, before starting to aggressively invest.

The Emergency Fund

In my previous detailed article on saving money, I talked about the need to have a starter emergency fund. Investing is a long-term game. The last thing you want to have to do is sell your stocks when the market is down, only because your car broke down or you had some type of medical emergency.

5. The Psychology of the 20-Something Investor

The greatest challenge to making money is not the stock market but emotions. As you're investing, you'll see fearsome headlines that read, "The Economy is Crashing!".

The place where you need to employ the "Buffett Mindset": "Be fearful when others are greedy, and greedy when others are fearful."

If the market is going down, try not to sell because you don't want to panic. It can be equated to a major sale event with your favourite stocks on sale. As a young person, you have decades to wait for market recovery and an increase in the market. A temporary drop is simply a short dip on the radar screen that is being monitored over a long period of time.

Your step-by-step action plan

So, you've had enough of dreaming? This is your step-by-step paycheck checklist:

1. If your company offers a 401(k) Match, do so!
2. Open an ISA or Roth IRA: Make an automatic monthly transfer. Keep it consistent, though it may be just $50 or £50 a month.
3. Buy the Market: If you don't see a Total Stock Market Index, then you should have an index fund that tracks the S&P 500 with an expense ratio that is less than 0.1%.
4. Don't check your portfolio balance daily: Forget About It. Like grass growing, investing does not occur if the soil is continually turned over.

The Bottom Line

There is no time to wait to be "ready"—it's just a matter of beginning. For years I believed that I needed more money in order to invest, more formal knowledge or better market timing. I was wrong. The most expensive item that I ever bought was the “I'll start next year” excuse!

The 20's are a gift of the universe that you will only get once. Capitalize on them. Remember, slow and steady wins the race and your future self will thank you for the financial freedom you are creating today!

What's next? In my next post, I will give you a simple, in-depth plan that will teach you how to get rid of your debt fast and live a life of financial peace! Stay tuned!

Stay happy and wealthy, 

Finnly Joy.

Disclaimer: The information provided in this article is for educational and informational purposes only and should not be construed as professional financial, investment, or legal advice. Financial strategies, including budgeting and saving methods, may vary based on individual circumstances. Always consult with a certified financial planner or advisor before making any major financial decisions.