The 3 Quick-Win Investment Accounts in Your 20's-30's

Lexis Hanson
Sep 25, 2018 · 6 min read

Breaking down your investment money into the exact accounts you should be contributing to.

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While there’s no shortage of (often terrible) advice out there about which stocks or funds to invest in, there’s far less information about the types of investment accounts you should have in your portfolio.

Investing is important. It’s also easy to mess up. Whether you’ve been thinking about investing and putting money into retirement funds, or maybe you already are, coming up with a strategy for how to distribute that money can be overwhelming.

I’ve focused my passion for finance on my own investments, and I’ve found another passion in helping others feel confident about their own investing.

Disclaimer: I do not provide personal investment advice and I am not a licensed investment advisor. All information found here, including any ideas, opinions, views, or suggestions, are for informational, entertainment or educational purposes only and should not be construed as investment advice. I will not and cannot be held liable for actions you take resulting from anything you read here. Conduct due diligence on your own, or consult a licensed financial advisor or broker before making any investment decisions.

Here are the 3 investment accounts you should be contributing to right now:

To make things more digestible, we’ll assume you have an income of $100,000 and $15,000 of that available to invest.

1. 401k

At a minimum, you should be contributing up to your employer’s match amount to your 401k. If not, you’re leaving money on the table. If your employer matches 100% of the first 5% you contribute, it’s a no-brainer to contribute at least 5% to your 401k. Start with this.

You’ll likely want to place this money in a couple of funds available from your 401k plan. You can choose from funds focused on growth, income (divided payouts), small or large companies, emerging markets, bonds, target date funds, etc. Some 401k plans will allow you to invest a portion directly in equities. This article does a good job of explaining the tradeoffs between index funds vs. target date funds.

At the very least, look for options with low fees and cross-reference the ticker of the fund on Morningstar to check its rating. For reference, one of the funds I’m investing in is FXAIX (Fidelity). It has a low expense ratio and Morningstar gives it 5 stars.

Using the example above, with $100,000 income and $15k available to invest, consider putting 5% ($5k) into your 401k to get your company’s full match. This leaves us with $10k remaining.

Start with: $15,000, Invest: $5k, Remaining: $10k

2. Roth IRA

A Roth IRA, like a 401k, is a tax-advantaged retirement account. One key differentiator is that you invest post-tax money in a Roth IRA. When you withdraw it in your future retirement, you will not have to pay any taxes on that money. Wowza!

It’s a good strategy to balance money between pre-tax and post-tax retirement accounts, and there’s potentially only a limited window for you to invest in a Roth IRA. Once your income (technically, “modified adjusted gross income” MAGI) reaches $120k, the amount you’re able to contribute to a Roth IRA gets limited. This is one of those scenarios where you’ll want to take advantage before you’re making more money.

If you reach the income limits for a Roth IRA, there are other avenues you can pursue, such as a Backdoor Roth IRA. I’ll write more about that strategy in a future article.

Assuming your income of $100k, you can contribute up to $5,500 to a Roth IRA. From that $10k remaining you have to invest, max out your Roth IRA contribution. That leaves you with $4,500.

Invest: $5,500, Remaining: $4,500

3. Direct Stock

Direct stocks can be riskier, and the market is “high” right now (whatever that means), but stocks should have a place in your portfolio.

The average return of the stock market for the last century has been ~10% per year (Source). This is the amount that buy-and-hold investors can expect to earn over time.

A 10% a year on average beats your bank’s “generous” 1% interest rate they’re offering on your savings account.

The stock market is paying you 1000% more than your bank account.

Don’t expect that you should buy/sell daily, weekly, or even monthly.

Don’t be scared if you see some drops.

Generally, you should hold on to your stock investments, through ups and (most) downs. The #1 mistake I see of first-time stock investors is that they freak out when a stock drops 5% and sell immediately.

Think about it this way: you haven’t actually lost money (or gained, for that matter) until you’ve sold the stock.

If you’re savvy enough to use limit orders, a simple strategy is to sell off a portion of your stock for a company if it goes up a sizable amount, say 20%, in a short amount of time. This way, you collect some of your gains from your original investment in case the stock takes a dip. This is a very simplistic approach, and I’d recommend doing research on nature of buy and sell limit orders before going down this path.

One other benefit of buying and holding: if you own a stock for greater than 1 year, the government will give you a break on the amount of taxes you pay.

Instead of paying taxes at your normal income rate, the long-term capitals gains tax rate kicks in after 1 year.

With an income of $100k, you fall into the 25% income tax bracket, but your long-term capital gains tax rate would only be 15% (Source). Consider this a high-five from Uncle Sam 💸.

With your remaining $4,500 consider investing in direct stocks.

Invest: $4,500, Remaining: All invested! 🎉

Bonus: ESPP

I’m adding this as a bonus as ESPP plans are usually only offered at mid-to-large size companies. ESPP plans can be a great way to level-up your portfolio.

An Employee Stock Purchase Plan (ESPP) is an especially great investment if your employer gives you a discount on stock or freebie shares 🙌.

It’s common for ESPP offerings to include a 15–20% discount on the price of the company’s stock. Similar to a 401k match, this is an easy choice if your company gives you this extra benefit.

If you sell the ESPP stock grants as soon as they’re made available, that’s an immediate 15–20% gain. Free money 💰! If you didn’t get the raise you wanted this year, this is a nice boost to your income.

(Keep in mind the short-term vs. long-term gains taxes apply to ESPP shares too, so in some cases it can make sense to hold your stock rather than sell right away.)

If you have an ESPP plan offering discounted or bonus shares, how should you factor that in with the strategy outlined above?

Consider contributing to your 401k at least up to your company’s match, and then maxing out your ESPP plan. Put any remaining savings into a Roth IRA.

If you don’t have anything left for your IRA, fear not! Once you get around to selling your ESPP shares, you can optionally put that money into your Roth IRA, or take a portion and treat yourself to something nice — you deserve it!


Thanks for reading! I plan to write more content on investing topics, but I’d love feedback from you on what you’d like to read.

Here are some topics I’m considering:

  • Tax strategies for investments
  • Reducing your taxable income
  • Backdoor roths, mega(!) backdoor roths
  • RSU’s 101
  • How to use limit orders
  • Why compound interest is a wonder of life

Please comment with what you’d be interested in reading next!

Capital Ques

Actionable, practical investing advice to get your money making you money.

Lexis Hanson

Written by

Self-taught software engineer, life-long learner, finance aficionado, most comfortable at a temperature between 68–78 degrees.

Capital Ques

Actionable, practical investing advice to get your money making you money.

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