How to invest in your 20s?

Five steps to invest in your 20s that can make you a millionaire in the future.

First and foremost, the basic step for you to invest your money risk free is to find a high yield saving account and put your money into it. Some of the online banks, notably Ally Bank, offer 1% annual return on all levels. This might seem low but when compared to big brick-and-mortar banks who usually offer the interest rate at around 0.01%-0.03%, these 1% returns are like a needle in an ocean. Moreover, before the Covid-19 hits, these online banks used to have their rate up to 2% and even 3% in some cases. I have a great belief that the rate will return back to that high after the pandemic is over.

Highly yield savings account will give you the high return with pretty low risk

Secondly, the most important thing is setting up a Roth IRA account. The reason is that for this account, by the time you’re 59.5, you can realize your profit without paying a single cent on tax. This is the advantage of investing with a Roth IRA account as early as possible, because with just 5 years different, the capital gain tax you have to pay is significant. Vanguard offers an option to open a Roth IRA account if you choose to invest with them.

Roth IRA: image from UnSplash

My third recommendation is in terms of what to invest in, an index fund with a low expense ratio is your best choice when taking into account both return and risk. With an index fund, when aiming for long term results, historically, over the last century, the stock market has returned about 10% annually, with dividends reinvested. With just $1000 a month invested in an index fund and a return of 10% every year, your path to become a millionaire is not far fetched. This article will show you exactly how you can achieve this goal.

An index fund is a guarantee way for your 10% annually return

My fourth advice is setting up a Traditional 401k. Your contribution is deducted from your total taxable income when you put it into your 401k account, and you can grow your investment tax free until you take it out at 59.5. This means that you’ll have more money to invest beforehand, and therefore making more money, because you’re paying less in taxes. Moreover, if you open a 401k account through your company, many of them today have a match program where for every $1 you put into your 401k, they will give you an extra $0.5-$1. This is basically free money and you should use it WHENEVER you have a chance.

Traditional 401k: image from UnSplash

At last but not least, if you are willing to extra miles, you can choose to invest in individual stocks. This will be more risky, but the return will be far greater than index funds if you choose the right stock to buy. Make sure to invest with your Roth IRA account so that you won’t be taxed when you realize your profit after you turn 59.5.

The good individual stock yield far greater result when compared to an index fund

You can also invest in real estate, but since in our 20s, we still have a tendency to not settle down yet, buying a house might not be a good idea. Let’s put it in our to-do list in our 30s then!

For all of my recommendations above, holding your investment long-term is the key. It might sound silly because you cannot use any of your money or profit until you turn 60, but in the long run, those investments can make you a fortune. You can retire without worrying too much about money, and that you can finally reach your millionaire goal.