Learn about the best investments for young adults and how to invest in your 20s by continuing to read.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).
Introduction
The kind of investment accounts you should create and the choices you should make depend greatly on your age. Low costs and no minimums are characteristics of the finest investing accounts for young adults. Furthermore, while not all investing objectives for young adults include planning for the long term, the investment horizon is important.
Young individuals specifically have competing investment timeframes that necessitate them to think about the optimal short-term and long-term investments depending on these various demands.
After deciding how to prioritize their investing goals, Millennials and Generation Z prefer to favor investment accounts with beginner-friendly mobile stock trading platforms and excellent customer support offered through a variety of channels.
In actuality, the importance of physical sites for banks and other financial organizations is declining. Young investors value affordability and mobile friendliness more, therefore this is more important to them.
Last but not least, the sooner you understand how to invest money, the better off you’ll be financially in the future.
Here are the eight best investments for young adults that you should start while you’re still young. You are not required to invest in each one. However, if you choose only two or three and consistently finance them, your wealth will start to increase swiftly.
8 Best Investments For Young Adults
1. Invest in S&P 500 Index Funds in Your 20s
Your investments as a young investor should be mostly in growth-oriented assets. This is due to the fact that growth investments offer far larger rates of return than safe, interest-bearing assets do over the next decades due to compounding.
Going all the way back to 1926, the S&P 500 index has generated returns at an average yearly rate of 10%. That is a very effective source of compound income.
Stocks are still a wise investment if you’re young, despite the fact that the stock market is currently somewhat volatile owing to worries about the coronavirus’s rapid spread. Top stocks are available at affordable pricing. Additionally, you have enough time to endure the current stock market lows. Make sure you only invest the extra money that you have.
For instance, if you put $10,000 into secure certificates of deposit (CDs) when you’re 25 and they give an average yearly return of 2%, you’ll have $22,080 by the time you’re 65.
You will have $452,592 by age 65 if you invest the same $10,000 at age 25 in S&P 500 index funds, which have an average annual rate of return of 10%. That’s more than 20 times what you would have earned if you had put the same sum of money into CDs instead!
At least three months’ worth of living expenses should be covered by the funds you save in an emergency fund. This provides you with a financial safety net in case you lose your job or are slammed with a string of unanticipated bills. Another benefit of having an emergency fund is that it will prevent you from selling your financial holdings.
However, keep in mind that the 10% annual growth rate for S&P 500 index funds represents an average over more than 90 years. It has experienced significant swings. You can see a 20 percent loss one year and a 35 percent gain the following. But while you’re young, you can easily afford to take this risk. If not, you’ll miss out on a lot.
2. Invest in Real Estate Investment Trusts (REITs) in Your 20s
Another growth-oriented investing approach is real estate, and while you’re young, you just can’t get enough of those. This is definitely one of the best investments for young adults.
A real estate investment trust (REIT) investment gives you the chance to own a portfolio of commercial properties. Due to the fact that the portfolio is comprised of numerous types of real estate in multiple places, it may be more valuable than owning a single investment property. You benefit from greater diversification as a result than you would with just one property.
The fact that you may invest in a REIT with as little as a few thousand dollars is another important benefit. A far higher sum of money would be needed to purchase an investment property entirely, merely for the down payment. We might also add that, unlike with an investment property, a REIT doesn’t require active management.
Investing in commercial real estate normally outperforms residential properties, therefore REITs have the benefit of investing in it.
There is even a case to be made that stocks have underperformed REITs over the previous three decades. A REIT is still a worthwhile holding for new investors, even if the returns are no better than the S&P 500 index’s.
- First off, for at least the last 50 years, real estate has performed well.
- The second, and maybe more significant point, is that the real estate market, and commercial real estate in particular, frequently fluctuates independently of the stock market.
For instance, even when the stock market is sinking, a real estate investment trust may still offer profitable returns. This is due to the monthly dividend payments made by REITs as well as the possibility of continued appreciation of commercial real estate even during periods of declining stock prices.
Investing in REITs is an opportunity to diversify your growth assets beyond equities, maybe more than anything else.
3. Invest Using Robo Advisors in Your 20s
Investing in equities through S&P 500 index funds or commercial real estate through REITs have previously been covered. However, you may always use a robo adviser to invest if you’re not familiar with or comfortable doing it on your own.
That is an automated online investment platform that manages your investments on your behalf. It involves setting up your portfolio and continuing to manage it. In order to reduce your taxable investment gains, they even reinvest dividends, regularly rebalance your portfolio, and provide you with a variety of tax planning options.
Additionally, you can employ a robo adviser for an IRA or a retirement account, particularly a taxed investment account. It’s the pinnacle of hands-off investment. All you have to do is fund your account; the robo adviser will take care of the rest. They also frequently invest in a combination of bonds and equities. Many also provide ESG stock-focused investment funds.
4. Buy Fractional Shares of a Stock or ETF in Your 20s
These days, you don’t have to purchase all the shares of a stock or an ETF. Consider fractional shares if you want to be more involved in your investment but can’t afford to buy a lot of stock. This is when you pay a little amount of the price to purchase a piece of a stock.
For instance, let’s say you want to purchase shares in Netflix but cannot afford the $500 per share. Instead, you may spend $20 and purchase a little portion of that one share. Even with fractional shares, you still have ownership in the business.
It’s not possible to purchase fractional shares through all investing apps or brokers. Public.com, a commission-free stock and ETF trading software for iOS and Android, is one fantastic app that will also let you acquire a fraction of shares. Additionally, it permits buying stocks and ETFs in fractional shares.
5. Invest by Buying a Home in Your 20s
This is another one of the best investments for young adults, although it is a bit of a mishmash. On the plus side, owning a house enables you to accumulate significant equity over a long period of time. This is accomplished through a combination of progressively paying down your mortgage and rising property values.
The benefit of leverage is another benefit of property ownership. Since you may purchase a home for as low as 3 percent of the purchase price (or nothing at all with a VA loan), you can profit from appreciation on a $300,000 property with only a $9,000 out-of-pocket expenditure.
Your $9,000 investment will increase to $30,000 in 30 years, even if you do nothing else than pay off the mortgage. Your initial investment will rise by a factor of 33 as a result. However, if the property’s value increases, that figure might be far greater.
The drawback of purchasing a home while you are young is that you might not be in a stage of life where the relative stability of homeownership would be advantageous to you. You could need to relocate soon because you’re still early in your profession, for instance. If so, having a house of your own may make the transition more difficult.
Owning a property encourages a single person to spend more for housing than they truly require. Additionally, a future marriage can need moving to a new area or getting a new house, which is of course a possibility.
When you’re young, buying a home is unquestionably a wise investment. But you’ll need to do a thorough study to decide if it’s the best decision for you at this stage of your life.
6. Start a Retirement Plan in Your 20s
Getting a head start on retirement savings and tax deferral are the two main justifications for doing this.
Retirement Savings
If you start making $10,000 yearly contributions to a retirement plan at age 25 and earn a combined annual return of 7% on stocks and bonds, you’ll have $2,008,829 in the account by the time you’re 65. On such a fast pace, you could even be able to retire a few years sooner.
The returns, however, are less favorable if you put off saving for retirement until you are 35. Let’s assume that at the age of 35 you start saving $15,000 annually and that your average yearly rate of return is 7%. Your plan will only have $1,426,427 when you are 65.
Despite the fact that your yearly contributions will increase by 50%, that is more than 25% less. That is a strong argument in favor of starting early retirement savings. Also, you are not required to give $10,000. Give as much as you can right away, then raise it as your wages rise over time.
Tax Deferral
The tax deferral strategy has a similar allure. In the last illustration, we shown how saving $10,000 year starting at age 25 can result in a retirement portfolio worth more than $2 million by age 65. Tax deferral is largely responsible for making that feasible.
But suppose you decide to put the same amount in a taxed investment account each year. Your marginal income tax rate is 25% when federal and state taxes are added together. The effective return on investment will then only be 5.25 percent.
What will the outcomes be after 40 years at the lower investment after-tax return?
Only $1,290,747 will be yours. That is a reduction of more than 35%, totally as a result of taxes.
Retirement Plan Options
Your first option should be the company-sponsored retirement plan provided by your work. You may normally contribute up to $19,000 per year from your income to either a 401(k) or a 403(b) plan that they typically provide.
Retirement plan payments are tax deductible from your current income in addition to the tax deferral outlined above. A donation of that amount would result in a sizable tax savings.
If your employer does not provide a plan, you should think about opening a regular or Roth IRA, both of which enable you to contribute up to $6,000 year and offer tax deferral on investment gains.
The main distinction between regular and Roth IRA contributions is that although Roth IRA contributions are not tax deductible, traditional IRA contributions are. That absence of tax deduction is more than made up for by the Roth IRA, though.
When you are at least five years into a Roth IRA and have reached the age of 5912, withdrawals are entirely tax-free.
7. Pay Off and Avoid Incurring Debts in Your 20s
Debt is one of the main obstacles to investments for young people. With an average loan amount of about $38,000 for 2021, student loan debt alone is a serious problem. But many young people also have credit card debt that is far higher than average and vehicle loans.
Debt has the drawback of reducing your cash flow. If you make $5,000 a month but must pay $800 in debt, your actual monthly income is only $4,200.
In an ideal world, you wouldn’t have debt at all. But even in an ideal world, you probably already know that.
You’ll need to discover a means to strike a reasonable balance if you do have debt and wish to invest. It would be fantastic to state that you’ll only make the minimal debt payments and invest the remainder. That will undoubtedly enable you to benefit from the income compounding that investments offer.
But there is also an imbalance. While investment profits are not guaranteed, loan interest rates are set in stone. In other words, even if you lose 10% on your investments, you’ll still have to pay 4% on your vehicle loan, 6% on your school loan debt, and 20% or more on your credit card debt.
Starting to pay off your obligations early in life is one of the finest investments you can make. A excellent place to start is with credit card debt. Even though they often have the lowest balances, they have the highest interest rates.
You won’t be able to continuously get that type of return on your assets if you’re making 20 percent of your payments using a credit card. The greatest way to reduce your debt is to pay off your credit cards.
8. Invest in Health Savings Account in Your 20s
Health savings accounts provide a special tax benefit not seen in other tax-advantaged investment accounts: a triple tax benefit. Among these benefits are:
- No tax obligation on donations made to the account (deductible from your income)
- No tax obligation on gains realized from investments made in the account (excluded from income)
- No tax obligation on withdrawals used for qualified medical expenses.
Regarding the operational details of these programs, some provide these accounts through an employer-sponsored account.
In this scenario, pre-tax deductions from your paycheck serve as your direct contributions, but you can still make direct contributions to your health savings account. You deduct these donations from your taxable income when filing your taxes.
But if your company does not provide you an account, you can open your own HSA and write off your contributions when filing your taxes.
As was mentioned above, investing money in these accounts entitles you to tax advantages that stimulate long-term capital growth. You may put your savings in mutual funds or other sorts of investments when you utilize a service like those provided by Lively.
You will get these monies tax-free when the time comes when you might need to withdraw money for permissible medical costs. However, you will incur a severe 20% penalty if you take money and do not spend it for medical costs prior to the age of 65.
Be aware that you can withdraw money for any reason after age 65 without facing hefty penalties. Furthermore, you are exempt from mandated minimum distributions, unlike with IRAs (RMDs).
Unlike Flexible Spending Accounts, which have a “use it or lose it” nature, these monies are always available (FSAs).
Opening and making contributions to these accounts are subject to limitations. You must not be a beneficiary of Medicare and have high deductible health insurance (HDHP) in order to qualify.
Additionally, you are not permitted to be covered by any health plans that disqualify you or to be reported as a dependant on another person’s tax return.
A word of caution: Be careful not to choose a high-deductible health plan and HSA combination just to save money on medical expenses.
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
