Learning how to invest isn’t complicated. It starts with a common sense guide to good financial habits. If you follow these steps, you’ll not only learn how to invest in your 20s, you’ll build the groundwork for successful investing habits over your lifetime. These rules apply whether you’re 25 or 75 and will lead you to save, invest, and grow your wealth.
Of course, your teens and 20s will largely define your financial habits throughout your life. You might as well get it right from the start. It is never to early to learn how to invest.
Build A Foundation
If there ever was a time to develop a habit to save more money, it’s when you’re young. And since you need money to invest, this is actually important.
It means you have to regularly set aside money specifically to invest. Do this once a month or better yet every paycheck. And I’m not talking about $5 or $10 a month.
It’s time to think big. Most likely, you’ve started your career. You have a decent salary and money burning a hole in your pocket. It’s time to put a percentage of it aside now. Open a brokerage account and make regular deposits. A good goal is at least 20% of your income (including retirement savings).
Start Saving For Retirement Too
At this point in your life, retirement isn’t even a blip on the radar. It’s hard to act on some event 30 to 40 years in the future.
Don’t think about it, put it off, make excuses…just do it. Start with your retirement plan through work. Head down to human resources, grab all the information, ask questions and fill out your contribution amount. If your work doesn’t offer a retirement plan or if you can swing saving more, take advantage of an IRA.
The more you put away now, the better off you’ll be when retirement comes calling. Your future self will thank you. After you set up your savings plan, it’s time to put that money to work. I use TD Ameritrade, but also recommend Scottrade for new investors. Both offer simple, smart investment choices for IRAs and brokerage accounts.
How to Invest
Investing involves taking on risk for the potential of higher returns. Many people can’t handle this idea. So they save instead of invest. You can stash all your money in a savings account somewhere for 40 years. You’ll have more than you started with, but will fall far short of your potential. That’s the difference between hoping to preserve money and building wealth.
Learning how to invest and building wealth requires work. Yes I said it. It involves making money. The last time I checked, that requires time, commitment and work. How much? That depends on how advanced you want your investments. So we understand each other, you will have to work if you want to learn how to invest.
Keep It Simple
Start with a simple portfolio. Focus your money in two index funds. One stock fund and one bond fund. That’s it. Don’t over complicate things this early. Young investors should have a heavier weighting towards stocks.
You can make investing as simple or as complex as you want. A basic portfolio is easy to learn and put into motion, then automate it.
Your 401k does this. You can do the same with an IRA. Automatic savings and investing removes second guessing and emotion from the process. Money is automatically taken out of your paycheck or bank account, added to your retirement account, and invested in the funds you choose.
This gives you time to learn all about advanced, complex investment strategies later.
Invest in What You Understand
There’s a good chance you’ll want to invest in more than index funds at some point. Before you do, you should learn and research first, then take action to grow your money. Not the other way around. Investing has a learning curve. You’ll have to advance your knowledge. Read a book or two…or twelve if that’s what it takes. It depends on what you want to invest in.
Take stocks. It’s easy to get swept up with certain financial guru’s and their stock tips. It’s exciting. That’s why it sells. But if you don’t understand the business behind the stock, should you really be putting your money there? Probably not.
This doesn’t mean you shouldn’t invest in individual stocks. Know that investing in stocks requires more work researching the company, the competitors, balance sheet, and more, before you can make an educated decision. The “experts” on TV make it sound easy, but if it is that easy everyone would be rich from doing it.
Watch Your Costs
This a simple concept that too many people overlook. The more you spend on your investments, the less you have to invest. To put it another way, you have to earn back every dollar you spend before you make a profit.
In order to grow your money, you need to lower your costs to a point that it doesn’t hinder the process. One way of doing this is using low-cost index funds. Compare the expense ratios of similar funds before buying in. Another is limiting your number of trades.
Costs will be one of two obstacles eating into your returns. Mistakes will be the other.
Learn From Your Mistakes
Here’s a few things you can expect to happen in your investing lifetime:
- Panic sell
- Get greedy and refuse to sell
- Fall for the ‘hot tip’
- Buy at the top of the market
- Sell at the bottom
All of these mistakes will result in unnecessary losses. And I guarantee you will make each one of them at least once.
Learning how to invest is the same as learning to play a sport, an instrument or how to ride a bike. At first it seems complicated, if not impossible. Slowly you pick things up.
Sure you make mistakes. It’s part of the learning process. It happens to every investor, even the pros. The best investors learn from their mistakes. With investing, knowledge and experience is the great equalizer.
Track Your Progress
Over time, your savings and investments will grow. You need to regularly track your progress. Are you saving enough? Is your retirement account on track? Is your progress in line with your goals?
This is no different from taking your car in for a tune up or oil change. You want to make sure everything is working as expected. If not, you can catch it early and fix the problem. You should do a review, at least, once every three months. Monthly reviews work even better. Just keep your time horizon in mind when you review your finances.
I recommend free software tools, like Personal Capital, that let you track all your accounts in one place and make sure your plan is on track.
Time is the biggest advantage a 20 something has with investing. The early you start, the more financially rewarding it becomes. This is why everyone should learn how to invest while they are young.