How To Invest: A Get Started Guide For 20 Somethings

A guide for twenty-somethings on a plan to set a budget, savings for emergencies, and starting an investment portfolio.

As more and more young professionals delay marriage and family until into their late 20s or even 30s, these people should prepare themselves for a sound financial future. Depending on social security or company pensions alone no longer seems a prudent way to plan for retirement. By adhering to a few simple guidelines, however, and choosing to live within your means, you can begin saving for your financial future in your 20s.

The first part of your plan is to budget, and budget for savings. Too often people in any age bracket, but primarily in early adulthood, consider savings or investments to be any money that's left over after they pay their bills and spend on entertainment without a clear idea of how much those portions of their budget cost. A budget should include investment money as a matter of course. When you get a stable job, you should sit down and create a monthly budget, taking into account costs that must be maintained, including rent or mortgage, student loans, credit card debt, utilities, groceries, gas or other transportation expenses, car payments, insurance, medical bills and any other fixed expense.

Now, consider what's left of your paycheck. Add up incidentals, like stopping for a cup of coffee or going to a movie with a friend. Don't deny yourself these extras; just limit them to stay within your means. Allot yourself a reasonable amount of money from the discretionary amount you have left after your bills and make the commitment not to use credit cards. While it may be wise to keep one card for emergency purchases, begin now to get out of revolving consumer debt. You should have subtracted only enough from your account to leave a modest sum for investments. If you can only save $5 or $10 a paycheck when you're starting out, that's enough to get you started.

Before you invest, however, the cardinal rule from financial gurus is to get out of debt. While you will maintain large debts, such as mortgages, for long-term benefit, do not continue to pay minimum balances on credit cards. Look at your bills and compare the balances versus the interest rates. Begin now to spend more of your budget to pay off debt. If you're paying astronomical interest rates, it does not make sense to save money. Your long-term financial interests would be better served by putting the money toward your debt.

Once you eliminate your debt, you may begin to consider the various options for investing. In your 20s, at the beginning of your investment career, you likely will want to start small; not tying up your money in investments you won't be able to touch for years to come. Investments in your 20s should start small, building a financial portfolio that will put you on the track to self-sufficiency in retirement. Here we'll cover retirement accounts, savings accounts, money market accounts, bonds, mutual funds, and certificates of deposit (CD). Those investment types are the simplest to begin. First things first, open a simple savings account. Decide on an amount of money you'd like to have put away for emergencies, such as major medical catastrophes or a job loss. Some financial sources suggest having enough to cover three to six months' expenses on hand at any given time, while others extend that figure to up to one year. So, determine what you need to live on and how long you think you want to have funds to cover. Once you sock away that amount, continuing putting away money into a savings account until you have enough to invest elsewhere. While you cannot expect to earn much on a savings account, you can keep money there in case you need to access it quickly, and it will earn a few dollars' interest.

If you have a significant amount of money in a savings account, you may want to consider putting it into a money market account. A money market account is like a high-interest savings account with a number of restrictions. Money markets may earn up to 10 percent interest, but this number fluctuates. You must have a larger minimum amount, usually $1,000, to put into a money market account. Savings accounts require substantially less, usually $100, but sometimes no minimum is required. Money market accounts also cannot be used frequently. If you are considering this investment strategy, it should be money you will not touch because there are fees associated with making more than two to three withdrawals on the account monthly. Consider the benefit, though, since your savings should only be touched in emergencies. If you have $1,000 in a simple savings account drawing a meager two percent interest monthly, you earn $20 that month. In a money market at seven percent, you'd earn $70. The difference adds up quickly.



Maybe before you even begin using a savings account, you will have the option to enroll in your company's 401(k) plan. Non-profit agencies offer a 403(b), which works in essentially the same manner. A retirement account is a must for anyone. In basic terms, a 401(k) is a plan for you, the employee, to put money into an account overseen by your company. Many companies match a percentage of the funds you put into the account. This match means that you are automatically getting a return on your money when the company tosses in its percentage. The money you invest comes out of your paycheck before you receive it, making investing the money easier because it doesn't reach your pocket first. Then, the employer offers a variety of options for investing the money, and the employee should examine those options and choose how to invest his or her 401(k) stash.

Now that you are putting away money in your company's 401(k) or 403(b) plan and you have a savings account padded with a little extra, it's time to consider where to invest the little extra. Some of the easier and safer investments - a good bet for the novice financier - are bonds, mutual funds, and CDs. First, let's go over bonds. A bond is considered a "lending investment," meaning the buyer "lends" money to the corporation or government backing the bond with the understanding that the money, plus interest, will be returned to the investor in the future. Two important factors to consider when purchasing a bond are the length of maturity and the interest rate. Only buy bonds with set maturity dates so that you will know exactly when you can get your money back. The amount you need to invest in a bond depends on the type of bond you purchase. Private corporations offer two types of bonds: corporate and high-yield. Both of these types are riskier than government bonds because the "lendor" - you - must rely on the company to have the funds to cover the bond and interest at maturity. Corporate bonds normally require a $1,000 minimum investment while the investment for high-yield, or junk, bonds varies widely.

Government-issued bonds include treasury bills, treasury notes, treasury bonds, municipal bonds, and government agency bonds. Treasury bills mature in short times, from three months to one year, and require a $1,000 minimum investment while treasury notes require the $1,000 minimum but take up to five years to mature. Treasury bonds require the minimum investment and take 30 years to mature. The interest rates vary on these government-issued bonds. The other government bonds, municipal bonds and government agency bonds, are not backed by the federal government. A state or local municipality issues municipal bonds, and the terms depend on the issuing government. Agency bonds come from various government agencies and are backed by that specific agency.

The benefit of bonds is that they are stable, longer-term investments, and with the government's backing on many of the bonds, it is a good bet. If you are interested in higher-yield investments, however, consider a CD. Certificates of deposit mean that you put your money into a bank for a specified length of time. The bank will use your money to do some investing of its own. When your CD has reached its maturity date, you can leave it to continue to draw interest or cash it out, earning your original investment plus interest. CDs are guaranteed investments, meaning the money definitely will be there when the CD matures. CDs are available in varying timetables from six months to years. Keep your money in a CD long-term if possible. While the money will be inaccessible to you now, you will earn higher interest on it.

The last type of investment appropriate for most people in their 20s is the mutual fund. Mutual funds are basically group investments. People pool their money through brokerage firms, and the funds are placed in stocks, bonds, or other investment venues. Devoid of many fees and as a pool of money, mutual funds cost very little to the investor. Someone with only a few hundred dollars to invest could join a mutual fund. Because the portfolio manager will not place all of the money in the same place, a plan called diversification, mutual funds are very safe investments for relatively little money.

As a recap, people in their 20s should begin their investment plan by putting money into their company-sponsored retirement plan as soon as possible. Once consumer debt is paid off, young professionals can accumulate into a savings account an amount of money they will be able to survive on in case of an emergency, and this money should be switched over to a money market account when feasible. Once you are ready to begin investing on your own, consider government bonds, which are very low-yielding but safe. Other early options include CDs and mutual funds. If you begin this investment plan in your 20s, you should be prepared for retirement.

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