The Do's and Don'ts of Investing in Your 20s and 30s

People who start investing early get the advantages of compound interest, which allows them to continuously earn money on their savings. Still, it’s common for people to put off investing for a variety of reasons. Some believe they don’t have enough money to make investing worthwhile. Others may need to use everything they earn to pay off student loan or credit card debt.

We want you to be able to bring your financial dreams to life. One of the best ways to do that is to start investing early. Here are our best investment tips for people in their 20s and 30s, including some Do's and Don’ts to guide you.

What Are the Key Financial Goals for Someone in Their 20s and 30s?

Our first piece of investment advice is to start with financial goals, which form the backbone of financial health and stability throughout your life. Setting goals can help you identify your priorities and make sure that you’re putting them first. Here are some key financial goals that are common among people in their 20s and 30s.

Paying Down High-Interest Debt

A common financial goal for people in early adulthood is to pay down high-interest debt. If you went to college, you might have significant student loan debt. Paying it down can help you save money in the long term and pave the way for other goals. The same is true for credit card debt.

Creating an Emergency Fund

People in their 20s and 30s may not think they need an emergency fund. The truth is that even if you’re healthy and earning a good living, you should still prepare for the things that you can’t predict. Most financial experts suggest having a minimum of three months of savings, and six to 12 is preferable to make sure you’re protected if you lose your job or become unable to work.

Build Your Credit 

Your personal credit score is something that will play a role in helping you meet many of your financial goals, including buying a home or a car. The best way to improve your credit is to make on-time payments. Other things that contribute to your credit score include credit utilization and your credit mix. These factors take into account how much available credit you’re using and the variety of accounts you have open.

Opening and Contributing to a Retirement Plan

Retirement may seem like a long way off when you’re in your 20s and 30s, but it’s still important to open a retirement plan and make regular contributions. If your employer sponsors a 401(k) or other plan, it will benefit you to max out your contributions and take advantage of employer matching contributions if they’re available.

Saving for Long-Term Goals

Young adults share many common long-term goals, including buying a home, having kids (and paying for their college), and retiring early. Whatever your goals are, saving early increases the likelihood that you’ll meet those goals.

Why Is It Crucial to Start Investing Early in Life?

Investing early in life is essential because it allows you to take full advantage of compound interest. You’ll have a much easier time saving enough for retirement–and being confident that you won’t outlive your savings–if you begin investing when you’re young.

How Much Money Should You Invest at This Stage of Life?

A good rule of thumb for savings is that you should try to save between 15% and 20% of your income throughout your life. People who have student loan debt may struggle to save that much. If that’s something that applies to you, then save as much as you can for now and increase the percentage of savings when you’re able to do so. Be sure to max out any employer-sponsored match in your retirement fund to fuel your growth.

What Types of Investment Vehicles Are Ideal for People in Their 20s and 30s?

Here are some investment vehicles that you may want to consider as you start saving money and investing it for your retirement. Based on your preferences and risk tolerance, you can determine which vehicles are right for you. Keep in mind that the National Credit Union Administration does not insure investments.

• Stocks are one of the best investments for young people. Stocks offer potentially high returns. The overall trend of the stock market is up and when you’re young, you’ll have plenty of time to ride out stock market fluctuations.
• Exchange-traded funds or ETFs offer many of the same benefits as buying an individual stock but with a bit more protection. When you buy shares in an ETF, your risk is spread out across multiple stocks in the ETF but you’ll still have the potential to earn high returns.
• Index funds are designed to mimic the performance of benchmarks such as the Dow Jones Industrial Average or the S&P 500.
• Mutual funds offer some of the same perks as ETFs. A mutual fund consists of stocks, bonds, and securities, and the fund is overseen by a fund manager.
• Fixed-income investments such as bonds and high-yield savings accounts don’t offer huge returns, but they can balance your portfolio and help you diversify your holdings.

As a rule, young people can usually afford to take more risks than older people, which is why stocks and ETFs are often the most popular choices for people in their 20s and 30s.

Do's and Don’ts of Investing for People in Their 20s and 30s

It’s always useful to have an overview of financial do's and don’ts, so here are some things you should know about investing. 

Investing Do's for Your 20s and 30s

We suggest taking these steps to build healthy financial habits and make the most of your investments when you’re in your 20s and 30s.

• DO set short-term and long-term financial goals. Each investment goal may be broken down into steps.
• DO create an emergency fund to make sure you have enough money to pay for your expenses in the event you lose your job or experience an illness or injury.
• DO make paying off debt a priority, especially student debt and credit card debt.
• DO learn about investing on a budget. Investing should be a priority and using a “pay yourself first” approach is essential.
• DO try to save 15% to 20% of your income every pay period.
• DO take advantage of an employer-sponsored retirement account if you have access to one.
• DO contribute enough to your employer-sponsored account to take full advantage of employer matching funds. (Not doing so is like leaving free money on the table.)
• DO build a portfolio with a mix of investments and review your asset allocation regularly to make sure your risk is balanced.
• DO maximize investments in stocks and ETFs to the extent you’re comfortable.
• DO revisit your investment strategy when your financial situation changes or you reach a life milestone.
• DO consider working with a financial advisor or a wealth management company to choose investments and manage your portfolio.
• DO make financial planning a priority. You’ll get the best results if you’re deliberate and mindful of your investment goals.

Investing Don’ts for Your 20s and 30s

Here are some investment behaviors and choices to avoid when you’re in your 20s and 30s.

• DON’T put off investing because you think you don’t have enough money or that you lack experience. Starting early gives you the best opportunity to save what you’ll need to retire.
• DON’T spend windfall money unless you need to. If you get a bonus or inherit money, invest it instead!
• DON’T take on more risk than you’re comfortable with. Cryptocurrency is a good example of an investment class where you should never buy more than you can afford to lose.
• DON’T use a set-it-and-forget-it mindset with investing. Instead, think of your investment goals as being flexible and revisit them at least once a year (and whenever your financial circumstances change).
• DON’T overlook alternative investment accounts such as 529s if you have kids.
• DON’T put too much of your money in low-return investments such as money market accounts or high-yield savings accounts. These accounts are perfect for your emergency fund, which needs to be liquid, but they won’t yield enough of a return to help you save for retirement.

How Does Risk Tolerance Change Between Your 20s and 30s?

As people move into their 30s, it’s common for their risk tolerance to change at least a little. If you’ve got kids, for example, you might want to be a bit more conservative with your money to make sure you have the money you need to raise them and send them to college.

The rule of thumb in investing says that investors should subtract their current age from 100 and use the resulting number to decide how much of their money to put into higher-risk investment vehicles such as stocks. That would mean that if you were 21, you could put 79% of your investments into stocks and if you were 35, that number would be 65%.

You should take your personal risk tolerance into consideration. As you get older, it’s important to review your asset allocation and rebalance your portfolio to make sure that you’re not taking unnecessary chances with your money.

Are You Ready to Start Investing in Your Future?

Whether you’re just starting your first full-time job or you’re wondering why you should regularly review and adjust your investment plan, the do's and don’ts we’ve listed here can help you get a handle on your investment strategy for your goals and work toward a bright (and financially comfortable) future! For more help on how to get started with investing, you can download our free Investing 101: A Guide to Growing Your Wealth.

Do you need some guidance to help you make the most of your investments? Learn about Leaders Credit Union's investment services and open an account today.