Last Updated on January 24, 2023
How should my money grow? is a question that comes to mind of everyone who is in their 20’s. I’m sure this question hits your mind too. So, what to do?
People in their 20’s are mostly students or the young working population who started to make or save at least some money. They are always searching for a way to generate returns from their money. In this post, we will guide you to some of the best pathways that will help in to invest money in your 20s and creating wealth.
Almost everyone in the field of finance will agree that the age of 20-25 is the idle phase of life to start an investment journey. The earlier the investing starts, the more benefit will be fetched through investment and careful financial planning.
The twenties (’20s) is the best decade to learn and start building wealth and we will about to know why?. If the persons start investing when they are young, they will have ample time to make mistakes and learn from those.
Below is the investing guide on how young beginners should start investing from their 20’s.
Let’s Dive in!
Best Ways to Invest Money in your 20s
1. Avoid taking loans
The first and foremost is to avoid opting for a loan or if it is a requirement then the loan should be minimum. Whenever a loan is taken, people get bounded in a certain way. Taking a loan at an early age might be one of the worst mistakes made in wealth building pathway.
An education loan can be taken and it is understandable to take an education loan in the early ’20s but other types like personal loans, vehicle loans, house loans should be strictly avoided. As education loans come with very fewer interest rates but they should also be avoided if possible. The main point is to reduce or eliminate taking loans in the twenties.
The money saved from not paying interest can be invested in many types of investment avenues that are available to invest in. These little savings will grow eventually with time and will greatly boost financial strength.
Insurance is very important because it is an essential way to prevent or plan for something unforeseen. Anything can happen in life and to protect from the financial crisis in that uncertain event there are two types of insurance available and recommended i.e. life insurance and health insurance.
The benefit to opt for term insurance early in life is that a high financial cover plan can be availed at very affordable prices as compared to taking it late in your life.
For example, a $1,000,000 health cover if opting for term insurance can be available for $100 per month premium if purchased early in life but the same worth health cover will be far more expensive let say $250 per month premium as the health conditions will start deteriorating with the age.
Insurance is an investment in a certain way as if any contingency arises then at time need for finance will be fulfilled and covered with these insurance plans. Loss of a large chunk of savings will be saved by paying a small amount of premium.
Health insurance should be for everyone in the family including parents, spouses, and children. Health insurance is important to get financial protection in unfortunate situations. This insurance will be made available by the employers in corporates or can choose personally. Whole family protection cover can be provided in a single insurance plan.
Now, let’s understand about investments.
3. Invest in financial products
In the twenties, one of the advantages is that most of the persons started their career or earning little money and that means they have to pay less or no tax liabilities. The benefit of it will be that the potential to invest that money will be more. A large percentage of money is available in the hands to invest. The investment will be fruitful if invested in an investment ratio.
So, what is the right investment ratio? It is nothing but a simple ratio breakdown of the income. It is suggested that 50% of your monthly income will be spent on need fulfillment, 30% on wants that include traveling, new gadgets, leisure, etc., and lastly, 20% should be for investment.
If the investment will be done on a regular basis and in a disciplined manner of at-least 20% every month, then there is a high probability of the creation of good wealth and financial stability.
4. Investment Portfolio
So after rationing for investment the question arises as to where should the money will be investing in? In the twenties, there is much more freedom to make mistakes and for high risks.
The merit here is that because of high risk-taking capacity less emphasis is given to the protection of money instead investment experiments can be done to learn more ways to grow the money. Even if the investment is made in high volatility assets if the value goes down, there is always another chance to generate gains.
One should avoid investing in fixed deposits as an investment option as the returns are generally lower than inflation. Instead invest money in high yield assets like equity, mutual funds, digital assets, etc., and hold them for very long-term.
Following are some assets to invest money in your 20s:
- Stocks and Equities – investment in the stock market is one of the most popular and high return-yielding investment options. Selection of stocks can be made as per research and investment objective. It facilitates direct investment in companies listed on stock exchanges. Investment can be made in companies that are top players in the market. The main aim is to invest and hold it for the long term.
- Mutual Funds –If there is no knowledge of how the stock market works but wants to invest in it. Money can be given to other companies like AMC or Hedge funds to manage and grow it. The mutual funds‘ managers do all the brainstorming and invest accordingly. At early age i.e. from the ’20s, invest in high-risk and high-return mutual funds to maximize gain out of it.
- Gold – Investing in gold may not be the best choice to get high returns but it can give an average return and provide protection against high volatility. Investing in gold includes physical gold, bullion, gold certificates, gold bonds, etc.
- Crypto currencies – Investing in cryptocurrencies or digital assets is a very risky affair as it is highly volatile as compared to other assets. A portion of money can be invested in crypto currencies as it may generate high returns as compared to other asset classes and can be a great asset for the future.
Ideal Investment Portfolio
The investment size may be large or small but If you are planning to invest in the twenties, the ideal investment portfolio should be as follows:
- 30% in stocks
- 40% in mutual funds
- 20% in gold
- 10% in cryptocurrencies or other digital assets
It is not necessary to invest in the above-explained manner only, It’s all up to the amount of risk you want to take and the expected returns.
5. The power of Compounding
This concept is the important part of investing, if you understand the compounding then you will surely understand why investing in your 20s is the best decision you can take.
It is nothing but a simple concept of incrementation of the principal amount by a certain rate and then again investing the increased principal amount. It gets more return at the same rate but on the increased base amount.
In terms of investing, compounding means if your money keeps growing year by year, then over a long period of time, it will result in a huge increment in the money that helps to take care of all your needs and wants. Compounding mainly depends on three factors i.e. the principal amount, rate of return, and the number of compounding periods.
So imagine that investment is done early in the phase of life which means you will get ample time to compound your invested principal. Compounding can do wonders if you keep invested for a long period of time. Next is the rate of return, this mainly depends upon the type of asset. The higher the risk higher is the return. Comprehensive research must be done before making any investment decision.
The sooner the habit of investment and financial planning is acquired the more will be the accumulated gains. If you’re aware about the ways to invest and grow money it will prove to be one of the crucial information related to finance you ever acquired in your life.
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He is graduate in M.B.A Finance, and owner of the financial blog “Saifwealth.com“. He started this blog to share his knowdelge in the field of finance and to help people understand and aware about the financial world.