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If you’re in your 20s, you probably know that there is no better time in your life to invest. But if you’re unsure what you should be investing in, today I have the answers. I’m showing you the five assets to buy in your 20s that will set you up for financial success later in life.
Before jumping into the best assets to buy in your 20s, though, I want to talk big picture strategy for this time in your financial life.
Risk
When you’re in your 20s, your investment horizon is long. That means if you make mistakes, you have plenty of time to recover.
However, the most considerable risk you face in your 20s is not investing at all.
Let’s say you decide to start investing $1,000 per month and earn a 7% investment return. If you start at age 25 and continue that strategy until you’re 65, you’ll have $2.64 million at retirement.
How does this compare to if you start investing at age 40 instead of 25? If you start investing at age 40 instead, you’d have just $814,000 upon hitting age 65.
In other words, starting to invest at age 25 instead of age 40 helped you grow an additional $1.8 million of wealth.
The key point is that you must start investing early in your life. Portfolio volatility doesn’t matter when spread out over decades. But the duration of time for which you invest does.
With that out of the way, what are the best assets to buy in your 20s? Let’s get into it.
1) Index Funds
Where should you invest your money in your 20s? When you’re just starting to invest, it can be tempting to try many types of investments. However, rather than throwing spaghetti at the wall, the best approach is to keep it simple.
Before spreading yourself too thin, start with a portfolio of stocks and bonds.
At a high level, stocks tend to carry more risk and higher returns than bonds. How you should weight these asset classes in your portfolio has long been debated. In your 20s, however, you should be more heavily weighted towards stocks.
Should you own bonds in your 20s? In my own portfolio, I have a small weighting to bonds (~10%), but again, the answer depends on your risk tolerance. However, with a long horizon, if you can afford to stomach the risk, weighting heavily towards stocks should result in more wealth.
When choosing specific investments, rather than trying to pick individual stocks and bonds to buy in your 20s, invest in index funds instead. Index funds are baskets of multiple investments that allow you to gain diversification (reducing risk). Instead of picking winners and losers, just buy the whole market (such as through an S&P 500 index fund).
One other benefit of index funds beyond diversification is that many index funds are low fee. Investment fees will quickly reduce your returns, so you’ll want to avoid them to the extent possible. Curious about what you’re paying in fees? Check out Personal Capital’s retirement fee analyzer to find out!
Personal Capital
Personal Capital is a comprehensive suite of financial tools that helps you track your net worth, make sure you stay on track for retirement, and much more! The best part about Personal Capital is it offers a FREE way to track your investment and cash accounts and plan your financial future! Check out this review to learn more!
If you’re unsure how to pick the best index funds, your best bet is to use a Robo-advisor, which can recommend a portfolio allocation based on your age and risk profile. Some options to consider are M1 Finance, Acorns, Betterment, and Wealthfront.
Finally, when buying index funds, make sure to consider the tax implications of your choices. You want to buy as many tax-advantaged investments as possible. This means maxing out your 401(k) (including taking advantage of any employer match) and IRA before investing in a taxable brokerage account. Using tax-advantaged accounts will help your investments grow to be much larger.
2) Real Estate
When you’re young, you can afford to make bets on different types of assets. Adding alternative investments to your investment portfolio can when done correctly, reduce portfolio volatility and increase your risk-adjusted returns.
One asset class on which I bet is real estate. While there are many classes of real estate, I prefer residential properties. People will always need a place to live, and except for rare circumstances, residential real estate has proven to be a remarkably stable asset class.
If you’re interested in investing in residential properties, check out this ASF guide on buying your first rental property. It’s much easier than you think, and it is a relatively passive asset.
I am now up to three units, and I’m in the process of buying my fourth. While getting the properties closed and rent-ready has been a headache, very little work is required once the tenant has moved in.
If, however, investing directly seems too difficult, there are some alternatives to consider. My next favorite option is a platform called Fundrise. Think of it a bit like crowdfunding for real estate. Fundrise finds and manages investments on your behalf, allowing you to invest completely passively with as little as $10.
Fundrise
Fundrise is my favorite tool for getting started with real estate investing. It allows you to invest in a diversified portfolio of commercial real estate at low costs and with a great deal of transparency. Check out my full review to see if this tool is right for you!
If you prefer to invest through a publicly-traded asset, check out real estate investment trusts (REITs). You can invest totally passively, and it’s as easy as executing a trade with your brokerage firm.
If real estate isn’t your cup of tea, there are countless other alternative asset classes to consider. Just make sure you do your homework and only invest in things you understand. That said, there’s plenty of time to make mistakes and learn from them when you’re young.
3) Primary Residence
In your 20s, you’re probably thinking about buying your primary residence. While there are many considerations in deciding between renting and buying, buying your primary home can often make a lot of sense if you plan to stick around for more than a few years.
Admittedly, I don’t consider primary residences to be assets. It takes money out of your pocket instead of putting money in your pocket, and that makes it a liability.
That said, renting is often worse than buying your primary residence. In all reality, your primary residence, be it a rental or something you own, will take money out of your pocket. Therefore, the goal with your primary residence is to have the least amount of money coming out of your pocket as possible.
For this reason, consider purchasing a house well within your means rather than one which is the maximum amount you can afford. And if you want to lower your housing costs, consider creative strategies to save on housing like house-hacking.
4) Education
Your 20s are an ideal time to invest in education. This could mean an advanced degree to help you earn your income or even just investing in a course here or there to learn a new skill.
Education can be one of your most important assets. Why? Because it can set you up for career success.
That said, not all educations are assets. If you go to school to get an art or history degree, chances are this won’t help you grow your income down the road. Now, if you recognize this and want to spend the money anyway, that’s great. But acknowledge that certain education spending is a hobby, not an investment.
In addition to investing directly in education in your 20s, there is no better time to focus on building financial literacy. Even if this means just buying a few books, learning as much as you can about personal finance in your 20s will set you up for success for the rest of your financial life.
Looking for some recommendations to get started? Check out some of my favorite personal finance books today!
- I Will Teach You to Be Rich (corny title, outstanding book)
- Common Sense on Mutual Funds
- A Random Walk Down Wall Street
- Rich Dad Poor Dad
- Negotiating Your Salary: How to Make $1,000 a Minute
5) Cash Flow
If you’re a few years out of school, you may be wondering if you should pay down debts or start investing.
The mathematical answer is as follows: if the interest rate on your debts is less than you could earn through investing, you’re better off investing instead.
So, for example, if you have student loan debt with an interest rate of 4% and believe you could earn a 7% return on your investments, you’re better off investing instead and making the minimum payments on your loans.
In general, I’d encourage you to invest instead of prioritizing paying off debts with an interest rate of less than 5-6%. That said, you should be making at least the minimum payment.
There is, however, one exception to this rule. While the mathematical answer says that low-interest-rate debt isn’t that problematic, I would note that it can cause financial stress as a cash flow burden.
For example, if your student loan payment is $800 per month, you may find it extremely challenging to pay your monthly bills or find other money to invest. In this case, you may want to consider paying off the debt as fast as you can.
In doing so, you’ll free up cash flow. This cash flow can then be used to invest more aggressively while also reducing your financial stress.
Of course, there are other alternatives to increase your cash flow. For example, you may want to consider refinancing your student loans with interest rates near historic lows. This can reduce your monthly payment and free up more money to invest.
In your 20s, using your earnings to free up cash flow can help boost your finances on a longer-term basis, creating more opportunities to invest in assets.
Other Investing Tips for Your 20s
With the best assets to buy out of the way, I want to share a few other words of wisdom to consider as you start investing early in life.
1. Grow your Income, not your Investment Returns
Have you ever heard of shiny object syndrome? It’s rampant among new investors. If you turn on CNBC, you’ll be bombarded by pundits sharing “hot stock” tips. This could be anything from the latest tech stock (like Tesla) to cryptocurrencies.
I’m here to tell you, though, that investing is a marathon, not a sprint. Your goal is to be an investor, not a gambler. A slow and steady, diversified portfolio will almost always outpace those who pick individual investments.
So, rather than trying to eke out an extra few dollars of returns by chasing investment advice, instead, focus on growing your income.
Chasing investment returns isn’t a good return on your time, and there are very few people in history who’ve done it successfully. However, if you focus on growing your income, you can materially increase the number of dollars you have to put towards your investment portfolio.
Over time, this will lead to substantially increased wealth – a lot more, in fact, than boosting your investment returns by a percent or two.
Remember, buy the market using index funds – you’ll save a lot of headaches and know you’ll succeed if the broader economy does well.
2. Invest Aggressively
Should you be aggressively investing in your 20s? Yes, in your 20s, you should invest aggressively. Remember, you have lots of time to learn and recover from your mistakes.
That said, again, you shouldn’t be chasing the hot investments. Instead, focus on building a diversified portfolio centered around quality.
When I say you should invest aggressively, I don’t mean picking a bunch of penny stocks or high-flyers. I mean focus on investing as much as you can comfortably stomach. By reducing your expenses and living below your means, you’ll free up extra money to put towards your investments.
Now, I want to note that you should not aggressively invest any money you need for relatively near-term purchases. I don’t recommend investing any money that you’ll need access to in the next five years. Some examples include:
- Your emergency fund (which you should build before you start investing)
- Money saved for a near-term down payment on a home purchase
- Any other near-term event where you expect to need access to liquidity
Assets to Buy in Your 20s: Summary
The secret to building wealth in your 20s is to invest aggressively once you’ve built an adequate safety net. You have plenty of time to make mistakes and learn from them, but you don’t have time to delay investing.
Five of my favorite assets to buy in your 20s include:
- Index Funds
- Real Estate
- Primary Residence
- Education
- Cash Flow (e.g., paying down debt)
While there’s no perfect formula, the best investing tip for your 20s is to take action. Simple steps like setting up an IRA with a brokerage like M1 Finance and tracking your net worth with a service like Personal Capital will drastically grow your wealth over time.
