You may have wondered how to retire early, or maybe you want to live your life as a digital nomad. Regardless of if you have a 401(k) or not, there are other steps you can take in your 20s to start growing your retirement account.
1. Set up an Emergency Fund First
You might want to invest your savings in a robo-advisor or try your hand at trading stocks on Wall Street, but you shouldn’t do anything until you have a steady income and at least one to three months of living expenses saved.
The last thing you want to do is have an unexpected expense when you’ve invested all of your extra cash. It will save you from having to take out a personal loan or max out your credit card.
2. Gradually Increase Your Contributions
If you are contributing to a 401(k) or other retirement account, there are limits on how much you can contribute each year.
If you can’t contribute the maximum amount right now, gradually increase the amount by a percentage point each year. You won’t notice the impact on your budget overall and eventually you will be able to afford to pay the full amount each year. This is especially important if your employer matches your contributions, which is an easy way to beef up your funds.
3. Try a Robo-Advisor
If it’s your first time investing, try getting started with a robo-advisor. You can contribute a small amount each month and use it as a way to learn how stocks work. Robo advisors make investing simple, by automating your investments to an index fund, called an ETF.
A lot of advisors also offer tax-advantage savings accounts like Roth IRAs, and you can tailor your investing portfolio to your savings goals. Once you are ready to invest more, you might be able to invest directly with them or look at other investing options like hedge funds.
When you do start investing, make sure to diversify your funds. Don’t just invest in one company or sector. Because of the volatility of the market, it’s important to make sure you have a little invested in a few different things, in order to increase your overall performance.
Another thing to think about is asset allocation, or when you put more money in riskier stocks when you are younger and then move to investing in steadier stocks and bonds as you get closer to retirement.
5. Be in it for the Long Haul
Markets are volatile. Your investment might go down in a year or go up a lot, especially if you make more risky investments.
Overall the point is to invest for a long time so all those ups and downs even out. The advantage of investing when you’re in your 20s is that you can afford to invest in riskier stocks longer. While risky stocks come with lots of volatility, overall they have a great long-term track record on returns.