Investing in stocks during your 20s can set you on a surefire path to financial success and wealth later in life. With time on your side, you can leverage the power of compound interest and steady market growth to build significant wealth over time. Let’s discuss some simple steps you can take in your 20s to set yourself up to get rich with stocks.

Start Early and Be Consistent

The most important thing to remember is that starting early is the most important thing you can do. The earlier you start investing, the more time your money has to grow and compound. For instance, if you invest $500 a month until you’re 60, starting at 25 instead of 35 will leave you with an extra $600,000. You might not be super rich in your 20s, but you can set yourself up to be very well off as you get older.

Investing early and consistently can lead to a significant accumulation of wealth over time. Aim to invest a portion of your income regularly, regardless of market conditions. Try not to let emotions or fear play into when you decide to invest, since generally the longer you are invested the better you will perform. Budget your money wisely and keep in mind how powerful investing can be when you are young. Just get started with a smaller amount first to get over the initial fear, and keep investing consistently. The consistency of your investments will pay off in the long run. You’ll thank yourself for having started early.

Invest in Low-Cost Index Funds and ETFs

Some people who are hesitant to invest are scared of the apparent risk that investing in stocks can bring. While stock investments do carry risk in general, index funds and ETFs that track the broader US or world market are excellent options for investors with a long time horizon. For instance, the S&P 500 index, which tracks the top 500 largest US companies, has returned around 10% with dividends reinvested over its entire history. It may not return 10% exactly every year, some years it will go up a lot more than 10%, and some years it will lose a large amount, but over the long term, you will make money.

Index funds and ETFs are just investment vehicles that invest in a large basket of stocks. The difference between ETFs and index funds is that ETFs can be bought and sold just like stocks, whereas index funds can only be traded once a day. Be sure to avoid ETFs that have high expense ratios, which is essentially the fee you are charged each year to own a fund. Try to aim for expense ratios under 0.5%.

Some good low-cost ETFs are VOO, which tracks the S&P 500 and has an expense ratio of 0.03%, and VTI which tracks the total US stock market and has an expense ratio of 0.05%. High fees can greatly lower your overall return in the long run since it can take away from your compounding. Investing in these broad market funds provides an easy way to diversify your investments and often provides better returns and less risk than trying to pick individual stocks.

Take Advantage of Tax-Advantaged Retirement Accounts

The simplest way to invest is in a taxable brokerage account, but tax-advantaged retirement accounts can boost your returns drastically by providing either tax savings today or tax savings during your retirement. While retirement may seem too far away in your 20s, being able to compound your money tax-free is immensely powerful. And even though you can’t withdraw from retirement accounts until you’re 59 and a half normally, there are various ways to withdraw money if you need it earlier or you are retiring early.

We will cover retirement accounts at much greater length in later posts, but we’ll give a general overview now. Most people will have access to a workplace-sponsored retirement plan like a 401k or 403b, and also an individual retirement account (IRA). There are two main types of retirement accounts Traditional 401ks/IRAs or Roth 401ks/IRAs. The main difference is the tax treatment.

For traditional accounts, you will get a tax deduction in the year you contribute, so you won’t pay income tax on that money. But then when you withdraw the money you will pay income tax on the amount you withdraw, including any growth. For Roth accounts, you will pay income tax on the money going in, but you won’t pay any taxes on the money you withdraw, including any growth. This makes Roth accounts very favorable for young people who are likely in a lower tax bracket, and have a very long time to compound their money.

So, contribute as much as you can to these tax-advantaged retirement accounts and make sure to select the right investments as we described above. As well, be sure to take advantage of any 401k matching your employer might offer, since that is quite literally free money.

Reinvest Dividends

One important thing to ensure is that you are reinvesting your dividends. Dividends are payments that companies make to their shareholders just for holding their stock. This is one of the only truly passive income sources that one can have, and it can also give you some mental motivation by showing you that your investments are paying off.

However, make sure that you are reinvesting your dividends back into stocks since you don’t want to be leaving that in cash and it can significantly hinder your returns in the long run. Many firms like Fidelity and Vanguard have dividend reinvestment plans (DRIPs), that will automatically reinvest dividends either into the same stock or ETF or you can pick an entirely different one.

Build an Emergency Fund

You must build up an emergency fund to be able to sustain your needs if you were to lose your job or have some kind of emergency. It would not be a good time if you were unable to make income and the markets were down. Selling your investments at a loss when the markets are low is not something that you want to take lightly.

Be sure to have a comfortable cushion of cash, so you can have that peace of mind to keep investing aggressively and often. Try to maximize your employer match on your 401k first, but then building an emergency fund is a great next step. We discussed building up your emergency fund in more depth in a previous post, so make sure to check it out!

Conclusion

Taking control of your financial future in your 20s by investing in stocks is one of the smartest moves you can make. By starting early and consistently investing, leveraging low-cost index funds and ETFs, utilizing tax-advantaged retirement accounts, reinvesting dividends, and building a robust emergency fund, you are setting a great foundation for your future wealth accumulation.

These steps are simple but require considerable dedication, sacrifice, and discipline. The earlier you start, the more you benefit from the power of compound interest and market growth, positioning yourself for significant financial success in the years to come. The journey to wealth is a marathon, not a sprint, and your sacrifices and efforts today will certainly pay off immensely in the future.

Disclaimer: The content provided on this blog (Zooming to Fire) is for informational and educational purposes only. It represents the opinions and perspectives of the authors and should not be considered as financial advice. The authors are not licensed financial advisors, and no content on this blog should be in any way interpreted as professional financial counsel or advice. See more here.