Your 20s are a time of exploration, growth, and, for many, the start of financial independence. It’s a decade full of opportunities to set up a strong foundation for financial security, and one of the most impactful steps you can take is to begin investing.

You might feel you don’t have much money to invest, or maybe you’re worried about the risks. The good news? Starting small and developing smart strategies can make a huge difference over time.

Here’s a look at some of the best investment strategies for 20-somethings who want to build wealth and work towards financial freedom.

1. Start with a Budget and Emergency Fund

Before diving into investments, it’s essential to have a solid financial foundation.

— Build a Budget: Knowing where your money goes each month helps you control spending and allocate more toward investments. Use budgeting tools or apps to help track and categorize your expenses.

— Establish an Emergency Fund: Aim to save 3-6 months’ worth of expenses in a high-yield savings account. This fund acts as a safety net, ensuring you have a cushion in case of unexpected expenses without having to dip into your investments.

Creating a budget and an emergency fund may not feel like investing, but they’re crucial first steps to set yourself up for success.

2. Leverage Compound Interest by Starting Early

One of the biggest advantages of investing in your 20s is time. Thanks to compound interest, the earlier you start, the more your investments grow over time, even with smaller contributions.

— Start Small, Think Big: Even if you can only set aside a small amount each month, over time, compound interest can lead to significant growth.

— Set Up Automatic Contributions: Automating your investments, even at a modest rate, ensures consistency and makes investing a habit. Over time, these small contributions compound and can lead to substantial returns.

An early start means you’re not only investing your money but also giving it time to grow exponentially.

3. Take Advantage of Employer-Sponsored Retirement Plans

If you’re employed full-time, there’s a good chance your company offers a retirement plan, such as a 401(k). This is a fantastic way to kickstart your retirement savings.

— Employer Matching: Many companies match a percentage of what you contribute. For instance, if your employer offers a 3% match, try to contribute at least that amount to maximize this “free money.”

— Tax Advantages: Contributions to a 401(k) are often pre-tax, which can reduce your taxable income. Additionally, the money in your account grows tax-free until withdrawal.

Investing in a 401(k) is one of the easiest and most effective ways to save for retirement, especially if your employer offers matching contributions.

4. Open a Roth IRA

A Roth IRA is an individual retirement account that offers a unique tax advantage: contributions are made with after-tax dollars, but your money grows tax-free and can be withdrawn tax-free in retirement.

— Tax-Free Growth: Since you pay taxes upfront, you won’t owe taxes on your contributions or earnings when you withdraw them in retirement, making it a great long-term strategy.

— Flexibility for the Future: Unlike other retirement accounts, contributions (but not earnings) can be withdrawn at any time without penalty, which gives you some flexibility in case of emergencies.

A Roth IRA is especially beneficial for young investors who are likely in a lower tax bracket now than they will be in the future.

5. Invest in a Diversified Portfolio of Index Funds and ETFs

For young investors, diversification is key to balancing risk and reward. Index funds and ETFs (exchange-traded funds) are excellent choices because they offer broad market exposure at a low cost.

— Low Fees: Index funds and ETFs often have lower fees compared to actively managed funds, which means you keep more of your returns.

— Diversification: These funds allow you to invest in a variety of stocks or bonds across different sectors or markets, which spreads out your risk.

— Simplicity: For beginners, investing in index funds or ETFs simplifies the process and reduces the need for constant monitoring.

By focusing on low-cost, diversified funds, you’re setting yourself up for steady growth while minimizing the impact of market fluctuations.

6. Consider a Mix of Stocks and Bonds

While investing heavily in stocks can yield higher returns, having a balanced mix of stocks and bonds can provide some stability, especially during market downturns.

— Stocks for Growth: Stocks, or equities, generally provide higher returns over the long term. Since you’re young, you have the time to recover from market dips, so it’s wise to invest a larger portion in stocks.

— Bonds for Stability: Bonds are more stable and less volatile than stocks, providing a “safe” portion of your portfolio that can help balance risk.

A good rule of thumb for your age is to subtract your age from 100 to determine what percentage to allocate to stocks, with the remainder in bonds. For example, at 25, you might consider a portfolio with 75% stocks and 25% bonds.

7. Invest in Yourself Through Education and Skill Development

Investing in yourself can yield high returns over your lifetime. Building your skills, advancing in your career, or even pursuing additional education can increase your earning potential significantly.

— Higher Earning Potential: Enhancing your skills or obtaining certifications can make you more competitive and increase your salary potential.

— Networking Opportunities: Investing in education often brings new connections, which can open doors to better opportunities.

— Personal Development: Developing a mindset of lifelong learning benefits both your personal and professional life, making you more adaptable to changes in the job market.

While this might not seem like a typical investment, putting time and resources into personal growth is a powerful way to set yourself up for long-term financial success.

8. Explore Real Estate Options

Real estate is a popular investment for building wealth over the long term, and starting young can provide substantial benefits.

— House Hacking: If you’re open to it, you can buy a property and rent out part of it to cover your mortgage. This way, you’re building equity while someone else helps pay for it.

— REITs (Real Estate Investment Trusts): If buying a property is out of reach, consider investing in REITs, which allow you to invest in real estate without the need for direct property ownership.

— Long-Term Value: Real estate has historically been a stable and appreciating asset, providing a hedge against inflation.

Real estate can diversify your portfolio and, if done right, create additional income streams.

9. Educate Yourself on Financial Literacy

Understanding the basics of finance is crucial for successful investing. The more you learn, the more empowered you’ll be to make informed investment decisions.

— Read Books and Listen to Podcasts: There are countless resources available that make financial concepts accessible. Books like The Simple Path to Wealth by JL Collins or podcasts like The Money Guy Show can help you build your foundation.

— Use Free Online Courses: Platforms like Coursera and Khan Academy offer courses on investing and personal finance that can deepen your understanding.

— Stay Updated on Market Trends: While you don’t need to obsess over every market fluctuation, staying informed about broader economic trends can help you make strategic adjustments.

Developing financial literacy is a lifelong process, and starting in your 20s can give you a significant advantage over time.

Summary 

Investing in your 20s is one of the most powerful financial decisions you can make, even if you’re just starting with a small amount. Building good habits now, like budgeting, setting up retirement accounts, and learning about diversified investments, can pave the way for a secure and prosperous future.

The strategies above are a great starting point, but remember that personal finance is personal. What works best for you depends on your goals, risk tolerance, and lifestyle. Start where you can, keep learning, and remember that every dollar invested today brings you one step closer to financial freedom.