How to invest in your 20s
During your 20s, it can be difficult to plan ahead and start your investment journey when you have other priorities, but it can pay dividends in the future.
When you’re just starting out in the world of work and have other priorities, it can be easy to overlook having a financial plan, including investing for the future.
However, having a plan can reap significant benefits, giving you greater independence in the future.
Are you in your 20s and wondering how to invest your hard-earned cash?
Read on to find out how to get started.
1. Pin down your priorities
Before you look into any investment opportunities, it’s important to weigh up your key financial goals and priorities.
Here are some questions you need to ask:
- How much can you set aside each month after you’ve paid for your rent or mortgage, bills, essentials and other living expenses?
- What are your financial goals over the next few years? Maybe you want to save up for a car, a big holiday, or for your first home or to get married.
- What are your longer-term goals? Whether you’d like to save a deposit for a house or have the option to go travelling later, these goals will impact your investment strategy.
- How much risk are you prepared to take on?
- Do you need easy access to your money?
2. Pay off your debt
Debt is nothing to be ashamed of, but it’s important to have a strategy for managing it.
Whether you’ve accumulated some credit card debt or taken out a loan, prioritise paying this off before you start investing.
Paying off debt in a timely manner means you can potentially save on interest payments, and it may help boost your credit rating, which will make it easier to secure better deals if you need to borrow in the future.
3. Start (or review) your pensions
Retirement may still be decades away, but it’s important to set up a pension and start making regular contributions to it as early as possible.
Not only do you benefit from tax relief on any contributions, but your employer also pays into it, making a pension one of the most effective ways of maximising your money.
If you’re employed, you’ll likely benefit from auto-enrolment, so you may already have a workplace pension.
But if you’re self-employed, you can set up a Self-Invested Personal Pension (SIPP), which lets control how your pension is invested.
It can be accessed at the minimum retirement age. This is currently 55 but will rise to 57 in 2028.
4. Build an emergency fund
A long-term financial strategy is a great idea, but it’s always worth having some money saved up for emergencies.
Whether your laptop breaks, your car gives up the ghost or you suddenly lose your job, having a financial buffer set aside can help you out of a tricky situation.
It’s typically recommended that you save between three and six months worth of expenses for emergencies.
Ideally, an emergency fund should be easy to access with no penalties for withdrawals.
5. Consider an Individual Savings Account (ISA)
An ISA is a tax-efficient way of saving money.
You can deposit up to £20,000 into most ISAs (except for Lifetime and Junior ISAs) in each tax year, and you’re not taxed on any interest.
There are several types of ISAs, including:
- Cash ISA: This is for cash savings, and any interest is tax-free.
- Lifetime ISA: You save up to £4,000 per year for your first home, or for retirement. The government pays an additional 25 percent on top of what you deposit each year, up to £1,000.
- Stocks and shares ISA: You can invest in shares, funds, investment trusts and bonds through a stocks and shares ISA. Any return on your investments, including dividends, are tax-free.
- Junior ISA: A Junior ISA is a tax-free savings account that can be used to save a nest egg for your child with an annual limit of £9,000. You can open a cash or stocks and shares Junior ISA.
- Innovative finance ISA (IFISA): This type of ISA allows you to make a tax-free investment in peer-to-peer lending, which is a way for people to lend money to individuals or businesses. Any return on your investment is untaxed.
While IFISAs can potentially deliver a higher return on investments than a cash ISA, it’s worth bearing in mind that this type of ISA is not protected by the Financial Services Compensation Scheme (FSCS), so you could potentially lose some or even all of your original investment.
6. Do your research
Once you’ve set up an emergency fund, sorted your pension and considered any ISAs, you could also look into other financial products and platforms.
There’s usually no minimum investment to buy stocks and shares, but it’s worth speaking to an independent financial adviser who can go through your options.
When you’re new to investing, it’s essential to avoid excessive risk, so it’s worth getting specialist advice.
Before you invest in a company, look carefully at its financial health.
Many online platforms and apps analyse and compare stocks according to different criteria before you choose which ones to invest in.
7. Take a long-term long view
Any investments should be made from a long-term perspective, rather than with an expectation of instant returns.
Starting to make regular investments when you’re in your 20s can reap significant returns over a decade or more, thanks to the effect of compound interest.
You may lose some value in your investments during a difficult market but the longer you’re invested in the market, the longer you have to ride out any volatility.
Ideally, you should expect to invest for at least a few years before withdrawing your money.
8. Diversification is key
Spreading your investments across different asset classes such as stocks, government bonds, corporate bonds and property funds minimises your exposure to excessive risk.
A financial adviser can help you build a diverse portfolio, or you can choose to invest in an index fund or exchange-traded fund, which tracks an index like the FTSE 100.
A fund manager will charge you for managing your fund.
It’s also important to review your portfolio regularly to make sure it aligns with your financial goals.
Get expert financial advice
Starting to invest in your 20s is a smart move that can set the stage for a more secure financial future. By pinning down your priorities, paying off debt, and building a solid foundation with pensions and emergency funds, you’re laying the groundwork for a successful investment journey.
With the right mix of ISAs, careful research, and a long-term perspective, you can navigate the world of investing with confidence.
Remember, the key is to start early, stay informed, and diversify your investments. Your future self will thank you for the steps you take today.
Unbiased will match you with a financial adviser for expert financial advice on starting your investment journey and building a solid financial plan for your 20s.
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