Earn $20 when you view your rate on a personal loan *
Bonus deposited into a SoFi Money® account. See terms.

A Beginner’s Guide to Investing in Your 20s

December 30, 2020 · 11 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

A Beginner’s Guide to Investing in Your 20s

Update: The deadline for making IRA contributions for tax year 2020 has been extended to May 17, 2021.

Investing in your 20s is one of the greatest steps you can take toward being a bona fide, successful adult. It pays to get a jumpstart on saving for financial goals like retirement, especially because of compound returns.

Compound returns are returns that you earn on the money you invested and all previous profits, which means your money grows at an ever-increasing rate. Keep in mind, investing comes with risk—including the risk of loss—and past performance is no guarantee of the future. But if you’re successful, your 70-year-old self might just look back on 20-something you and be grateful you took the time to learn to invest.

Deciding how to invest money in your 20s can seem overwhelming at first; there are a lot of people with differing opinions and it’s hard to know where to start. But remember that you don’t need to be bringing in the big bucks to be a savvy investor.

Thanks to advancements in investment technology and options available to investors of all income brackets, investing has never been more accessible. Below, we’ll discuss a few different strategies for how to invest money in your 20s.

Think About Financial Goals

Here’s a great first step: separate money into different “buckets” depending on your goal for that money. For example, the money you save for a down payment on your first home is earmarked for a different goal than the retirement savings you won’t touch for 40 or more years, and should therefore be invested differently.

When thinking about goals, ask yourself these two questions:

1. What is your goal for this money?
2. When will you want to use the money?

If you have savings that is not currently earmarked for a specific financial goal, take some time to think about what goal you’d like to apply it to. A great first saving goal is to have three to six months of living expenses in an emergency fund. After that, it might be good to turn your attention toward retirement savings and investing.

Decide Where to House Your Money

Once you have outlined some money goals, you could consider setting up your accounts. Often, the type of account you open depends on when you need the money. When deciding how to invest money in your 20s, it can help to think in terms of immediate, mid-term, and long-term financial needs.

Where to Put Immediate Money

Food, bills, rent, and everything else you must pay for on a month-to-month basis is an immediate need. Often people keep this money—along with a cushion so as not to overdraft their account—in a checking account, or a cash management account like SoFi Money.

Where to Put Mid-term Money

Mid-term money is any money you might need in the next couple of years, such as an emergency fund (so long as you have fast access to this money), travel fund, wedding fund, or down payment savings.

It might make sense to keep this money in a high-yield savings account. While you can use the savings account offered by a bank with whom you do your checking, there are other options that can offer you a better interest rate on your money.

For example, some people are migrating to online banking experiences over traditional big name banks. Because these financial service companies do not maintain brick and mortar locations, they are often able to offer a slightly higher interest rate within their products than a commercial bank. A credit union might also offer a high-yield savings account option.

High-interest savings accounts, along with other “cash equivalents” like certificates of deposits (CDs) and money market accounts are considered to be lower-risk investments (though CDs are not useful for emergency funds, because of the early termination penalties).

Where to Put Mid- to Long-term Money

For money you’ll use in five to 20 years, you may be prepared to take slightly more risk than a high-yield savings account. You might choose to keep the money in a high-yield bank account or in CDs, or an active brokerage account where you can invest that money in stocks, bonds, mutual funds, or other asset classes. You can also do a combination of the two.

Longer-term savings options can also be appropriate if you’d like to get a head start on planning for higher education needs for current or future children. A 529 plan offers benefits—including tax benefits, in certain states—over a brokerage account (though you may be limited on what you can invest in, depending on your state).

SoFi offers tools such as auto invest to help you invest for the future.

Long-Term Money

Think of long-term money as cash you won’t need for several decades. A retirement account is a great example of an appropriate place to hold long-term money. You’ve probably already heard of the better known retirement plan types like an IRA, Roth IRA, or a 401(k) account, which can offer important tax benefits.

Choosing the right retirement account for investing in your 20s can be tricky because there are several to choose from. The next section in this article is dedicated solely to retirement accounts.

One app for all your investing needs.
Open an account and get up to $1k.

**No purchase necessary.
Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

A 20-Something’s Guide to Retirement Accounts

Many retirement accounts are tax-advantaged, meaning that you won’t pay immediate capital gains taxes on the money earned through investing. This is the primary benefit of using a retirement account to invest in your 20s or at any age. You can prepare for retirement with a SoFi managed online IRA from SoFi Invest.

For a traditional IRA and a 401(k), you pay taxes when you withdraw your money in retirement, but not when you put the money in. When you contribute to a Roth IRA, you pay taxes on the money when you put it in the retirement account, but do not have to pay taxes on the money upon withdrawal.

401k Accounts

Most companies that offer a retirement account use a 401(k). (If you work in a government job, public education, or a few other select fields, you likely have a 403b retirement plan.) When you make a contribution to a 401(k), many companies will “match” that contribution.

For example, an employer might contribute 3% of your salary to your 401k account when you contribute 6%. This is a great deal, since the employer is essentially donating money directly to your retirement.

401k accounts are also useful because they are fairly straightforward to use. You can choose your contribution amount (up to a certain limit) and the money can be taken directly from your paycheck. The 2020 contribution limit for a 401k is $19,500.

Traditional IRA

Traditional IRAs are tax-deferred accounts which means that, like a 401(k) account (and most other retirement account types except a Roth IRA), you won’t pay income taxes on the money that you contribute to the account. Instead, you’ll pay them when you withdraw the money in retirement.

You can contribute up to $6,000 per year (as of 2020) to a Traditional IRA as long as you aren’t already covered by a retirement account at work. (Individuals 50 years or older can contribute an additional $1,000 to a traditional IRA each year.) This is a good option for someone that doesn’t have a workplace 401(k)..

A SEP IRA is much like a Traditional IRA, but for self-employed persons. It has much higher contribution amounts than a traditional IRA, so consider a SEP IRA if you own your own business.

Roth IRA

Unlike tax-deferred accounts, Roth IRAs are funded with money that you’ve already paid taxes on. Because you are paying taxes now as opposed to later, a Roth IRA can be great for investors who are currently in low income-tax brackets and expect to earn (and spend) more in the future. If you’re investing in your 20s, this may describe you.

Like a Traditional IRA, a Roth IRA has a $6,000 (as of 2020) contribution limit. (And people over 50 years old can contribute an additional $1,000 each year.) Unlike a Traditional IRA, there are income limits on a Roth IRA. Currently, eligibility starts phasing out at $124,000 for single tax filers and $196,000 for joint tax filers. If you make more than the income limit, you can’t open a Roth IRA.

If you do plan to open a traditional or Roth IRA, you can do so through any brokerage bank, mutual fund house, or other financial institution. Retirement accounts are also offered by some online investment advisors.

Potential Assets to Invest in During Your 20s

Once you’ve determined which account/s you’ll be using, you’ll need to determine your investment strategy and goals. One important thing to understand about investing in your 20s is the tradeoff between risk and reward. You cannot have one without the other.

Higher risk generally should come with a possibility of higher reward, and that risk usually comes in the form of volatility. Because higher-risk assets can go through periods of significant downside, they are generally only recommended for money that you won’t need for decades or more.

There are a number of traditional and newer assets classes someone might consider when investing in their 20s.


A stock is a tiny piece of ownership in a publicly traded company. When you invest in a stock, you could earn money through capital appreciation (the value of the stock growing over time) or through dividends, which are periodic payments made by the company to shareholders.

Stocks can be volatile: prices fluctuate according to supply and demand forces as they trade on an open exchange. This volatility may result in higher long-term returns over time—stocks have shown a growth rate of approximately 10%-11%annually over time (according to the S&P 500 returns between 1926 to 2018).

Stocks are also called equity investments, because an investor owns equity in a company. Other types of equity investments include limited partnerships, gold, direct investments in real estate, and equity real estate investment trusts (REITs), which are bundled real estate investments that trade like a stock.


A bond is a contract where you loan a company or the government money for a fixed period of time. The money you earn on that investment is the interest they pay you for borrowing your money.

Although not risk-free, bonds are generally considered less risky than stocks because they are a contract that comes with a stated rate of return. Bonds backed by the U.S. government, called treasury bonds, are the safest within the category of bonds because it is unlikely that the U.S. government will go bankrupt.

Bonds are considered debt investments because you are literally investing in the debt of some entity. In addition to treasuries and corporate bonds, there are also municipal bonds, which are issued by state and local governments, and mortgage- and asset-backed bonds, which are bundles of mortgages or other financial assets which pass through the interest paid on mortgages or assets.

Mutual Funds and Exchange-Traded Funds

Some investors might want to utilize funds—either mutual funds or exchange-traded funds (ETFs)—to gain exposure to certain asset classes.

A fund is essentially a basket of investments—stocks, bonds, another investment type or a combination thereof. Funds are useful because they provide immediate diversification: safety against the risk of having too much money invested in one stock, sector, or any other single asset.

Funds are either actively or passively managed. A fund that is passively managed is attempting to track a specific index. ETFs tend to be passively managed, but there are more active funds out there. Mutual funds can be either passively or actively managed.

Active management means that there is someone actively buying and selling stocks to try and outperform the market. (Unfortunately, they rarely do.) When looking for passively managed mutual funds, look for the ones labeled index funds.

An index is used to track the performance of a certain market, and therefore represents the market average. Index mutual funds and ETFs typically have very low fees, which means you get to keep more of your own money.

Retirement target date funds are another option. These investments package together several funds, shifting into a higher bond exposure as you approach the selected retirement date.

Some retirement target date funds use managed funds, which can increase the cost for you and potentially underperform compared to their peers or the index they seek to track.

Tips on Investing in Your 20s

Once you’ve become familiar with the basics of investing, it’s time to put that knowledge into action. These tips can help you shape a strategy for how to invest money in your 20s and beyond.

Gauge Your Personal Risk Tolerance

One of the key rules to remember when investing in your 20s is that time is on your side. You have a larger window to allow your portfolio to recover from bouts of inevitable stock market volatility, which means you could choose to take more risk with your investments to achieve higher rewards.

Getting to know your personal risk tolerance can help you decide where and how to invest in your 20s to achieve your investment goals. It’s also important to understand how risk tolerance matches up with your risk capacity.

Risk tolerance means the level of risk you’re comfortable taking; risk capacity is the level of risk you need to take to reach your investment goals. Playing it too safe with your portfolio when you’re younger might mean missing out on significant investment returns over time.

Know the Difference Between Asset Allocation and Asset Location

People often invest in a combination of stocks and bonds, which is easy to do using funds. One strategy for investing in your 20s is to invest a higher allocation of your long-term investments in stocks and less in bonds, slowly moving into more bond funds the closer you get to retirement. This “big picture” decision is called asset allocation.

Asset allocation is important and there are several rules of thumb you can use to pinpoint the right mix of assets you should have. The rule of 110, for example, suggests subtracting your age from 110 to determine how much of your portfolio should be committed to stocks. So if you’re 25, for example, you’d put 85% of your money in stocks and the rest into bonds.

But asset allocation is only part of the picture. One might also consider asset location. This means where you’re putting your money, i.e. savings accounts, an online brokerage account, a 401k or an IRA.

Asset location matters when it comes to how you invest money in your 20s, because it can maximize tax advantages. With a 401(k), for instance, your contributions are deducted from your taxable income for the year. That could result in owing less in taxes or getting a larger refund.

Likewise, it’s important to consider the tax implications of a traditional vs. Roth IRA. If you expect to be in a lower tax bracket once you retire, then getting an upfront deduction for traditional IRA contributions now could make sense financially. But if you anticipate being in a higher tax bracket when you retire, then you may be better off with tax-free withdrawals from a Roth IRA.

Take Advantage of Free Money

One of the simplest ways to start investing in your 20s is to enroll in your workplace retirement plan. Many employers allow for automatic enrollment into a 401(k) but if yours doesn’t, talk to your human resources department or plan administrator about how to sign up.

Once you’re enrolled in the plan, consider contributing at least enough to get the full company match if your employer offers one. Otherwise, you could be leaving money on the table.

And if you can’t make the full contribution to get the match right away, you can still work your way up to it by increasing your salary deferral percentage gradually. For example, you could raise your contribution rate by 1% each year until you reach the maximum deferral amount. If you’re also getting a raise each year, you may not even miss the extra money coming out of your paychecks.

Don’t Be Afraid of Investment Alternatives

Stocks, bonds and mutual funds can all be good places to start investing in your 20s. But don’t count out other opportunities to invest outside the market.

Real estate is one example of an alternative investment (along with cryptocurrency, precious metals, and commodities) that can be attractive to some investors. Real estate isn’t strongly correlated to stock market movements, so it may continue to perform well even when stocks are shaky. It can also act as a hedge against inflation to help your portfolio maintain the same level of purchasing power.

Investing in real estate in your 20s doesn’t necessarily mean you have to own a rental property, though that’s one option. You could also invest in fix-and-flip properties, real estate investment trusts (REITs), or crowdfunded real estate investments. Adding alternatives such as real estate to your portfolio can improve diversification and potentially create more insulation against risk.

Be Consistent With Your Strategy

One thing to know about how to invest in your 20s is that consistency can pay off in the long run. Even if you’re only able to invest a little money at a time through 401(k) contributions or by purchasing partial or fractional shares of stock, those amounts can add up as the years and decades pass.

Keep Learning

Learning how to invest money in your 20s doesn’t happen overnight. And you may still be fuzzy on how certain parts of the market work as you enter your 30s or 40s.

Continually educating yourself about different investments and investing strategies can give you the knowledge you need to guide your portfolio toward your financial goals.

The Takeaway

When it comes to investing in your 20s, the earlier you get started, the earlier you can start to grow your savings for more immediate goals like a home, education, and travel, as well as more long-term financial goals like a well-funded retirement.

While retirement savings are very important—and you can choose between 401(k)s, IRAs, or a combination of retirement savings plans—there are other investment opportunities for investing in your 20s and beyond.

More good news: It’s a myth to assume you can only invest in your 20s if you have large amounts of money to do it. Thanks to online investing platforms like SoFi Invest®, you can start building a portfolio right now with the money you have—so that you can meet all the important goals and milestones in your life.

Find out how SoFi Invest can help you take a big step towards reaching your financial goals.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender