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A college education is an investment in the future. But as with any investment, it’s important to consider what you’ll get in return — your ROI — to determine if the cost is worth it. And so college students and their parents are weighing the cost of college against future earning potential, as well as intangibles like friendships, network building, and soft skills.

This guide explores the “return on education” for bachelor’s degrees, and offers insights into how to maximize the value of your college education.

Average Cost of a Degree

Choosing the right college is a multifaceted decision. Considerations include where the school is located, whether it has programs that meet your interests, what student culture is like, and of course price.

The price tag for college can be jaw dropping. The average cost of college for an in-state student attending a four-year university is $27,146 per year (including living expenses). Students that attend private, nonprofit universities spend an average of $58,628 per year living on campus.

💡 Quick Tip: Fund your education with a low-rate, no-fee SoFi private student loan that covers all school-certified costs.

Return on Investment by Education Level

You can determine your ROI by education level by looking at the ratio of the cost of your degree to your expected income once you graduate. Your return on education is much like a traditional ROI calculation, which looks at the ratio between net profit and cost from investing resources.

In this case, time and money are the resources you’re investing, and your future income is the profit. The ROI for your education will depend largely on how much you spend on your schooling, what type of job you get after school, and to a certain extent what you major in.

Median 40-year ROI for a College Degree, per Education Data Initiative

Associate Degree Return on Investment

Associate degrees can typically be completed in one to two years and often at a community college, which can make them more affordable than four-year degrees. According to data from the Education Data Initiative, the ROI for an associate degree is 363.5% after 20 years.

Bachelor’s Degree Return on Investment

Bachelor’s degrees typically take students four years to complete. According to Education Data Initiative, the ROI for a bachelor’s degree is 38.1% after 20 years. Keep in mind, though, that this estimated return on investment can vary greatly based on the major you pursue. For example, computer science degrees offer an ROI of 716.6%.

Master’s Degree Return on Investment

A master’s degree can be completed after a student receives their bachelor’s degree. This degree allows the student to specialize in a specific area of interest, such as those who pursue a Master in Business Administration, or MBA. The ROI for a master’s degree is 90.1% after 20 years, according to Education Data Initiative.

Doctoral Degree Return on Investment

A doctoral degree is generally the most advanced degree one can get in a particular field. Doctorates can take up to eight years to complete, though the exact timing will vary depending on factors like the program type, structure, and research being completed by the doctoral candidate. The estimated ROI for doctorate degrees is 84.0% after 20 years, according to Education Data Initiative.

Professional Degree Return on Investment

Professional degrees are advanced degrees that prepare a student to work in a particular field, such as law or pharmacy. After 20 years, the ROI for a professional degree is 60.4%, according to Education Data Initiative.

Highest Earning Degrees

The return on education will vary depending on the degree program you choose. For example, a student with a computer science degree may earn more than an English major. There are exceptions, but it’s a good idea to understand the norm for particular fields. These are some of the highest-earning degree programs.

Associate Degree

As mentioned, an associate degree takes about two years to complete and can often be finished at a community college for significantly less than it may cost to get a four-year degree. Associate degrees often allow students to specialize in a specific trade or field, and in some cases, this specialization can lead to a high-earning career.

One of the top-earning post-associate degrees is air traffic controllers. According to the Bureau of Labor Statistics (BLS), air traffic controllers earn a median income of $137,380.

Dental hygienists, MRI technicians, and funeral service managers all earn an average salary of $70,000 or higher, making them top associate degrees based on earning potential, as well.

Bachelor’s Degree

According to Best Colleges, some of the bachelor’s degrees with the highest earning potential include chemical engineering, computer engineering, computer science, finance, and business analytics.

For example, in 2023, chemical engineers earned a median salary of $112,100. Financial analysts earned a median salary of $99,890 per year, according to the BLS.

Certifications

Some people may consider adding a certification to their resume in order to boost their earning potential. Professional organizations often award certifications for specific skill sets. Some top earning and in-demand certifications include those for project management and data engineering.

Recommended: Guide to Student Loans for Certificate Programs

Bachelor’s Degree ROI by Major

The ROI can vary quite a bit based on the type of bachelor degree pursued. As mentioned, computer science degrees have some of the best ROI for bachelor’s degrees — about 716.6% over 40 years, according to Education Data Initiative. Take a look below at a list of majors and their estimated ROI after 40 years, according to Education Data Initiative:

•     Business finance — 710.2%

•     Business accounting — 547.2%

•     Electrical engineering — 517.8%

•     Biology — 225.0%

•     Communications — 209.3%

•     Architecture — 188.6%

•     Fine Art — 70.5%

Consider What Can’t Be Measured by Money

Yes, going to college or pursuing other higher education opportunities can be expensive. But in addition to the cost and potential boost in earning potential, there are a variety of intangible benefits that can’t be measured by a dollar. For example, college students living on campus are gaining a newfound independence and developing life skills they’ll carry with them.

Plus, many colleges have strong alumni networks that can help when a student is looking for a job post-grad. Students have the chance to not only get to know themselves better, but in the process they may make lifelong friends.

Recommended: How to Budget as a College Student

Controlling Costs

One way to improve ROI is to lower the amount of money you are paying for school. This could be particularly useful if you already know you want to pursue a career in a relatively low paying field.

Scholarships

You can help offset the cost of tuition by looking for scholarship programs that help pay your tuition and other college expenses. Many schools offer need-based financial aid to families who might otherwise struggle to pay tuition costs. In some cases, you could even get a full ride.

You can find scholarships by looking at your school’s financial aid website, connecting with your guidance counselor, or reviewing databases or online scholarship search tools.

In some cases, you may be able to apply for unclaimed scholarships to help supplement the aid you have already received.

Grants

Students may qualify for grants directly from their school or through federal financial aid. Grants typically do not require repayment, so they can be an incredibly helpful addition to a student’s financial toolkit when it comes to paying for college. Pell Grants are one type of grant awarded by the federal government to students who demonstrate exceptional financial need.

Pell Grants are available to undergraduate students. In order to maintain eligibility for a Pell Grant, undergrads will also be required to meet satisfactory academic progress requirements.

Student Loan Forgiveness Programs

If you need to take out student loans to help pay for college, keep an eye on your terms and interest rates to help keep costs down. If you take out federal loans and plan to work for certain non-profits or government organizations, you may be eligible for loan forgiveness under the Public Service Loan Forgiveness (PSLF) program. After making 10 years’ worth of qualifying monthly payments, the remaining balance of your loan may be forgiven through this program.

Private Student Loans

Private student loans don’t qualify for federal benefits like PSLF, but they can be helpful tools for students who have exhausted their federal financial aid.

If you are interested in paying for college or another higher education degree with a private student loan, take the time to shop around and review interest rates, terms, and other fees or benefits offered by lenders. 

Employer Support After Graduation

Finally, some employers may also help you pay back your student loans as part of a benefits package. Consider working for an employer who offers these benefits.

Recommended: Finding Jobs That Pay Off Student Loans

The Takeaway

College students can estimate the return on their educational investment by looking at how much they’ll pay for their degree and comparing it to their lifetime earnings. Though important, the money you’ll eventually earn isn’t the only thing you should consider when choosing a college. Getting a bachelor’s degree can help you acquire skills and expand your horizons in ways that aren’t directly related to your degree or job prospects.

When you decide on the right school for you, take the time to consider all your options — including scholarships, grants, federal and private student loans, post-graduation repayment programs, and other sources of public and private funding — to help you achieve your education and career goals.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

What is the average return on investment for a college degree?

The average return on investment (ROI) for a college degree varies by field, but generally, bachelor’s degree holders earn significantly more over their lifetime than those with only a high school diploma. On average, the ROI for a college degree ranges from 9% to 10%, but can be higher depending on the major and institution.

Which degree has the highest return on investment?

Degrees in fields like engineering, computer science, and technology typically have the highest return on investment (ROI). These degrees often lead to high-paying jobs with strong job security and growth prospects, resulting in a significant lifetime earning advantage compared to the cost of education, making them highly valuable investments.

Is a bachelor’s degree a good investment?

A bachelor’s degree is generally a good investment as it can lead to higher lifetime earnings, greater job stability, and more career opportunities compared to having only a high school diploma. However, the return on investment depends on the chosen field, the cost of education, and individual career goals and outcomes.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

SOISL-Q324-052

If you’re heading off to grad school, you’re probably not a newbie at the financial aid process after your years as an undergraduate. You might even have a few things to say about the increase in graduate student loan borrowing.

Out of the over $1.74 trillion in student loan debt in the United States, dollars borrowed by graduate school students are rising more quickly than undergraduate debt.

However, it’s a mistake to assume that graduate student loans are the same as undergraduate loans. There are actually significant differences between the two, and knowing those differences can be the key to saving money on your grad school debt in the long run. 

Keep reading to learn key differences between undergraduate and graduate student loans.

What Does Undergraduate Mean?

In the context of student loans, an undergraduate refers to someone who has not yet completed their bachelor’s degree.

An undergraduate student is someone who is pursuing their associate or bachelor’s degree.

Associate degrees are generally offered at two-year community colleges. A bachelor’s degree generally takes about four years to complete and is often completed at four-year colleges or universities. There is a wide variety of bachelor degree programs including history, English, engineering, math, chemistry, and more. 

Three of the most common types of bachelor’s degrees include Bachelor of Arts, Bachelor of Fine Arts, and Bachelor of Science. Program requirements for undergraduate degrees will vary by institution.

Recommended: A Guide to Choosing the Right College Major

What Does Graduate Mean?

A graduate is someone who has successfully completed a specified course of work. In terms of a graduate student, it’s any student who has completed their bachelor’s program and is working toward a more advanced degree. 

Graduate degrees include master’s, doctorates, PhD’s, MBA’s, and JD’s. Depending on the program coursework, a graduate degree can take anywhere from one to six years to complete. Law students, medical students, and PhD candidates are all examples of graduate students.

Recommended: Applying to Graduate School: Smart Tips & Strategies 

Differences Between Undergraduate and Graduate Programs

Beyond differences in coursework, there are differences when it comes to student loans and financial aid options for undergraduate and graduate students.

1. Dependency Status

As a graduate student, you’ll still need to complete the Free Application for Federal Student Aid (FAFSA®) to qualify for federal student aid. However, you no longer need to include financial information about your parents on the form.

That’s because students who are pursuing either a master’s or doctorate degree are considered to be independent students.

There are a couple of key benefits associated with being an independent student. First, it helps streamline filling out the FAFSA. Second, as an independent student, you’ll likely report much less income because your family’s earnings generally are no longer considered when financial aid eligibility is calculated, which could potentially give you access to additional aid options.

There are circumstances where undergraduate students can also be considered independent, but it’s usually more common with graduate students.

2. Interest Rates on Federal Student Loans

The 2024-25 federal student loan interest rates for graduate and professional students are 8.08% for Direct Unsubsidized Loans for graduate or professional students and 9.08% for Direct PLUS Loans — much higher than the 6.53% interest rate on federal undergraduate student loans.

Graduate students can use federal student loans to pay for qualifying education expenses, including tuition, fees, college textbooks, and living expenses.

PLUS Loans are funded by the U.S. Department of Education and require a credit check, although the credit requirements are not as stringent as they would be with a private lender. At 9.08%, they have the highest interest rate of all the federal student loans.

Federal loans also have fees that should be factored into the total cost of borrowing. For Direct Subsidized and Unsubsidized Loans, the loan fee is 1.057%. For Direct PLUS Loans, the fee is 4.228%.

3. Loan Type

Grad school federal loans start accruing interest while you’re a full-time student, unlike subsidized loans for undergraduates.

For example, say you borrowed $20,000 in Direct Unsubsidized Loans (for graduates) to cover the cost of tuition when you started the program. When you factor in the current disbursement fee of 1.057%, you would have received approximately $19,789.

Since this loan type is unsubsidized, it will accrue interest while you attend school. And even though you received $19,789, interest will accrue based on the loan total of $20,000. If the program is two years long and you made no payments during that time, the loan would have accrued approximately $3,233 (assuming the interest rate stays the same 8.08% for those two years). For undergrads with subsidized loans, the interest clock doesn’t start until after graduation.

4. Borrowing Limits

Typically, graduate students can borrow $20,500 annually in Direct Unsubsidized Loans, although there is currently a lifetime cap of $138,500 when undergrad loans and graduate school Direct Loans are combined. If you’re in a qualifying health field, you may have a higher lifetime limit, potentially up to $224,000.

Compare that to annual limits for undergraduates, and they’re typically capped at $5,500 during year one; $6,500 for year two; and $7,500 for subsequent years, with a total availability of $31,000.

Having said that, although graduate students have more flexibility in how much can be borrowed, it can be challenging to pay back those higher amounts of debt.

Recommended: 6 Strategies to Pay Off Student Loans Quickly

5. Interest Rates on Private Student Loans

Private student loans aren’t backed by the federal government; they’re issued by private lenders or banks.

If you’ve already established a solid credit history and/or have steady income coming in, those are important cornerstones that may help you qualify for more competitive rates on private student loans. This is in contrast to the typical undergrad, who may be new to credit and lending entirely, and doesn’t usually have a well-paying, full-time job.

Keep in mind, though, that private student loans don’t necessarily offer the same borrower protections as federal student loans — things like income-driven repayment plans or loan forgiveness options. Because of this, federal loans are usually prioritized over private student loans.

Recommended: Private Student Loan Guide

6. Student Loan Refinancing

While anyone with higher education debt can apply to refinance student loans, there are a couple reasons why this option tends to be more popular with grad students.

First, in order to qualify to refinance loans at a lower interest rate than what a borrower may currently have, a strong credit history that includes a positive track record of paying debts is important — and proof that you make enough money to pay back the loan (among other factors that will vary by lender). Depending on a graduate student’s background, there is a chance that they might be viewed as a more stable lending choice than an undergraduate.

Additionally, some graduate programs offer the potential for students to increase their earning potential after graduation, which also could be appealing to private lenders.

Student loan refinancing won’t be the right option for everyone. Federal loans come with a variety of protections and benefits, like income-driven repayment plans and loan deferment. When you refinance a federal loan, it becomes a private loan, and will no longer qualify for any federal benefits.

7. Federal Grants

Even if you were eligible for a federal Pell Grant the last time around, you can’t count on that for graduate school. A Pell Grant is a need-based grant that does not need to be repaid, and is typically awarded only to undergraduate students.

There are a variety of other opportunities available to grad students to help them finance their education, including some grad school scholarships, other grants, and fellowships. Grants are generally offered based on financial need, while fellowships are awarded based on a student’s academic performance and research.

Recommended: Grants for College

Thinking Outside the Box: Paying for Graduate School

When you think about paying for graduate school, it’s natural to consider student loans, but there are additional avenues likely worth pursuing. For example, your school of choice may offer scholarships, fellowships, and grants.

Typically, the college will use the information in the FAFSA to decide what funding, if any, they can offer you. Other times, though, there may be separate applications unique to your school; you can ask for specifics at the financial aid office. Sometimes, the award might be small; other times, it might be full tuition reimbursement.

Becoming a Teaching or Research Assistant

Some graduate students work on campus as teaching or research assistants. These opportunities could offer the opportunity for students to expand their skill set while earning some income.

Working Full-Time as a Grad Student

If you’re pursuing a graduate degree while working full time, you can check with your employer to see if they offer a tuition reimbursement plan. If they do, the program will have its own parameters and processes.

Sometimes, if you accept funds from this program, you’ll need to stay at the company for a predetermined amount of time; other times, they might fund only certain degrees.

Finding Scholarships

You can also use databases like FastWeb or SoFi’s scholarship search tool to see if there are private scholarships available that you might qualify for.

Want access to more student loan resources? Explore our student loan help center to help guide you in your debt repayment!

The Takeaway

Graduate students are those who have completed some type of bachelor’s program and are pursuing an additional degree, such as an MBA, master’s, PhD, or doctorate. Graduate students may be eligible for different types of federal loans and financial aid than they were as an undergraduate. However, federal student loans for graduate students typically have a higher interest rate and fees than options for undergraduate students.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Do graduate students borrow more money than undergraduate students?

Yes, graduate students typically borrow more money than undergraduate students due to higher tuition costs and increased borrowing limits. Federal Direct PLUS Loans allow graduate students to borrow up to the full cost of attendance, leading to larger loan balances compared to undergraduates who face stricter borrowing caps. The current lifetime cap for graduate student loans is $138,500 (this includes loans from undergrad, too), but may be higher for those in a qualifying health field.

Do graduate student loans have higher interest rates?

Yes, graduate student loans generally have higher interest rates than undergraduate loans. For the 2024-25 school year, federal undergraduate student loans have an interest rate of 6.53%. For graduate students, that rate is 8.08%. Direct PLUS Loans have a rate of 9.08%.

What is considered an undergraduate loan?

An undergraduate loan is a type of student loan specifically designed for students pursuing a bachelor’s degree or associate degree. These loans, which include Federal Direct Subsidized and Unsubsidized Loans, typically have lower interest rates and borrowing limits compared to graduate loans, and are often the first type of loan students encounter.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOISL-Q324-051

Deciding how to invest money in your 20s can seem overwhelming at first; many people have differing opinions or goals, and it’s hard to know where to start. But remember that you don’t need to have a lot of money upfront to be a successful and savvy investor.

Perhaps the most important thing is to start investing early, even if your initial investments are small. Here are a few different strategies for investing money in your 20s.

Think About Financial Goals

When determining your financial goals, you may want to break down short-, medium-, and long-term milestones. You want to ask yourself what you want from your money and figure out when you’ll need to use the money. For example, the money you save for a medium-term goal, like a down payment on your first home, should be treated differently than the retirement savings you won’t touch for 40 or more years.

So, you may want to start buying stocks right away, but you may also want to give some strategic thought as to how that may fit into your overall financial goals.

If you have not earmarked savings for a specific financial goal, take some time to think about what purpose 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 savings and investing for longer-term goals, like retirement.

Decide Where to House Your Money

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

Where to Put Immediate Money

Food, bills, rent, and everything else you must pay for on a month-to-month basis are immediate needs. Often people keep this money — along with a cushion so as not to overdraft their account — in an online bank account. These types of accounts allow you to withdraw money instantaneously, generally without penalties, making them ideal for your immediate financial needs.

Where to Put Mid-term Money

Mid-term money is any money you might need in the next couple of years, such as a travel fund, wedding fund, or home down payment savings. It might make sense to keep this money in a high-yield savings account, which provides a better return on your money than traditional savings accounts.

High-yield savings accounts, along with other cash equivalents like certificates of deposits (CDs) and money market accounts, are usually considered to be lower-risk investments (though CDs are not helpful 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 your high-yield savings account or in CDs, or a online 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 different types of accounts.

Longer-term savings options, like a tax-advantage 529 plan, can also be appropriate if you’d like to start planning for higher education needs for current or future children.

Where to Put 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. Retirement plans like a Traditional IRA, Roth IRA, or a 401(k) account can offer significant tax benefits.

💡 Ready to invest in your retirement? Consider opening a Traditional or Roth IRA with SoFi.

Potential Assets to Invest in During Your 20s

One important thing to understand about investing in your 20s is the tradeoff between risk and reward when implementing your investing strategy. You cannot have one without the other. With this risk and reward calculation in mind, you need to determine what asset classes you might consider when investing in your 20s.

Stocks

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, dividends, or a combination of the two.

Stocks can be volatile because prices fluctuate according to supply and demand forces as they trade on an open exchange. Even though stocks can be volatile and experience losses, they tend to provide positive returns over time. The S&P 500 index has had an average annual growth rate of 10.3% from 1957 through the end of 2023.

Bonds

Although not risk-free, experts generally consider bonds less risky (though not risk-free) 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 debt investments, meaning investors fund the debt of some entity. The money you earn on that investment is the interest they pay you for borrowing your money. In addition to treasuries and corporate bonds, there are municipal bonds, which state and local governments issue, and mortgage- and asset-backed bonds, which are bundles of mortgages or other financial assets that pass through the interest paid on mortgages or assets.

Mutual Funds and Exchange-Traded Funds

Some investors might want to utilize 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 helpful 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. An actively managed fund is maintained with a hands-on approach to determine investments in a portfolio. ETFs tend to be passively managed, but there are many actively managed ETFs funds on the market. Mutual funds can be either passively or actively managed.

Tips for 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 things to remember about investing in your 20s is that time is on your side. You have a significant time horizon window to allow your portfolio to recover from bouts of inevitable stock market volatility. Because of this, you could take more risks with your investments to try and achieve higher rewards.

Getting to know your personal risk preferences 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 your risk capacity and appetite.

Risk tolerance means the level of risk you’re comfortable taking. Risk capacity is the level of risk you prefer to take to reach your investment goals, while risk appetite is the level of risk you need to hit those milestones. When you’re younger, playing it too safe with your portfolio might mean missing out on significant investment returns.

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 mutual funds and ETFs. 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.

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

Asset location matters when it comes to investing money in your 20s because it can maximize tax advantages if you’re utilizing a 401k or IRA. But these retirement accounts also have restrictions and penalties for withdrawing money. So if you want to be able to access your investments quickly, an online brokerage may be a complimentary investing account.

Take Advantage of Free Money

One of the simplest ways to start investing in your 20s is to enroll in your workplace retirement plan like a 401k.

Once you’ve enrolled in a plan, consider contributing at least enough to get the full company match if your employer offers one. If you don’t, 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 gradually increasing your salary deferral percentage. For example, you could raise your contribution rate by 1% each year until you reach the maximum deferral amount.

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 alternative investments outside these markets.

Real estate is one example of an alternative investment that can be attractive to some investors. 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 alternative investments such as real estate, cryptocurrency, and commodities to your portfolio may improve diversification and could create some insulation against risk.

Learn more: What Are Alternative Investments?

The Takeaway

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. But by continually educating yourself about different investments and investing strategies, you can gain the knowledge needed to guide your portfolio toward your financial goals.

One thing to know about investing 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 401k contributions or by purchasing partial or fractional shares of stock, those amounts can add up as the years and decades pass.

If you’re ready to start saving and investing for your financial goals, the SoFi investment app can help. With SoFi Invest®, you can begin building a portfolio of stocks, and ETFs for as little as $5 to meet all the critical financial goals and milestones in your life.

SoFi Invest®