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Financial Planning

Investing in Your 20s: 4 Major Financial Questions Answered

When you're in your 20s, you may be starting to invest or you might have some existing assets you need to take better care of. Pay attention to these major issues.

Articles by Nick Holeman, CFP®

By Nick Holeman, CFP®
Financial Planning Expert, Betterment  |  Published: January 7, 2019

Choosing aggressive investments just because you’re young isn’t always a wise choice.

Jump start your finances by balancing the choice of paying down your debts versus investing.

Selecting Roth or traditional retirement accounts can help optimize your retirement savings.

For most of us, our 20s is the first decade of life where investing might become a priority. You may have just graduated college, and having landed your first few full-time jobs, you’re starting to get serious about putting your money to work. More likely than not, you’re motivated and eager to start forging your financial future.

Unfortunately, eagerness alone isn’t enough to be a successful investor. Once you make the decision to start investing, and you’ve done a bit of research, dozens of new questions emerge. Questions like, “Should I invest or pay down debt?” or “What should I do to start a nest egg?”

In this article, we’ll cover the top four questions we hear from investors in their twenties that we believe are important questions to be asking—and answering.

  1. “Should I invest aggressively just because I’m young?”
  2. “Should I pay down my debts or start investing?”
  3. “Should I contribute to a Roth or Traditional retirement account?”
  4. “How long should it take to see results?”

Let’s explore these to help you develop a clearer path through your 20s.

1. “Should I invest aggressively just because I’m young?”

Young investors often hear that they should invest aggressively because they “have time on their side.” That usually means investing in a high percentage of stocks and a small percentage of bonds or cash. While the logic is sound, it’s really only half of the story. And the half that is missing is the most important part: the foundation of your finances.

The portion of your money that is for long-term goals, such as retirement, should most likely be invested aggressively. But in your twenties you have other financial goals besides just retirement. Let’s look at some common goals that should not have aggressive, high risk investments just because you’re young.

  • A safety net. It’s extremely important to build up an emergency fund that covers 3-6 months of your expenses. We usually recommend your safety net should have a portfolio allocation of no more than 40% stocks.
  • Wedding costs. According to the U.S. Census Bureau, the median age of a first marriage for men is 29, and for women, it’s 27. You don’t want to have to delay matrimony just because the stock market took a dip, so money set aside for these goals should also probably be invested conservatively.
  • A home down payment. The median age for purchasing a first home is age 32, according to the New York Times. That means most people should start saving for that house in their twenties. When saving for a relatively short-term goal—especially one as important as your first home—it likely doesn’t make sense to invest very aggressively.

So how should you invest for these shorter-term goals? If you plan on keeping your savings in cash, make sure your money is working for you. Consider using a savings vehicle like Betterment Everyday Savings™†, which can earn a higher rate than many traditional savings accounts.

If you don’t want to keep your savings in cash and want to invest your money, you should separate your investments into different buckets for each goal, and invest each bucket according to its time horizon. An example looks like this:

The above graph is Betterment’s recommendation for how stock-to-bond allocations should change over time for a major purchase goal.

And don’t forget to adjust your risk as your goal gets closer—or if you use Betterment, we’ll adjust your risk automatically for you.

2. “Should I pay down my debts or start investing?”

The right risk level for your investments depends not just on your age, but on the purpose of that particular bucket of money. But should you even be investing in the first place? Or, would it be better to focus on paying down debt?

According to Northwestern Mutual’s 2018 Planning & Progress Study, millennials have an average of $36,000 in debt, mainly from student loans and credit cards.

In some cases, paying down debt should be prioritized over investing, but that’s not always the case.

Here’s one example: “Should I pay down a 4.5% mortgage or contribute to my 401(k) to get a 100% employer match?” Mathematically, the employer match is usually the right move. The return on a 100% employer match is usually better than saving 4.5% by paying extra on your mortgage if you’re planning to pay the same amount for either option.

It comes down to what is the most optimal use of your next dollar. We cover this in more detail here, but the quick summary is that, when deciding to pay off debt or invest, use this prioritized framework:

  1. Always make your minimum debt payments on time
  2. Maximise the match in your employer-sponsored retirement plan
  3. Pay off high-cost debt (anything 5%-6% or greater)
  4. Build your safety net
  5. Save for retirement
  6. Save for your other goals (home purchase, kid’s college)

Read more about investing and paying off debt.

3. “Should I contribute to a Roth or Traditional retirement account?”

Speaking of employer matches in your retirement account, which type of retirement account is best for you? Should you choose a Roth retirement account (e.g. Roth 401(k), Roth IRA) in your twenties? Or should you use a traditional account?

As a quick refresher, here’s how Roth and traditional retirement accounts generally work:

  • Traditional: Contributions to these accounts are usually pre-tax. In exchange for this upfront tax break, you usually must pay taxes on all future withdrawals.
  • Roth: Contributions to these accounts are generally after-tax. Instead of getting a tax break today, all of the future earnings and qualified withdrawals will be tax-free.

So you can’t avoid paying taxes, but at least you can choose when you pay them. Either now when you make the contribution, or in the future when you make the withdrawal. As a general rule:

  • If your current tax bracket is higher than your expected tax bracket in retirement, you should choose the Traditional option.
  • If your current tax bracket is the same or lower than your expected tax bracket in retirement, you should choose the Roth option.

The good news is that Betterment’s retirement planning tool can do this all for you and recommend which is likely best for your situation. We estimate your current and future tax bracket, and even factor in additional factors like employer matches, fees and even your spouse’s accounts, if applicable.

4. “How long should it take to see investing results?”

Humans are wired to seek immediate gratification. We want to see results and we want them fast. The investments we choose are no different. We want to see our money grow, even double or triple as fast as possible!

We are always taught of the magic of compound interest, and how if you save $x amount over time, you’ll have so much money by the time you retire. That is great for initial motivation, but it’s important to understand that most of that growth happens later in life. In fact very little growth occurs while you are just starting.

The graph below shows what happens over 30 years if you save $250/month in today’s dollars and earn a 7% rate of return. By the end you’ll have over $372,000! But it’s not until year 5 that you would earn more money than you contributed that year. And it would take 18 years for the total earnings in your account to be larger than your total contributions.

How Compounding Works: Contributions vs. Future Earnings

illustrative chart of compounding deposits

The figure shows a hypothetical example of compounding, based on a $3,000 annual contribution over 30 years with an assumed growth rate of 7%, compounded each year. This example is hypothetical and illustrates the general pattern of how compounding seems to work in the short term versus the long term. This figure is not based on or related to any Betterment portfolio or offering.

The point is it can take time to see the fruits of your investing labor. That’s entirely normal. But don’t let that discourage you. Some things you can do early on to help are to make your saving automatic and reduce your fees. Both of these things will help you save more and make your money work harder.

Use Your 20s to Your Advantage

Your 20s are an important time in your financial life. It is the decade where you can build a strong foundation for decades to come. Whether that’s choosing the proper risk level for your goals, deciding to pay down debt or invest, or selecting the right retirement accounts. Making the right decisions now can save you the headache of having to correct these things later.

Lastly, remember to stay the course. It can take time to see the type of growth you want in your account.


Betterment Everyday Savings

* The annual percentage yield (“APY”) on the deposit balances in Betterment Everyday Savings (“Savings”) is and represents the weighted average of the APY on deposit balances at the banks participating in Savings (the “Program Banks”) and is current as of . This APY is variable and subject to change daily. Deposit balances are not allocated equally among the participating Program Banks. A minimum deposit of $10 is required, but there is no minimum balance required to be maintained. The APY cited above is a promotional APY available only to customers who join the waiting list for Betterment Everyday Checking. The APY on deposit balances of customers who choose not to join the Betterment Everyday Checking waiting list is less than the promotional rate, and is as of , subject to change daily. Betterment Securities will receive fees in connection with deposit balances earning the non-promotional APY. See current APY. The promotional APY is available through the end of the year and may be extended in Betterment’s sole discretion. The APY available to a customer may be lower if that customer designates a bank or banks as ineligible to receive deposits. 

See Betterment’s Form ADV Part II and Terms and Conditions for additional information on the deposit allocation methodology.

 Betterment Everyday Savings (“Savings”) is offered by Betterment LLC. Clients of Betterment LLC may participate in Savings through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Savings, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance.  Savings provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities with through Betterment LLC and Betterment Securities. Savings should not be viewed as a long-term investment option. 

Funds held in brokerage accounts while in transit to Program Banks are not eligible for FDIC insurance. Funds deposited into Savings are eligible for up to of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 each at  up to four Program Banks). Even if there are more than four Program Banks, Clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above . The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Savings. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Savings may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Savings, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured.  For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

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