- Finance educator Soledad Fernández Paulino joined Insider at the Re/Thinking Re/Tirement Instagram Live event.
- One participant asked how to invest in your early 20s.
- Employer retirement accounts are a great place to start, followed by Roth IRAs and brokerage accounts.
- Read more articles in Insider’s Re/Thinking Re/Tirement series.
For many people in their 20s, retirement is their last thought. However, starting investing early can lead to financial success. Especially if you plan to retire early.
On Monday, Insider worked with financial educator and blog founder Soledad Fernández Paulino to host an Instagram live event focused on early retirement. Wells Para Todos. Re/Thinking At a Re/Tirement event, a participant asked, “What’s the best way to invest in your early 20s? Is there any special formula?”
Fernández Paulino gives you a step-by-step way to invest in your 20s, so you can financially prepare for the future.
1. Have a solid emergency fund
Fernández Paulino said, “Before you start making any truly aggressive investments, you need to make sure you have an emergency fund. You want to have access to a cash reserve.”
An emergency fund is money that can only be used in the face of an emergency, such as losing a job, large medical bills, or unexpected car repairs. You don’t have to hold off your investment completely until you have an emergency fund. all Your extra money is still being used for investment.
Traditionally, experts have advised to put 3 to 6 months of necessary expenses in an emergency fund. However, some people prefer to set aside more money for a rainy day, perhaps a year’s worth.
“It depends on the financial stability of your life,” said Fernández Paulino. If you think you can easily find another job if you get fired, you may only need a few months’ worth of money in an emergency fund. However, if you find it difficult to get a job quickly, or if you have children or other dependents who are financially dependent, you may want more cash reserves.
2. Pay off high-interest debt
Once you have your contingency fund, there is one more important step before you begin your investment strategy in earnest. It’s about paying off high-interest debt. Fernández Paulino said anything that charges an annual interest rate of 9% or higher is considered “high interest”.
You may not need to put extra money into federal student loans or mortgages that tend to charge lower interest rates. However, credit cards and personal loans are worth paying off faster because they can charge higher rates than you get by investing in the stock market.
3. Make sure you have an employer retirement account
The first step in investing is to contribute to your employer’s retirement account, if offered by the company. For example, it could be 401(k), 403(b), or 457(b).
Fernández Paulino said this is a particularly useful first step if your employer is offering you a match. For example, a company may donate 100% of the amount you donate, up to 3% of your salary. This way you can basically get your severance pay for free.
4. Explore Roth IRAs
Next, you can look at how to open a Roth IRA. With a Roth IRA, you pay taxes on the amount you donate now, so you don’t have to pay taxes when you withdraw cash later. Other accounts, like traditional IRAs, don’t have to pay taxes now, but you will do so when you withdraw money.
A Roth IRA is often a good account for young people.
Now than you will be later in life. Paying your taxes now may ultimately cost you less.
5. Finally open a taxable brokerage account
Fernández Paulino said, “If you still have extra cash flow and know you want to retire before age 59.5, you’ll want to open a taxable brokerage account as well.”
A taxable brokerage account doesn’t offer the same tax benefits as a Roth or traditional IRA, but there are no rules on when you can withdraw money. So, if you want to retire early, you can easily access your funds through a taxable brokerage account.