How to invest in Your 20s: Step-wise Beginners Guide

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Investing in your 20s

If you've recently begun a job or have a part-time gig and you're thinking about investing a chunk of your earnings, now's the perfect moment for you. However, the process might seem a bit puzzling with multiple investment avenues and thousands of recommendations online. So, here's a guide that outlines the actions you can follow before investing.

Step 1: Set your goals!

Before you start investing, it's important to understand your financial situation and what you're hoping to achieve. What are your short-term and long-term goals? How much money do you have to invest? What level of risk are you comfortable with, are some of the questions you should have an answer to before you begin your investment journey.

Young investors often dream of being a billionaire by the end of their 30s or even early retirement by investing. Irrespective of your goal, you need to develop the right plan. And the three key metrics in any investment plan are the investment amount, investment products or assets, and its tenure or duration.

Suppose Mr. Rahul earns Rs 50,000 per month and has anywhere between Rs 30,000 to Rs 35,000 to invest after deducting all the expenses. Here is how he can go about investing, that  would align with his future plans

Financial GoalInvestment AmountInvestment TypeInvestment Tenure
Emergency FundRs. 10,000/monthLiquid Funds6 Months
Wealth GoalRs. 8,000/month + 5% annual increaseEquity Mutual Funds10 to 40 years
Marriage GoalRs. 5,000/monthSIP in ETFs + Gold Bonds3 to 5 years
Travel GoalRs. 1,500/monthIndex Funds2 to 5 years
HomeownershipRs. 5,500/monthEquities + Debt funds + SIP7 to 15 years
RetirementRs. 5,000/month in Equity Funds + EPF + PPFEquity Mutual Funds30 to 40 years

It is crucial to note that at the beginning of your career, you might not have a lumpsum amount to invest. But with time and experience, the amounts can gradually increase. The numbers above are just an arbitrary example.  

Step 2: How and Where to Invest?

Once you have laid down your financial goals, it's important to understand the ‘Hows’ and ‘Wheres’ of investment. How much money you can afford to invest will depend on your income and expenses. A good rule of thumb is to start by investing 10% of your income. As you get more comfortable with investing, you can gradually increase the amount you invest.

And to choose where to invest, you can follow some popular options like:

  • Stocks: Stocks represent ownership in a company. When you buy stocks, you're essentially buying a piece of that company. Stocks are a volatile investment, but they have the potential to generate high returns over the long term.
  • Bonds: Bonds are loans that you make to a company or government. Bonds are considered to be a more conservative investment than stocks, but they also offer lower returns.
  • Mutual funds: Mutual funds are baskets of stocks or bonds that are managed by a professional. Mutual funds can be a good way to diversify your portfolio and reduce risk.
  • Exchange-traded funds (ETFs): ETFs are similar to mutual funds, but they trade on an exchange like stocks. This makes them more liquid than mutual funds, but they may also have higher fees.
  • Real estate: Real estate can be a good investment for those who want to build wealth over the long term. However, it's important to remember that real estate is an illiquid investment, and it can be difficult to sell quickly if you need cash.

Step 3: Consistency is the key!

One of the best things you can do to grow your wealth through investing is to invest regularly. This means setting aside money from each paycheck and investing it. Even if you can only invest a small amount each month, it will add up over time.

The earlier you start investing and do it religiously, the more time your money has to grow. Even if you can only invest a small amount each month, it will make a big difference in the long run. For example, let's say you invest Rs 1000 per month for 20 years and earn an average annual return of 13%. At the end of 20 years, your investment will be worth over Rs 11,45,519. That's the power of compound interest!

Step 4: Build the right Mindset!

Most young investors invest with the aim of gaining profits within a short period of time. However, this is not true as the market has its own ups and downs and you should be ready to face it all. For example, if you invest in equities, it is possible to see +20% returns in the first year and may go down to  -10% in the second year. So, you should be prepared to see the variability in your annual returns.

Since the Indian Education system neglects money management and personal finance, learning about key financial skills like budgeting, saving, different investment assets or products, and taxes can also help in mindset formation.

How to Invest in Your 20s: Key Takeaways

  • Before investing, define your financial goals, whether they're short-term or long-term.
  • Choose investment options that suit your risk tolerance and consider diversification.
  • Regularly contribute to your investments, even if it's a modest amount.