- Financial educator Soledad Fernández Paulino joined Insider for our Re/Thinking Re/Tirement Instagram Live event.
- An attendee asked how they should be investing in their early 20s.
- An employer retirement account is a good place to start, followed by a Roth IRA and brokerage account.
- Read more articles from Insider’s Re/Thinking Re/Tirement series.
For many 20-somethings, retirement is the last thing on their minds. But starting to invest early can set you up for financial success — especially if you want to retire early.
On Monday, Insider hosted an Instagram Live event focused on early retirement with Soledad Fernández Paulino, a financial educator and founder of the blog Wealth Para Todos. During the Re/Thinking Re/Tirement event, an attendee asked, “What is the best way to invest in my early 20s? Is there a particular formula for it?”
Fernández Paulino provided a step-by-step method for investing in your 20s so you can be financially prepared for your future.
1. Build a solid emergency fund
“Before you start really investing aggressively, you want to make sure that you have an emergency fund. You want to have access to cash reserves,” Fernández Paulino said.
An emergency fund is money that you only tap into when you face an emergency, such as a job loss, large medical bill, or unexpected car repair. You don’t need to completely hold off on investing until you have an emergency fund — you just may not want to put all of your extra money into investments quite yet.
Traditionally, experts have advised that you keep three to six months of necessary expenses in an emergency fund. But some people prefer to set aside even more for a rainy day, maybe a year’s worth of expenses.
“It depends on the financial security that you have in your life,” said Fernández Paulino. If you think you could find another job easily should you be laid off, you may only need a few months’ expenses in your emergency fund. But you may want more cash reserves if you think it would be hard to find a job quickly, or if you have kids or other dependents who rely on you financially.
2. Pay off high-interest debt
Once you have an emergency fund, there’s one more important step before kicking your investment strategy into high gear: Paying down any high-interest debts. Fernández Paulino said they consider “high interest” to be anything that charges over 9% APR.
You might not need to put extra money toward your federal student loans or mortgage, which tend to charge lower interest rates. But credit cards and personal loans might be worth paying down sooner, because they could charge higher rates than you’d earn by investing in the stock market.
3. Find out if you have an employer retirement account
The first step in investing should be contributing to an employer retirement account, if your company offers one. This could be a 401(k), 403(b), or 457(b), for example.
Fernández Paulino said this is an especially useful first step if your employer offers a match. For example, the company might contribute 100% of what you contribute, up to 3% of your paycheck. This way, you’re basically receiving free money toward retirement.
4. Explore a Roth IRA
Next, you can look into opening a Roth IRA. With a Roth IRA, you pay taxes on the money you contribute now so you don’t have to pay taxes when you withdraw cash later. Other accounts, such as traditional IRAs, don’t require you to pay taxes now, but you’ll pay when you take out money.
Roth IRAs are often good accounts for young people, because you’re probably in a lower
now than you will be later in life. It could ultimately cost you less to pay taxes now.
5. Finally, open a taxable brokerage account
“If you still have the extra cash flow and you know you want to retire before the age of 59.5, you’re also going to want to open up a taxable brokerage account,” said Fernández Paulino.
Taxable brokerage accounts don’t offer the same tax benefits as Roth or traditional IRAs, but there are no rules about when you can take out money. So if you want to retire early, a taxable brokerage account makes it easy to access your money.