8 min read
If you’re in your 20s, investing for the future is one of the smartest things you can do with your money. In this article, we’re sharing some of the best investments to make in your 20s. From passive index funds to cash-flowing real estate, these options can set you up for a comfortable (and early) retirement!
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or investment advice. Real estate investing involves risk — results will vary based on market conditions, financing terms, and your individual situation. Consult a licensed financial advisor, CPA, or attorney before making any investment decisions. Rent to Retirement specializes in turnkey rental properties, and the perspectives shared here reflect that focus.
Summary:
- Those who start investing in their 20s have a huge time advantage over those who wait until later in life.
- Before you invest, make sure you’ve built a strong financial foundation and are well-informed about the asset you’re investing in.
- House hacking, 401(k) investing, buying cash-flowing rental properties, and investing in index funds are some of the top ways to invest in your 20s.
Why Investing in Your 20s Is So Crucial
Time is every investor’s greatest asset, so investing in your 20s gives you a significant advantage over people starting in their 30s, 40s, or 50s.
At an 8% annualized return, $1 becomes $21 in 40 years. So, if you start at 25, you’ll have the chance to 21x your investment by traditional retirement age.
Here are the returns on $10,000 at different ages, assuming an 8% return and retiring at 65:
Invest $10K at 25 Years Old: $217,245.21 at age 65
Invest $10K at 30 Years Old: $147,853.44 at age 65
Invest $10K at 40 Years Old: $68,484.75 at age 65
Invest $10K at 50 Years Old: $31,721.69 at age 65
Invest $10K at 60 Years Old: $14,693.28 at age 65
This is the magic of compound interest. The longer you invest, the better your return!
Getting Ready to Invest
Investing before you’re ready can be disastrous for your finances. Before you start, you’ll need to ensure you have a strong foundation that can withstand changes in the market, unexpected expenses, or lifestyle changes. Equally important is having a clear understanding of what you’re investing in and the potential risks!
Track Your Expenses (NOT Just Budgeting)
Track your monthly expenses over the course of a few months. Don’t just create a budget (though it can help). You should know exactly what’s going out, as your burn rate directly impacts how much disposable income you have to funnel into your investments.
Have 3-6 Months of Savings
Before you invest, build a fund with three to six months of basic expenses. This can keep you afloat when unexpected expenses pop up, prevent you from dipping into investments when money gets tight, and give you dry powder if an excellent investing opportunity comes your way.
Educate Daily
Before investing, consume as much (good) content as possible across different asset classes. For real estate, the Rent to Retirement Podcast covers various strategies investors can use to reach financial freedom. Beyond that, you can track actual asset prices and performance (for free) of stocks, ETFs, and even turnkey rental properties.
Fight Lifestyle Creep
The wealthier you become, the easier it is to let your lifestyle become inflated. While minor tweaks may not have a major impact on your financial situation or your portfolio, avoid impulsive spending or large, unnecessary purchases. You probably don’t need a new car every three years!
4 Best Investments to Make in Your 20s
Have some money saved up that you’re ready to put to work? Here are four of the best ways to invest money in your 20s:
1. A House Hack
House hacking is a real estate investing strategy that allows you to offset what is likely your biggest expense: housing. You purchase a single-family or multifamily home, then live in one of the units or rooms while renting space out to tenants. The monthly rental income lowers your own contribution to your mortgage and, in some cases, can cover it entirely!
Why It’s Great for Your 20s
House hacking is one of the easiest ways to get into real estate investing, as you can use primary residence financing with lower down payments and interest rates. What’s more, house hacking in your 20s is often more viable, particularly if you don’t yet have a partner or children.
- Reduces Cost of Living: If you have a $2,000 mortgage payment and a tenant paying $1,500, you’re only paying $500 to live in a house you own!
- Buy Real Estate with Low Money Down: Although you’re renting out part of your house, it’s still your primary residence, which means you can put much less money down (as little as 3%!).
- Tenants/Roommates Pay Down Your Mortgage: By paying rent, your tenants are effectively paying your mortgage. Even if the rental income doesn’t cover your entire payment, there’s much less coming out of your own pocket.
- Take Advantage of “Leverage”: Real estate is one of the only investments where you can easily purchase an asset using debt. This means you can put low money down and still get the cash flow, appreciation, and tax benefits of direct ownership.
2. Your Employer’s 401(k) Match
Many employers offer 401(k) plans where they match a certain percentage of the employee’s contributions. Say you earn $75,000 a year, and your employer matches 100% of your contributions up to 4% of your salary. That’s 8% (or $6,000) going directly into your retirement account every year, and half of it is free money!
Why It’s Great for Your 20s
A 401(k) plan is a fairly common employee benefit, meaning you can start investing for retirement as soon as you enter the workforce. Plus, with employer matching, every $1 you invest is up to $2 in your account, which can help maximize your investments in your youth!
- Delays Taxes: Contributions are made with pre-tax money, meaning you won’t owe taxes on it until you start withdrawing from your 401(k) in retirement.
- Free Money (from Your Employer!): There aren’t many investments where you can potentially double your money right off the bat. A 3% match on a $60,000 salary is $1,800 in free money!
- Low Barrier of Investment: 401(k) contributions are automatic, and with the employer match, even small contributions can have a meaningful impact on your retirement.
3. Cash-Flowing Rental Properties
Rental property cash flow is the net profit left over after your debt service (mortgage) and expenses have been paid. This stream of income is in addition to the regular benefits of owning real estate, like appreciation and tax benefits. Use our free rental property calculator to determine if a property will cash flow before you buy!
Why It’s Great for Your 20s
If you’re getting into real estate at a young age, you may have more time to be a landlord, where your responsibilities often include collecting rent, communicating with tenants, and coordinating repairs. Don’t want to be a landlord? Turnkey rentals often have property management in place, allowing you to invest in real estate remotely (and more passively!).
- Adds a New Stream of Income: A cash-flowing rental property gives you another income stream to reinvest (with property improvements), invest elsewhere, or supplement your W-2 income.
- Tenants Pay Down Asset for You: If the rental income covers your mortgage payment, your tenants are effectively paying down your loan.
- Get Started with as Little as 5% Down: Most investment properties require a 20%+ down payment, but with Rent to Retirement’s 5%-down financing on select new builds, you could get into a brand-new turnkey property for much less!
- Tax Benefits (Pay Less on Passive Income!): With rental properties, you can deduct operating expenses like mortgage interest, repairs, and accounting fees. You can also use depreciation to directly offset your rental income.
- Take Advantage of “Leverage”: Real estate allows you to use borrowed money to purchase income-producing assets. Repeat this process, and you could build an entire real estate portfolio without hundreds of thousands of dollars in cash!
Buy a new-build, turnkey rental property for only 5% down with Rent to Retirement!
4. Low-Cost Index Funds
An index fund is a “basket” of stocks that tracks a specific market index, like the Dow Jones or the S&P 500. Be sure to consider the fund’s expense ratio, as high fees can eat into your potential returns. Funds that are actively managed tend to have higher fees.
Why It’s Great for Your 20s
Index funds allow you to invest in hundreds of blue-chip stocks without having thousands of dollars in disposable income. You can start today with a few hundred bucks!
- Low Barrier to Entry: You don’t have to know everything (or anything) about a specific company or market to get great returns with index funds. The S&P 500 has averaged 10% annualized returns over the last 100 years!
- Completely Passive Investment: With index funds, the only “work” you’re doing is transferring money into your retirement or brokerage account and routinely buying shares each month.
- Diversification Across Industries: Index funds are highly diversified, giving you exposure to many different companies and industries at a much lower share price than if you were to invest in these companies individually.
- No “Stock Picking” Needed: Because index funds have many different holdings, the only thing you’re “picking” is the fund itself!
Although a popular investment, be aware that index funds often only profit when sold at a gain, unlike rental properties that profit throughout ownership (via cash flow).
Investments to Be Cautious of in Your 20s
Investing in your 20s gives you a long runway for building wealth, but there are no guarantees. The following may not be worth it due to their high risk, extreme volatility, or low upside:
Cryptocurrency and (Very) Volatile Assets
Price swings are normal, but some investments never recover. In general, you’re taking on more risk by investing in cryptocurrency, commodities, and individual stocks (especially small-cap stocks).
Any “Get Rich Quick” Promises
As with most things, if an opportunity sounds too good to be true, it probably is. Playing the lottery with the hottest penny stock, meme coin, or startup has lost investors far more money than it’s made them. The best way to build wealth is by consistently investing in proven assets over a long period.
Bonds
While bonds are a completely legitimate asset that offers stability for those in or approaching retirement, they deliver relatively low returns. If you’re in your 20s, chances are you’ve got a much longer time horizon and can weather the peaks and valleys of higher-return investments, like the stock market and real estate.
Browse cash-flowing turnkey rentals in some of America’s best markets!
Sports Betting, Prediction Markets, and Gambling
Speculating about sports and future events is inherently risky, as their outcomes are largely driven by chance. Gambling can also be highly addictive, putting both your investments and your short-term financial stability at risk. Almost a third (30%) of sports bettors have debts they attribute to gambling. That’s not investing!
Whole Life Insurance
Often sold as an “investment,” whole life insurance typically has high fees and low returns. Term life insurance tends to be the more affordable solution for those with dependents, often costing five to 15 times less than whole life insurance.
Ready to Invest? Follow These Tips
Before you fund that brokerage account or make that big down payment, make sure you’ve given careful thought to the following:
1. Know Your Risk Tolerance
You should understand exactly what you’re investing in, the risks, and the potential rewards before parking your money anywhere. If you’re investing in your 20s, you may be able to take on more (calculated) risk than someone in their 50s or 60s.
2. Know the Time You Can Spend
Most investments fall on a spectrum between passive and active, so you should choose the option that best fits your availability. If you have the time, real estate can be more active than index funds, for example, but offers more benefits—like cash flow, tax benefits, and full control of the asset.
Turnkey rentals strike the ideal balance between passive and active investments. Since they are either newly built or renovated, they typically require less maintenance than other properties. Plus, they often come with a property manager!
3. Don’t Overleverage
If you’re using leverage in real estate, ensure your rental property makes enough to cover the mortgage, expenses, and maintenance. You should also avoid scaling too fast, as you could quickly lose control. Try our free rental property calculator to see if the numbers work!
4. Keep Long-Term Wealth in Mind
You should never invest in something with the idea of getting in and out quickly, as this thwarts any momentum and the wealth-generating effects of compounding. Build a strong, stable asset base that carries you to early retirement!
Retire (Early) with Real Estate? Turnkey Rentals Might Be for You
Real estate is often an “active” investment, but turnkey rentals give you a clear path to passive or semi-passive income. These are new builds and recently renovated homes, so they require minimal maintenance and repairs. Plus, many turnkey rentals come with property management already in place, meaning you have a professional handling operations for you on day one.
Meanwhile, you get all the benefits of actively investing in real estate, including cash flow, appreciation, principal paydown, and tax benefits. Whether you’re chasing early retirement or looking to retire at 65 with a manageable real estate portfolio, these are some of the best assets to buy in your 20s!
Best Investments to Make in Your 20s FAQs
What Is the Best Thing to Invest in in Your 20s?
The “best” thing to invest in depends on you, your long-term goals, and what’s available to you in your 20s. House hacking, 401(k)s, turnkey rental properties, and index funds are all great investment vehicles, as they’re proven, beginner-friendly, and can be passive or semi-passive!
What Creates 90% of Millionaires?
Andrew Carnegie is sometimes credited with saying, “Ninety percent of all millionaires become so through owning real estate.” While there’s no study to prove this claim, real estate is one of the most common investments among wealthy people. Even the average W-2 worker can become a millionaire by investing in real estate!
How Much Will $10,000 Invested Be Worth in 20 Years?
If you invested $10,000 and made an 8% annualized return (compounded annually), it would be worth $46,609.57 in 20 years. Now, imagine if you kept making contributions and invested over a longer time horizon. You could retire very wealthy!