I’m 25. Here’s How I Got Started Investing

Investing can feel overwhelming when you’re young and just starting out — especially in the age of social media. You could spend hours on TikTok or Instagram seeking out solid investing advice, only to come away with more questions than you started with.

But it doesn’t have to be so complicated. Here’s my personal approach to investing as someone in their 20s who spends a lot of time researching and writing about investing.

Investing tends to work best when your everyday finances are already under control. If you have any high-interest debt, like credit card debt, you may prioritize paying it off first.

The main thing I focused on when I got my first full-time job was building up an emergency fund. I think of it as “just in case” money. It gives me peace of mind to know I have enough saved up to fix my car if it were to break down or cover a few months of rent if I needed to.

I keep my emergency fund in a high-yield savings account, which pays a much higher interest rate than a normal savings account (usually around 3% to 4%, but rates can fluctuate over time).

That may not seem like a lot, but it can add up. For instance, if you put $5,000 in a savings account that has a 3.5% interest rate, you’d make $175 in your first year just for keeping your money in the account.

How much you need in your emergency fund depends on your lifestyle, but experts generally recommend you have enough to cover three to six months of expenses. Try to be realistic with your estimate. I got so used to putting a percentage of my paycheck into my emergency fund that I probably built it up too much, and that money could’ve been growing in the market instead.

While I was building up my emergency fund, I also started contributing to my 401(k) at work, which is an investment account you can withdraw from in retirement. Start by putting in a percentage of your paycheck that feels comfortable to you, but try to contribute at least enough to get your employer match if they offer one. The maximum people under age 50 can contribute this year is $24,500.

Another bonus of a 401(k) is that your contributions are pretax. This means that you don’t have to pay any taxes on money you contribute to the account now — you only pay taxes when you withdraw money in retirement. If the opposite sounds more appealing (paying taxes now rather than in retirement), check whether your work offers a Roth 401(k).

With a 401(k), you don’t really have to think too much about picking and managing individual investments. Most workplaces offer target-date funds, which are “set it and forget it”-style funds that adjust their risk as you get older. I’m a big fan of target-date funds, since they allow true beginners to invest for retirement.

When I first started contributing to my 401(k) at 22, I didn’t know that much about investing, but I found the process of picking a target-date fund to still be pretty simple. They’re named after the year you’re likely to retire around, so, for example, my 401(k) is invested in a 2065 target-date fund. It’s made up of mostly stocks right now, but it’ll shift toward safer investments, like bonds, when I’m closer to retirement.

So my emergency fund was fully built up, and I felt comfortable with what I was contributing to my 401(k) — what’s next? I decided to talk with a certified financial planner about what other kinds of accounts I should be investing in. While it was helpful for me to get one-on-one advice from a pro, don’t feel like it’s an absolute must for your own investing journey.

One of the accounts they recommended I open was a Roth IRA, which is another way to save for retirement.

To be honest, I was feeling a little “eh” about saving even more for retirement — and I still somewhat feel that way. Knowing I can’t touch my investment gains for decades to come feels strange. But as much as I feel energized to work right now, my 70-year-old self might not. I definitely want the option to take things easy when I’m older, which is why I think having multiple retirement accounts is ultimately a good setup for me.

Unlike a 401(k), which tends to have limited investment options, you can usually invest in whatever you want in your IRA. Easy, diversified investments for beginners include low-cost index funds or ETFs that track a broad market index, such as the S&P 500.

IRAs, however, have much lower contribution limits compared with 401(k)s: $7,500 this year for people under 50. You pay taxes on these contributions now, but your money can be taken out tax-free in retirement. Similar to my spiel about traditional versus Roth 401(k)s, if you would prefer the opposite tax structure for your IRA, that’s also an option through a traditional IRA.

Alongside investing for retirement, I wanted to leave room for other goals. Maybe you’re like me, and you don’t have a specific savings goal in mind, but you also don’t want to let your extra income sit idle. Or maybe you do have a savings goal in mind that’s, say, 5 to 10 years away.

This is when general investing comes into play. Another account my financial planner recommended I open was a brokerage account. You get a lot more freedom with this account — there aren’t any income limits, contribution limits or withdrawal rules. The main downside of a brokerage account is that it isn’t tax-advantaged. The only tax benefit you may notice is a lower tax rate on investments you hold for a while (this is called a long-term capital gains tax rate).

Similar to investing in your IRA, index funds or ETFs might make up the bulk of your portfolio in your brokerage account. I felt confident choosing and managing my own investments in both my brokerage account and IRA, but this strategy and level of attention isn’t for everyone.

If you’re just starting out, you may not want to stress about how to allocate your money across different assets or rebalance your portfolio if it gets out of whack. If this is the case, you might consider having a robo-advisor manage your investments, allowing you to be more hands-off.