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An Investing Road Map for Early Career Accumulators

Tips on getting the most bang for your investment dollars when you’re just starting out.

An illustrative image of Christine Benz, director of personal finance and retirement planning.

Editor’s Note: A version of this article was published on June 20, 2023.

Because they’re just starting out, early career accumulators—loosely defined as people in their 20s and 30s—don’t typically have much in the way of financial capital (unless they’re technology savants or supermodels, that is). Not only are their earnings often low relative to where they’ll be in the future, but new college grads may also be digesting college debt.

But early career accumulators have other assets that their older counterparts can look upon with envy. With a whole lifetime of earnings stretching before them, early career people are long on what investment researchers call human capital: Their ability to earn a living is their greatest asset by a mile. Investors in their 20s and 30s have a valuable asset when it comes to investing, too: With a very long time horizon until they’ll need to begin withdrawing their money (for retirement, at least), early career investors can better harness the power of compound interest. They can also tolerate higher-volatility investments that, over long periods of time, are apt to generate higher returns than safer investments.

If you’re just embarking on your investment journey, it’s hard to go too far wrong with the mantra of investing as much as you can on a regular basis and sticking with very basic, well-diversified investments. But it also pays to think of your “investments” in a broad sense, steering your hard-earned dollars to those opportunities that promise the highest return on your investment over your time horizon. For most people, that will require a bit of multitasking: Rather than wait until all of your student loans are paid off to begin investing in the market or saving for a down payment for a home, for example, you may want to earmark a portion of each paycheck for all three “investments.”

Here are eight tips for investing well and multitasking in your 20s and 30s.

  1. Put debt in its place.
  2. Make the investment in human capital.
  3. Build a safety net.
  4. Kick-start your retirement accounts.
  5. Focus on tax-sheltered vehicles.
  6. Choose Roth if your taxable income is low or you’re multitasking.
  7. Invest in line with your risk capacity.
  8. Employ simple, well-diversified building blocks.

Put Debt in Its Place

One of the earliest forks in the road that many early accumulators face once they begin earning a paycheck is whether to steer a portion of that paycheck to service debt or to invest in the market. If it’s high-interest-rate credit card or student loan debt that features a particularly high rate, it’s worthwhile to earmark the bulk of one’s extra cash for those “investments.” Even with today’s higher yields on CDs and high-yield savings accounts, it may be difficult to earn a higher guaranteed return from any portfolio investment than you can pick up by retiring debt. That’s because debt paydown delivers a guaranteed payoff that’s equal to your interest rate, less any tax breaks you’re getting on your debt. As a general rule of thumb, investors carrying debt with an interest rate of 5% or more would do well to focus on paying down those loans (or possibly refinancing into more favorable terms) before moving full steam into investing in the market. One exception: building an emergency fund (more on this below).

Make the Investment in Human Capital

While we’re on the topic of “investments” in the broadest sense, the 20s and 30s are also the ideal life stage to make investments in your own human capital—obtaining additional education or training to improve your earnings power over your lifetime. Of course, not every such investment pays off, and it’s ideal if you can get your employer to shoulder at least some of the financing. But if you have considered an advanced degree or extra training of any kind, the earlier you get started, the higher your lifetime return on your outlay is apt to be.

Build a Safety Net

With limited financial capital, it’s essential that young accumulators protect what they have and be able to cover financial emergencies should they arise. A good rule of thumb is to insure against risks that would cause extreme financial hardship and to skip insurance for items that would not. Homeowner’s (or renter’s), health, disability, and auto insurance are musts, as is life insurance if you have minor children; on the flip side, you can do without the extended warranty for your laptop or washing machine.

An emergency fund is also essential, as having a cash cushion on hand can keep you from having to resort to unattractive forms of financing like credit cards or raiding your 401(k) if you lose your job or encounter a surprise expense. While the rule of thumb of stashing three to six months’ worth of living expenses in cash might seem daunting, remember it’s three to six months’ worth of essential living expenses, not income. Gig economy workers and contractors should consider setting a higher savings target, as their cash flows from their jobs can be very lumpy.

Kick-Start Your Retirement Accounts

There are a lot of reasons that early accumulators put off saving for retirement. There’s the not-small fact that many people in their 20s and 30s are saddled with heavy student debt loads. Moreover, 20- and 30-somethings often have one or more shorter-term goals competing for their hard-earned dollars alongside retirement savings: down payments for first homes, cars, weddings, and children, for example. Psychology is also in the mix: With retirement three or four decades into the future, people who are just embarking on their working careers may be hard-pressed to feel a sense of urgency in saving for it.

Yet, the youngest investors have the longest time to benefit from compounding, and that benefit accrues even if they’re only able to save fairly small sums and the market gods serve up “meh” returns over their time horizons. The 22-year-old who starts saving $200 a month and earns a 5% return per year will have more than $362,000 at age 65. Meanwhile, an investor who waits until 35 to start investing yet socks away $300 a month and earns a 6% return will have a little more than $300,000 at age 65. Those first 10 years of missed compounding swamp both higher returns and higher contributions later on, underscoring the virtue of getting started on retirement saving as soon as you can, even if it means starting small.

Focus on Tax-Sheltered Vehicles

For retirement savers of all ages, it’s worthwhile to focus on investment vehicles that give you a tax break for doing so: company retirement plans like 401(k)s, 403(b)s, and 457 plans, as well as IRAs. (Self-employed individuals have an array of different vehicles to choose from.)

A company retirement plan, if one is available, is invariably the simplest way to get started on retirement savings. Not only do many company retirement plans offer matching dollars on employees’ investments, but having contributions extracted directly from a paycheck helps reduce the pain of investing. (If you never put your mitts on the money, you won’t miss it.) Making automatic contributions also helps enforce disciplined savings, even when the market is falling or your cash flows are at a low ebb. Of course, you could pull back on your 401(k) contributions once you set your initial contribution rate, but in reality, few participants do that.

For early accumulators whose company-provided options are poor, it’s always worthwhile to contribute enough to earn the match; after that, turn to an IRA for your additional investable assets. If you still have money left over to invest after meeting the match on your employer-provided plan and making an IRA contribution, you can then go back to your company retirement plan and make the maximum allowable contribution. Only after you’ve taken full advantage of those tax-sheltered vehicles should you consider an investment in a nonretirement account (that is, a taxable brokerage account).

Choose Roth if Your Taxable Income Is Low or if You’re Multitasking

Retirement investors trying to choose from among the alphanumerical soup of IRAs, 401(k)s, and other tax-sheltered vehicles have another decision to make: Should they make “traditional” contributions or Roth? The answer comes down to whether you’d rather pay tax today or later on. You make pretax contributions to traditional accounts but have to pay ordinary income tax when you pull the money out in retirement. The tax treatment of Roth contributions is exactly the opposite: You don’t get a tax break on the contribution, but your withdrawals in retirement will all be tax-free.

Pretax (traditional) contributions offer immediate gratification, in that all of your investment dollars can start working for you on day one, without paying taxes. But Roth contributions can actually make more sense for young accumulators, whose tax rates at the time of contribution may well be lower than when they begin withdrawing money in retirement.

Roth IRAs offer an additional attractive feature that traditional accounts do not: Contributions can be withdrawn at any time and for any reason without taxes or penalties. That makes a Roth IRA a perfect “multitasking” account for investors who need to build up both an emergency fund and retirement assets. Worst-case scenario, the IRA is a rainy-day fund; best case, the money in a Roth compounds tax-free for retirement.

Invest in Line With Your Risk Capacity

Investors are often advised to consider their risk tolerance: How they’d feel if their portfolios lost 5% or 10% in a given week or month. That’s not unimportant, especially if a nervous investor is inclined to upend her well-laid plan at an inopportune time. But the really important concept is risk capacity—how much you could lose without having to change your lifestyle or your plan for the money. It’s important to understand the difference between risk tolerance and risk capacity and to make sure that the two measures are in sync with one another.

When it comes to retirement savings, early career accumulators have high risk capacities because they won’t likely need their money for many years to come. That’s why retirement portfolios usually feature ample weightings in stock investments: Even though they feature sharper ups and downs than safer securities like bonds and cash, stocks have historically rewarded their long-term investors with better returns than other asset classes. That helps explain why the Morningstar Lifetime Allocation Indexes (which provide asset allocations for investors at various life stages and with different risk tolerances) and most target-date mutual funds hold about 90% in stocks and the remainder in bonds and cash.

On the other hand, if you’re investing for shorter-term goals—such as a home down payment, you probably don’t want to have much, if anything, in stocks. Yes, the returns from bonds and cash are apt to be much lower, but they’re also much less likely to encounter big swings to the downside. Portfolios for near-term goals might include a dash of stocks for growth potential, but the bulk of your money for such goals should be in safer, lower-returning assets.

Employ Simple, Well-Diversified Building Blocks

So you’ve decided to take advantage of tax-sheltered wrappers for retirement savings and to park the bulk of your long-term portfolio in stocks. But you still have to decide how, specifically, to invest that money. With thousands of individual stocks, mutual funds, and exchange-traded funds, that task can seem daunting, but resist the urge to overcomplicate and/or to venture into overly narrow investment types.

Instead, focus on low-cost, broadly diversified investments. For investors just starting out, target-date mutual funds can take the mystery out of the investment process: These funds employ aggressive, stock-heavy postures when investors are in their 20s, 30s, and 40s, then gradually become more conservative as retirement draws close. Moreover, the best target-date funds invest heavily in low-cost, well-diversified investments themselves. The American Funds Target Date Retirement Series, the BlackRock LifePath Index Target-Date Series, and Vanguard Target Retirement Series target-date series are both highly rated target-date lineups.

If you don’t want to delegate control of your portfolio’s stock/bond/cash mix and investment selection, a simple way to put together a well-diversified portfolio is to employ index mutual funds or exchange-traded funds. Such funds track a segment of the market, such as the S&P 500, rather than trying to beat it. That may sound uninspired—and uninspiring. But broad-market index funds often have the virtue of very low costs, which can give them a leg up on actively managed funds over time.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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