Start Investing Early
Investing in your 20s is a cheat code for wealth due to compound interest. Step 4 focuses on securing your employer 401(k) match, opening a Roth IRA, and buying simple, low-cost index funds.
The Power of Compound Interest
Compound interest is the snowball effect of your money making money, and then those earnings making more money. Every dollar you invest at age 25 is worth significantly more at retirement than a dollar invested at age 35, purely because it has 10 more years to multiply.
The Investment Order of Operations
- The 401(k) Match: If your employer offers a match (e.g., they match up to 5% of your salary), contribute exactly enough to get it. This is a 100% immediate return on your money.
- The Roth IRA: Next, fund a Roth IRA. In your 20s, your tax bracket is likely lower than it will be later in life. Money goes into a Roth IRA after taxes, grows tax-free, and is pulled out tax-free in retirement.
- Max the 401(k): If you still have money to invest after maxing the Roth IRA, go back and increase your 401(k) contributions.
What Actually Goes Inside the Accounts?
Opening an IRA is like opening a bucket. You still have to put something in it. For 90% of people, the best strategy is buying a low-cost, broad-market Index Fund or Target Date Fund (e.g., S&P 500 index). This provides instant diversification across hundreds of companies.
Run the Numbers
Use our free calculator to see how this step impacts your timeline.
Open Compound Interest CalculatorAction Sheet
Download the checklist for this step. Check off items as you complete them to stay on track.