The key to achieving financial success is to start investing early or by investing in cash flowing assets, those that can earn you money in multiple ways. So what were the best investments in 2022?
The decision to invest your money is one of the most important personal finance decisions you will make. Here at 40PlusFinance.com we take the view that each individual investor should take control of their own finances and is responsible for their own decisions and financial well-being.
It is better to start sooner rather than later when saving money so that it has time to grow through compounding returns. This will make it easier to become financially free.
However, remember, it’s never too late to start on your journey to financial freedom, even if you are over 40.
With all of that said, lets dig into some of the basic investing definitions, reasons for people investing some core types of investment accounts.
Investments Vs. Deposits
First, some terms. An investment is a financial transaction that results in an increase in the principal amount invested. The FDIC or NCUA insure your money up to $250,000 when you make a deposit into a checking or savings account.
This means that if the financial institution goes bankrupt or is robbed, the government will insure up to $250,000.
The money you invest is not protected by a federal institution. Since investments are more volatile than deposits, you run the risk of losing money if the market fluctuates or you make poor investment choices.
Why People Invest
The reason people invest instead of depositing all of their money into insured accounts is that they can make more money off of their investments.
Investment accounts can offer tax benefits that postpone tax obligations until retirement. This can let the money grow tax-free for a long time, giving investors more money to use in the market.
Why Are Investment Accounts Important?
Investment accounts are important because they can help spread risk across a portfolio.
Many investors spread their money across different types of accounts, including both safe accounts like checking and savings and riskier investment options. What’s more, some investments are riskier than others. Making smart investments can help shield you from market volatility, so you can earn higher returns without worrying about losing all your money during a market crash.
There are a few different types of investment accounts that you should consider. Here is a breakdown of some of the options.
If you are thinking of investing, the first thing you should do is find a brokerage firm.
A broker is a financial professional who helps you invest your money. In other words, you tell the broker what stocks you want to buy or sell, and the broker completes the transaction.
When you are looking to buy or sell financial products, you will want to look for brokers who are licensed and accredited. This will ensure that you are working with someone who knows the ins and outs of the financial industry and can give you the best possible advice. The individuals referenced provide information about the market, investing materials and support, and act as guides to help you make good decisions.
Are brokers necessary?
Although more and more brokers are offering free trades for their customers, some investors will choose to forego them in order to avoid paying fees. Some investors choose to use a transfer agent or a direct purchase plan through an employer rather than using brokers.
This approach is usually not recommended for beginner investors. The most common way to buy stocks, exchange-traded funds (ETFs), and mutual funds is by using a brokerage firm. Firms that are both well-established and on the cutting edge are rare. Some wallets allow you to purchase cryptocurrencies like Bitcoin.
Our own opinion is no, they are not necessary. If you insist on investing in a passive manner, just index in broad index funds like the S&P 500 with very low fees. Rarely are brokers worth it.
A retirement account is an account that allows you to invest funds and defer taxes throughout your working years. An account which allows you to contribute before tax can help your money grow without being taxed until you retire. While there are some accounts that are funded with post-tax dollars, there are also some that require accountholders to pay taxes on withdrawals.
There are many types of retirement accounts, each with different rules about when you’re allowed to access your money.
If you are thinking about having children or already have children, you may want to research investment options to help pay for their future education.
The average cost of tuition and fees for private schools in 2020-21 is $41,411, while the average cost of tuition and fees for state residents in public colleges is $11,171 and $28,809 for out-of-state students in state schools.
Education expenses are increasing annually making it more important to plan ahead financially.
The 529 Savings Plan
If you would like to start saving for your child’s education, you may want to look into a 529 savings plan. This plan offers tax advantages for those who use it to pay for qualified education costs, including expenses for kindergarten through 12th grade, college, and apprenticeship programs.
Not only do 529 savings plans offer a way to save for college, but they can also provide income tax breaks for investors. The funds will be visible to colleges when applying for financial aid. This means that if you have a 529 savings plan set up, your child may receive less aid. This statement also applies to education savings accounts, trust funds, and brokerage accounts.
If you want to protect your money during the financial aid process, you should look into using Roth IRAs or even cash value life insurance policies. These can both help you keep your money safe while still getting the financial aid you need.
There are some investments that can help you save money and also make it more likely that you will get more financial aid when you apply for it.
Rather than saving for college in a 529 plan, we personally keep our money for college in a cash value insurance policy. It has guaranteed returns, is liquid and can be used for things other than just college expenses.
Outside of traditional investment accounts, there are a whole slew of types of investments. Real Estate, Bitcoin, precious metals, collectibles, you name it.
Our own personal choice for investing is single family real estate.
Let’s get into how some investments performed in 2022, plus how our own favorite did.
Best Investments in 2022
1. High-yield savings accounts.
A savings account which offers a high interest rate for cash deposits. You can earn money on your savings like you would at a normal bank, but with online high-yield savings accounts.
Who are they good for? If you are looking for a way to save money and have easy access to cash, a savings account is a good option. A savings account with a high interest rate is also a good option for investors who are risk-averse and want to make sure they will get their money back.
The banks that offer these accounts are FDIC-insured, so your deposit is safe.
While high-yield savings accounts are considered safe investments, like CDs, you do run the risk of losing purchasing power over time due to inflation, if interest rates are too low.
With lower overhead costs, online banks typically offer higher interest rates.
In addition, you can usually access the money by transferring it to your primary bank or by using an ATM.
2. Short-term certificates of deposit.
A certificate of deposit, or CD, is a savings account that is offered by a bank and typically has a higher interest rate than a traditional savings account. If you believe that interest rates will go up in the near future, investing in a short-term CD may be a better option for you. This is because you will be able to reinvest the money at a higher rate once the CD matures.
Who are they good for? Retirees who do not require immediate income and are willing to tie up their money for a period of time may find CDs to be a good option because they are safe and have higher payouts. A CD may be a good investment for someone who is risk-averse and needs to access their money at a specific time. They may be able to get a higher yield than what they would get from a savings account.
Risks: CDs are considered safe investments. There is a risk that when interest rates fall, investors will not earn as much when they reinvest their money in new CDs with lower rates.
The risk is that interest rates will rise and investors will miss out because they have already locked their money into a CD. With rates expected to rise in the future, it may be a good idea to invest in short-term CDs, so that you can reinvest at a higher rate in the future.
At regular intervals, the financial institution pays you interest with a CD. When it reaches maturity, you will receive your original investment back plus any interest that has accumulated.
You can save money by shopping around online for the best rates.
You can get CDs from banks and credit unions, but you’re more likely to get a better interest rate if you look elsewhere.
3. Short-term government bond funds.
Government bond funds are mutual funds or ETFs that invest in debt securities issued by the U.S. government and its agencies. Short-term bond funds are not as risky as long-term bond funds when interest rates go up, as happened in 2022.
Who are they good for? The funds invest in fixed income securities including U.S. government debt and mortgage-backed securities issued by government-sponsored enterprises. funds which are related to government bonds are good for investors who want low-risk These funds can also be a good choice for investors who are just starting out and those looking for a consistent flow of income. Government bond funds are a good investment choice for people who are risk-averse, although some types of these funds (like ones that invest in long-term bonds) may experience more fluctuations than others (like those that invest in short-term bonds) because of changes in interest rates.
The riskiest investment government debt instruments are those that are not backed by the full faith and credit of the U.S. government.
The price of a bond is inversely related to changes in interest rates. The risk of interest rates is higher for long-term bonds than for short-term bonds. Short-term bond funds will not be significantly affected by rising rates, and the funds’ interest rates will gradually increase as prevailing rates rise.
If inflation is high, the interest rate may not be high enough to keep up with inflation, and you will lose purchasing power.
Bond funds offer a monthly payout and with rising rates in 2022, these funds will yield more than they have in recent years.
Bond funds are available for purchase from many online brokers that also permit trading for ETFs or mutual funds. Most brokers that offer ETFs do not charge a commission for buying or selling them. However, some mutual funds may require a commission to be paid or a minimum purchase.
4. Series I bonds.
Overview: The U.S. The Treasury department issues savings bonds for individual investors, and an option that is growing in popularity is the Series I bond in 2022. This bond helps build in protection against inflation. The interest rate consists of a base rate with an additional percentage based on the inflation rate. The result: If inflation rises, so does the payout. However, the reverse is true: If inflation falls, the interest rate will also fall. The inflation adjustment resets every six months.
Who are they good for? Series I bonds are government-issued debt that are attractive to risk-averse investors because there is no risk of default. If you’re worried about the effects of inflation on your investments, bonds are a good option. Despite this limit, you can still purchase up to $15,000 in Series I bonds in a single year by using your annual tax refund.
The primary risk of investing in Series I bonds is inflation. These bonds are considered to be very safe, even safer than other types of government debt.
You will earn interest on Series I bonds for 30 years, and the rate will change along with the inflation rate.
Series I bonds can be bought directly from the U.S. Treasury at www.treasurydirect.gov, from a bank, or from another financial institution.
5. Real Estate.
Last but not least, real estate continues to be one of the best long term investments. Our favorite sector here for passive income continues to be investing in single family rental houses.
Specific to the single family rental market, according to CoreLogic, single family rents were up by 10.2% in September Year over year.
What does that mean for the single family home real estate investor?
Especially for those that smartly secured 30 year financing, which kept their mortgage rates locked, a boost like that will mostly go right to the investor, increasing their Cash on Cash returns.
Couple this with the dramatic rise in real estate prices earlier in the year, 2022 was a fantastic year for large and small residential real estate investors.
What about for you, the reader? What were your top investments in 2022? Let us know in the comments below.
Article sources & references:
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor owning properties in multiple states.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here.