Investing at 22
- 04.10.2020
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So I decide to go with that bit of guidance and get started. The problem is, to keep diversified and keep my eggs in several places I might spread myself too thin. I'm still young, still in college, and haven't had a steady reliable source of income for long enough to build a significant amount to work with. But the concept of keeping things diverse is a wise one, so I just need to figure out how to diversify without putting such small amounts of money in each basket that it makes no sense or difference.
Before settling on what stocks and accounts to pursue, I have found that it's vitally important to take assessment of what risk I'm willing to take on with my finances. It's one thing to say that interest added a couple hundred dollars to my savings account balance, but if inflation has outpaced those earnings, then I really haven't made anything because I have no increased spending power. So to be able to ensure that I can potentially see increased returns on my investments, I'm going to need to assume some moderate risk.
Luckily, as a student I have very little in the way of current expenses. My part-time job during the semester covers daily activities, such as gas and food, and I could continue living comfortably in the event of economic problems without having to empty my emergency savings accounts. While I certainly don't want to lose my principal investment, I can also understand the need to diversify across low and high-risk options.
Keeping my eggs out of the same basket, so to speak. Right off the bat, I want half of my allotted amount to go to longer-term savings. Since I'm still in college and without a full-time job, for the time being a k is out of the question. Although it is paramount to start retirement savings at a young age, that's a basket I will keep my eggs out of for the time being.
I feel like the best option for this right now is a high-yield month CD. By putting my money into a CD versus a standard savings account, I'm assured that I won't be tempted to withdraw that money early, as I'll be forced to pay an early withdrawal penalty. Since I already have a part-time job with wages being deposited into a standard student checking and savings account, I'm also looking for something more long-term and with a better return than the regular free savings account will offer.
The real value of your money will go down, because the interest you're earning will be less than inflation. However, there's no way to avoid this while keeping your money absolutely safe from loss and maintaining absolute freedom to take it out whenever you want. To address a couple of the alternatives you mentioned: A CD is as safe as a savings account, but you can't take the money out until a certain amount of time has passed.
A mutual fund carries risk and you may lose money. Treasury securities such as T-bills can be a reasonable part of an investment portfolio in the long term. They are considered risk-free. However, with the small amount of money you're describing, it probably doesn't make sense to invest in treasuries.
You could buy a mutual fund that invests exclusively in treasuries, but the fund would charge you a fee. Even if there were no such practical obstacles to investing in treasuries, with only a couple thousand dollars for a few years, the difference in gains between treasuries and just leaving the money in a savings account would be literally pennies.
It makes more sense to use a savings account, because it's much more flexible: you can deposit and withdraw any amount you like, any time you like. It's good that you're thinking about this now. However, you shouldn't worry unduly about "getting the most out of your money" at this stage. In other words, two weeks after your job starts, you'll have earned as much as your entire savings before you started the job.
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