Join 3,552 readers in helping fund MetaFilter (Hide)


How should I manage my small fortune of privilege?
July 28, 2011 8:28 AM   Subscribe

I have the random fortune of being raised in a wealthy family. As I prepare for life after university I want to make sure I understand personal finance and properly manage the money that I've thus far received from parents and grandparents. Can you please help me? Snowflake details inside.

I am a 21 year old student preparing for my final year of college and my departure into life after formal education. As the question mentions, I have the random fortune of a wealthy family. Consequently, I have a fair amount of money in my account that I am looking to properly manage / allocate. Even to me I sound like a spoiled brat, but while spoiled, I'm not a brat, just a result of circumstance.

Specifically, my personal finances to my knowledge are as follows:
$50k in a savings account
$15k in a checking account
$15k in an online stock broker that I personally manage
$20k in stocks chosen by my father, managed by myself and a money manager
$30k in mutual funds chosen by my father, managed by myself and the same money manager.
-Mostly domestic and I'm in the process in looking for funds in international and emerging markets, do you have any recommendations? I'm currently thinking Vanguard. How about funds in renewable energies - wind and solar?

Perhaps more importantly, no debt from credit cards or education.

This totals to $130 thousand, quite a fair amount...I'm quite lucky, and I understand that. But moving forward, how might you suggest I manage this money? Would you recommend I invest a greater amount of my savings in mutual funds? Simply leave it as is? Invest a greater amount in stocks? Invest a smaller amount in stocks? I understand that investing in stocks is generally a losing game compared to mutual or index funds but I think it to be a worthwhile endeavor for learning the market and such. Do you agree?

I realize that what you say is to be taken with a grain of salt for you don't know the market nor does anyone else, but I just feel a bit lost and could use some input. I know I also have the resource of the money manager but I would like some additional opinions. I also know to max out 401(k) contributions, but I don't yet have an employer, so that's not an option. I've done fairly thorough browsing and know not to maintain credit debt, buy things out of my budget, etc., so basic personal finance measures such as those don't really need to be discussed, I'm more looking for personal advice.

I also ask this question because I'm that privileged kid that says I don't want to pursuit making great amounts of money in life because money doesn't = happiness, though only because I had the luxury of not having to worry about money growing up. I plan to do what makes me happy which will likely be something that doesn't entail a great amount of money, and as a result, I want to see that this small fortune I've been graced with is properly managed into the future.

So perhaps I have everything under control, perhaps you think something should be tweaked a little, perhaps you think I'm well articulated and happy for my good grace, or perhaps you think I'm a spoiled brat - please let me know what your thoughts are.

You can email me at throwawaypu2012@gmail.com

Thanks!
posted by anonymous to Work & Money (18 answers total) 13 users marked this as a favorite
 
Two books which I have found useful:

The Boglehead's Guide to Investing
I Will Teach You To Be Rich

The first will teach you how to invest smartly for retirement. Heavily geared towards index funds (Vanguard, specifically) but the ideas are sound. The second is geared towards personal finance for young adults and specifically how to automate and prioritize things such that your bills are paid, you are automatically saving money (investing, retirement, Subaru WRX STi, etc) and the remaining money is free to spend, guilt-free, on whatever makes you happy.
posted by Loto at 8:37 AM on July 28, 2011 [2 favorites]


If you own individual stocks, you should read A Random Walk Down Wall Street.
posted by procrastination at 8:45 AM on July 28, 2011


"to my knowledge..."

- First things first: figure out what's what.

- Second thing: hire a fee-only financial planner for yourself. I think it would be a good investment in your situation. They will also have reading recommendations for your situation. Use yelp, or at least vet anyone relatives recommend (ask about conflicts of interest, etc.). You might even just separate decision-making from your Dad and the manager on principle. Especially if there's more money headed your way, you will need to hone your own instincts and criteria about who to trust with your money. Better you do that now with some money, than later with all your money.

- Third: until you actually know what you're talking about*, put money into no-load, no fee index funds. Better yet, do nothing until you know what you're talking about and have a CFP or other trusted manager to work with. Depending on your current funds, you may incur fees to move things and it would be silly to do that without having a personalized master plan.

(*That's not meant to sound snarky, just that it doesn't make sense to do anything without the knowledge about why you're doing it. A CFP and/or trust-worthy manager will be best positioned to help with your particular situation.)
posted by Yoshimi Battles at 8:46 AM on July 28, 2011 [1 favorite]


I am a big fan of - Ernst and Youngs Retirement Planning Guide
posted by iamabot at 8:50 AM on July 28, 2011


Money managers typically charge significant fees (e.g., several percent of assets) and do not perform better than index funds.

Read a few books - a classic is A Random Walk Down Wall Street - and start managing your own money.
posted by Mr.Know-it-some at 8:53 AM on July 28, 2011


I can tell you what worked well for me and my wife, starting out after college. (We didn't have any money, but the advice is the same.)

1. Keep only enough in checking to to pay about 2 months worth of bills. (Can be a little more or less.) The rest goes to savings. It's not so much that savings pays interest, but that the savings is more out of mind.

2. Figure out if/when you want to buy a house and save up for the 20% down payment. If you can, pay more down and get a 20 or 15 year mortgage.

3. Live below your means. Read "The Millionaire Next Door," for example.

4. You already say you're planning to fully fund the 401k, which is the right thing to do. Try to estimate how long before you want to buy a house and use that to guide how you want to direct your investments. Sure, we'd all like to make 20% annually and starting with 100k+ that sounds even better, but if you lock up the 50k you have in savings into an investment product (or even stocks) you risk them a.) losing value before you're ready to take them out to buy a house (or whatever) and b.) paying fees for early withdrawal. There are ways to avoid both of these, but sometimes it's not worth it in terms of time, effort, stress, whatever. Once you are comfortable with your liquid assets (in terms of getting ready for major purchases like a house) THEN you can start to think about how to grow your non-401k investments.

Hope that helps. Everyone's situation is different. It worked well for us, hopefully it works well for others.
posted by achmorrison at 8:53 AM on July 28, 2011


That was close to the picture my siblings and I ended up with after inheritances, and I don't think it would've occurred to any of us to piffle on about privilege and wealth. Unless some information is missing -- like, tens of thousands from parental coffers heading your way every year for the rest of your life -- this is not that exciting; I would suggest doing what some of us did, viz: down payment on a nice but modest residence, a little vacation or other treat, middling pile of savings in a low-risk account. This is not enough to...I mean, you are not set for life here. Certainly an exciting sum if you wish to risk it all by starting a grand business venture. But if you're not looking to gamble with it, it's not going to be too too life-changing.

" I don't want to pursuit [sic] making great amounts of money in life because money doesn't = happiness, though only because I had the luxury of not having to worry about money growing up" -- it is, speaking from experience, easy to take your nest egg and buy a house, make repairs to the house, have a family, and find yourself worrying about the utility bills like the rest of the world. I admit that that is a huge sum at 21, but I worry that you have a bit of a 'set for life' mindset, and because you grew up without financial worries you can't quite anticipate how they may happen. Join the middle class, tread carefully.
posted by kmennie at 9:05 AM on July 28, 2011 [3 favorites]


Best thing you could do for yourself?

no debt from credit cards

Keep it that way.
posted by EmpressCallipygos at 9:25 AM on July 28, 2011


Read everything you can. This includes the books mentioned above are great and mostly without bias (perhaps I just agree with Bogle), but I would also think about reading some investment magazines (Kiplingers, etc.). But understand that much of what you see on TV or read in these magazines is not written specifically to benefit you - be very careful about hot tips, great funds, etc. - by the time you see them in writing, the cat it out of the bag and things are probably not so hot any more. And in the worse case (unfortunately all too prevalent) the intent is not to educate, but to manipulate the individual investor.

Be very careful of "loads" or advisory fees - or fees in general - any time someone is going to charge you a % of your investment look twice and question the size of the %. Some expenses are mostly unavoidable (mutual funds) but by picking the right funds you can minimize the impact. For every fund which charges you 1% load right off the top to invest, or 1% to get your money out, there is another fund (Vanguard is a good starting place) which will charge you 0% to invest - AND get the same returns as the loaded fund. Read up on ETFs and index funds - they can be the heart of a no-load, low expense investment strategy.

One specific piece of advice, when given the chance, try to move some of the money into tax advantaged accounts. This includes an IRA and a 401k. After some time working, if successful, you will rapidly start hitting contribution limits for things like IRAs - move some money in now, so you can let it grow tax differed or tax free in the future.

A word of warning, $130k can go very quickly depending upon where you live. As a safety net it will make your life much easier - and let you take some more risks with career, etc. But it will not pay all your bills - or unfortunately even pay for your kids college educations at current rates.

Investing is not hard but it can take time and attention. If you do not have the time to get educate and pay attention to your investments, find a trusted adviser - talk to your parents, I'm sure they will have a suggestion here. They did a great job to set you up with this "problem" I'm sure they can help you take the next step...
posted by NoDef at 10:05 AM on July 28, 2011


The key here is to align your money with your goals. You have a very good starting position coming out of college, but we don't know what you want money to do for you. If your goal is to retire as early as possible you should be miserly and invest for growth in these early years. Your goal may be simply to create a good cushion by preserving this money, in which case the bond market would be more appropriate. Maybe you want to support a charity, travel the world, etc but the tactics employed will be different depending on what you want to do.

You have a mature attitude about wealth and it sounds like you will do the right thing with it. If you say something like, "my goal is to achieve x by age y" then some answers here will be more specific.
posted by dgran at 10:29 AM on July 28, 2011


I also ask this question because I'm that privileged kid that says I don't want to pursuit making great amounts of money in life because money doesn't = happiness, though only because I had the luxury of not having to worry about money growing up. I plan to do what makes me happy which will likely be something that doesn't entail a great amount of money, and as a result, I want to see that this small fortune I've been graced with is properly managed into the future.

The very fortunate thing is that you have an opportunity to practice this mindset with a safety net. Track your expenses for a couple of months, figure out your average total monthly expenses (don't count big splurges) and put yourself on a budget. Instead of keeping $15k in a checking account, keep it in something like an ING savings account (it's still totally liquid) and transfer a set amount every two weeks into your checking account. Save up for splurges.
posted by desuetude at 10:35 AM on July 28, 2011 [1 favorite]


One specific piece of advice, when given the chance, try to move some of the money into tax advantaged accounts. This includes an IRA and a 401k. After some time working, if successful, you will rapidly start hitting contribution limits for things like IRAs - move some money in now, so you can let it grow tax differed or tax free in the future.


The IRS does not care what income tax bracket you are in when you make a qualified plan contribution, they only care what tax bracket you are in when you make the withdrawl. Qualified plans postpone the eventual tax calculation. If you think income tax rates are going up, and you do not want to retire poorer, contributing to traditional qualified plans is one of the worst things you can do.
posted by yoyoceramic at 11:11 AM on July 28, 2011


2. Figure out if/when you want to buy a house and save up for the 20% down payment. If you can, pay more down and get a 20 or 15 year mortgage.

Stuffing money into a house (1) lowers the interest deduction you take from your taxes and (2) ties up money you could otherwise have outside of your house working for you earning interest. Don't forget that a house is basically a financial account that earns a 0% rate of interest. What I mean is, the market price of the house is independent of the amount of equity in it. Besides, if you think inflation is a reality, that means your most valuable dollars are the ones you have in your wallet, today. So why would you want to 'hurry' up and pay down your house, giving the bank your most valuable money?
posted by yoyoceramic at 11:15 AM on July 28, 2011


The IRS does not care what income tax bracket you are in when you make a qualified plan contribution, they only care what tax bracket you are in when you make the withdrawl. Qualified plans postpone the eventual tax calculation. If you think income tax rates are going up, and you do not want to retire poorer, contributing to traditional qualified plans is one of the worst things you can do.

I don't want to divert too much attention here, but I think this is misleading - and I think the last statement is wrong.

1) As your income increases, you will reach limits where you cannot contribute to a Roth IRA or traditional IRA.

2) The primary benefit is the tax deferred nature of these accounts. This means the interest you earn is not taxed until it is withdrawn from the account - this allows the untaxed interest/dividends to compound over time - so you get interest on the postponed taxes. This is a considerable incentive to using these accounts . For a Roth IRA, in most cases the withdrawls are tax free (the money is taxed before it goes in). A Roth IRA is exactly what people use to address the scenario that tax rates at retirement will increase - similar Roth-like 401k plans also exist.

3) The withdrawls from traditional IRA, 401ks will be taxed at your tax rate at the time of the withdrawl. But this is not based upon wealth, it's based upon income - for most, retirement income will be smaller than the last years of working income and thus be taxed at a lower rate. It's also useful to mention that $1M in a 401k generates less taxable income than $1M in non tax privileged account.

So I would state it again - please do look elsewhere to form your own opinion. Investing in IRAs and maxing out one's 401k should be an important piece of investing strategy for the young - especially once they have a reasonable safety net in more liquid investments.
posted by NoDef at 11:52 AM on July 28, 2011


I'm following this thread closely, I'm looking to be a an entrepreneur and this situation interests me, there' lot's of great advice. What if this person were to spend 50 thousand dollars on a start-up business? What might be wise for him/her to do with the remaining money?
posted by masters2010 at 1:33 PM on July 28, 2011


Do yourself a HUGE favor and start a retirement account today. Talk to a financial advisor about what's best for you.

This is not a sexy thing to do when you're young. I could have and didn't. I *really* regret that.
posted by Murray M at 2:14 PM on July 28, 2011


The only piece of advice specific to your situation (young person with significant savings for a young person) is to not let your savings prevent you from living within you means because the money is on your mind.

If you "feel rich" and let that lead you into outspending your income ( the sum of your pay from work, dividends and capital gains from investment, and further inheritance / good fortune) then your kid WON'T be "from a wealthy family." If you earn more than you spend they might. 130K is a great nest egg for someone your age, but not really "wealthy" you still need a 9 to 5 :)
posted by oblio_one at 5:31 PM on July 28, 2011 [1 favorite]


Stuffing money into a house (1) lowers the interest deduction you take from your taxes and (2) ties up money you could otherwise have outside of your house working for you earning interest.


(1) is true, although I'd argue it's not that important to me. (2) is technically true as well, but is a bit misleading. (Firstly, an assumption: a person wants to buy a house, but cannot afford to purchase outright. None of my advice on mortgages is relevant if you don't want to own a house.) My original point was that you want to save enough in some sort of relatively liquid account to be able to pay a minimum of 20% down so you don't have to pay PMI when you get a mortgage. The reason your argument is misleading is that you are being charged interest when you carry a mortgage. So, yes you can earn interest instead of paying off the house, but it could be worth paying off the house early to then put your money to work.

Don't forget that a house is basically a financial account that earns a 0% rate of interest. What I mean is, the market price of the house is independent of the amount of equity in it. Besides, if you think inflation is a reality, that means your most valuable dollars are the ones you have in your wallet, today. So why would you want to 'hurry' up and pay down your house, giving the bank your most valuable money?

Personally, I want to not be paying the 5% (or whatever we're paying) interest on the house ASAP. So, while I'm paying it off, it is actually WORSE than a 0% rate of interest (assuming house prices hold steady, long term history shows they don't, recent history shows they don't always go up.) Not only am I competing against inflation, I'm also dealing with markets which go up and down. I can't be sure that I'll always get 5%, 15%, 25%, x% back on my money, unless I have some in low interest stable investments. If you think you'll get a high return on your money every year, then it can make sense to not pay off the house early. If you want to hedge again up-and-down markets, then paying off the house ASAP and having MORE money to invest can also work to your advantage.

This is a spreadsheet I put together that shows two scenarios with some hypothetical accounts. One scenario is a 30 year traditional mortgage paid off in exactly 30 years with consistent recurring monthly investments and the balance of $1000/month going into an interest paying account. The other scenario is using the $1000/ month first completely for paying off the house, then putting all of it into the earning account. If the interest earned is high enough, then I am wrong and you are right.

The real world isn't really that simple though, and I didn't mean to imply that I am as conservative of an investor as I may sound here.
posted by achmorrison at 6:17 PM on July 28, 2011


« Older We're moving in a couple weeks...   |  TypoFilter: I need a somewhat ... Newer »
This thread is closed to new comments.