Financial Gift for Graduate?

April 1, 2012 7:30 AM

What's a great "financial instrument" gift for my soon-to-graduate 21 year old?

So hard to believe it's here, but my 21 year old daughter graduates in May! I have a couple of thousand dollars and I'd like to buy her a ... I don't know?! IRA? CD? Money market account? I'm planning to add to it, perhaps monthly. I would prefer it's not easily accessible. What is it? Are we both on the account? What should I get and how do I set it up?

posted by thinkpiece to work & money (5 answers total)

When do you imagine her spending the money?
posted by Nelson at 8:46 AM on April 1, 2012

If you start her with $2000 and add $100 a month it could be worth about $500,000 when she retires. This assumes a fairly conservative 6% APR. Increase that to 8.5%, which is the historical return on the stock market, and it grows to over $1 million. I ignored inflation - so obviously we have no idea what $1 million will buy in 50 years.
posted by COD at 9:24 AM on April 1, 2012 [1 favorite]

Nice!

My thoughts:
- if it is too liquid (i.e. money market account or in bills) the temptation is to spend it. Illiquid might be better, but I have no advice on how to buy illiquid investments, like real estate.
- she is young so it should probably be in something that will grow, like say an equity investment.
- Maybe share control of it until she is ready and able to take responsibility for it. Sometimes "money management" is quite unappealing to young adults and they shy away from learning about it. This gift will be a great way for her to become engaged.
- time the investment duration to her needs and learning curve. For example, if you get 12 month T-Bill then she will need to decide what to do with it in a year once it matures. If you buy Apple stock, it could sit there until she needs it and understands it.
- I would look at it not as money but tuition towards a financial education. If she learns about investing and saving and even makes huge mistakes and loses it all, it will be a great education (although potentially stomach-turning.)
- one successful idea is the old Peter Lynch trick: buy stock of companies that she admires and likes. I've seen it work well.
- Fidelity is good. Not the cheapest, but have better phone support than others, which is good for newbies. Your milage may vary. :)
- I think you need earned income for an IRA, but she may not be earning enough yet to qualify.
posted by acheekymonkey at 9:33 AM on April 1, 2012 [1 favorite]

It depends on what you envision her doing with the money. Do you want her to have it for post collegiate startup costs like 1st/last/ security deposit on an apartment? A straightforward savings account seems reasonable for that. Down payment for a house in 10 years? Maybe low risk stocks or bonds. Retirement? Assuming she will meet the income requirements, a Roth IRA. (this would work for a house downpayment as well)

When I was right out of college and scraping by, my father gave me money every year for a few years to make an IRA contribution. His rationale was that he wanted to help me take maximum advantage of the possibilities of compound interest for retirement at a time when I was able to pay my bills but didn't have much extra for long-term savings. I've always been really grateful for that and almost 20 years later the money has accumulated nicely (it did take a hit in 2008-9 but has another 30 years or so to go before I need it).
posted by The Elusive Architeuthis at 10:16 AM on April 1, 2012 [1 favorite]

Roth IRA. I'm not sure what all the requirements are for them, but they're not really liquid, and they're a retirement account that you don't pay taxes on when you're finally able to start drawing from it in retirement. My parents did the same for me, although I might have already been gainfully employed at that point.

Within the Roth, you can buy and sell stocks/mutual funds/etc, with no taxes....everything that's in, stays in until you're old enough to start drawing money.
posted by specialnobodie at 1:37 PM on April 3, 2012