How to invest $5,000 for my family's future?

June 30, 2008 1:45 PM

I am a grad student, married with two kids—we're pretty broke. I just got an unexpected $5,000. What's the best thing to do with it to help my family?

My goal is to expand it/invest it, but I am completely unfamiliar with the world of investing. We already contribute faithfully but meagerly to retirement and college funds. We live in California so there is no hope of buying a house or even a small condo.

posted by Elizabethse to work & money (15 comments total)

Do you have any debt? Pay it off (highest interest rate first).
posted by box at 1:50 PM on June 30, 2008

I don't have debt.
posted by Elizabethse at 1:53 PM on June 30, 2008

Do you have an emergency fund? If not, put it in a high-yield savings account and don't touch it.
posted by grouse at 1:59 PM on June 30, 2008

box: "Do you have any debt? Pay it off (highest interest rate first)."

Indeed. Especially credit cards. Pay them off if you have any debt on them.
posted by Effigy2000 at 2:00 PM on June 30, 2008

If you don't have one yet, use it as an emergency fund. It will allow you to pay unexpected expenses without going below zero, which means you don't pay interest, which probably will save you more than you can earn by investing. Put it in a high yield savings account that allows quick withdrawal.
posted by dhoe at 2:01 PM on June 30, 2008 [4 favorites]

If you have a good matching 401k or stock purchase plan with your employer and can increase your pre-tax/matched contribution, do that for a while. Use the $5000 to offset the smaller paycheck.
posted by dosterm at 2:04 PM on June 30, 2008

For emergency fund use there are alternatives to savings accounts, which are returning horrible interest these days. I use a mixed bond/money market fund administrated through Thrivent (which also deals with several insurance type things for my family, but some of that is a Lutheran thing, but I believe their investment products are open to all). I get financial planning for free from them which is nice. The funds are fully liquid (I can get at my money at any time without penalty) and they have handily beaten the best savings interest I could find for 5+ years, even in the face of market conditions. I've never lost money. BUT - they are investment vehicles so they do carry risk, including loss of principle. So I keep a very close watch on it, which you wouldn't have to do for a bank account. Whatever the case, an emergency fund is a wise thing to have - if you avoid putting one bad car repair or medical bill on a credit card your net return will beat any gain you'd get off some intermediate term investment like a CD that ties up your money.
posted by nanojath at 2:27 PM on June 30, 2008

Put it into a savings account that you can get access to easily, as a cushion against sudden need for cash flow. The fact is the interest is negligible no matter what you do with that amount of money, and there are various cases that could be a real problem for you if you don't have this kind of cushion. I did this with most of an unexpected fellowship I got one summer early on, and it's been really helpful. I know you are thinking something more long-term might be wiser (I thought that for a while too), but you need to cover short-term emergencies first.

To give you an idea of what you might need emergency money for, I have used some of the fellowship money to replace a laptop that really needed replacing and that I probably couldn't have replaced otherwise, to help pay for a car after our old car died a sudden death, to front money for flying to job visits & conferences (reimbursed, but sometimes it takes a while -- this could be really expensive if you aren't prepared, especially if you are going into academia and do well on the job market), and to pay rent during parts of summers where I wasn't funded. Luckily I haven't had any big medical problems, but that is the other thing that comes to mind.
posted by advil at 2:55 PM on June 30, 2008 [2 favorites]

$4000 to emergency fund
$ 100 to set up a will, if you don't have one already
$ 900 to cover X years of term life insurance premiums, if you don't also have this in place

Please consider all those as part of emergency planning.
posted by acoutu at 2:56 PM on June 30, 2008 [1 favorite]

Take 10% of that money ($500 if you're a humanities student), and do something that would make your kids and spouse feel not so broke. Cheerios instead of oat circles, strawberry jam instead of strawberry gam, a nice dinner at a nice restaurant, a wii for the kids, maybe a cd or 2 for your spouse, clothes for the kids, a co-payment for doctor's visits for everyone, or maybe just a night on the college town.

Take the 90% ($4,500), and put it in a savings account that gathers just a tad bit of interest...but more importantly, it is 100% accessible, just in case you NEED it. Emergencies, things breaking down, aggressive bookies, and just general bribes.

Good luck.
posted by hal_c_on at 3:00 PM on June 30, 2008 [5 favorites]

Another option is to take $1500 or so and open a Roth IRA account (put the other $3500 in savings) and then contribute the minimum (usually $50/month) to the Roth IRA. What bank do you use for checking and savings? Talk to them about opening a Roth IRA and get on the road to saving for later.
posted by mattbucher at 3:02 PM on June 30, 2008

OH...I can't believe I didn't write this. This happened to me once in grad school. I went to my landlord, and asked how much he could lower my rent if I could pay up to a year's worth at ONCE, and IMMEDIATELY. I paid for 10 months right then, and I got 2 months free. 17% discount. Make sure you get a receipt that says "rent for xxx to xxx" including the free months. Better than ANY CD, investment, or whatever ponzi scheme yr thinking of. Plus, every paycheck I received, I thought "wow...I don't have to pay rent...I'M RICH".

Good luck.
posted by hal_c_on at 3:05 PM on June 30, 2008 [9 favorites]

Seconding the emergency fund, but also check out the Retirement Savings Contribution Credit. If your income's low enough, the Feds will match a chunk (up to $1000/person maybe?) of any investment you make to an IRA or ROTH-IRA.

If you're a full-time student you don't qualify, but maybe your wife can use some of that money to take advantage of it.

I haven't used it. I just know it's there.
posted by small_ruminant at 4:31 PM on June 30, 2008

It's a good idea to have the emergency money in a Roth IRA containing whatever investment type (moneymarket account, CDs, etc) you're looking to get. If you go to your bank they'll be more than willing to set this up for you, and most places that have the investments will do the same.

The advantages are that you can withdraw the contributions any time without paying extra tax, the interest grows tax-free (but you can't withdraw it without penalty except under certain circumstances*), and in the likely event that you never need the emergency money you haven't missed out on the $5000/year contribution limit to this tax-advantaged savings account.

The financial advice people at my school (this is their whole job!) even missed out on understanding this when presenting to the new graduate students. A Roth can contain almost anything, including the canonical "emergency money" bags like a moneymarket account, so if you're not otherwise using your $5000/yr limit and aren't counting on pulling out the interest soon it's the way to go.

*10k of earning can be taken out without penalty for buying your first home. You can also get qualified distributions if you become disabled.
posted by a robot made out of meat at 4:46 PM on June 30, 2008 [1 favorite]

Do you and your spouse each have life and disability insurance?
posted by Jacqueline at 5:32 PM on June 30, 2008