What should I do with 50k?
October 21, 2010 5:52 AM   Subscribe

Say you're in your mid-twenties and suddenly have around 50k you want to start investing/saving. How would you go about doing it?

My boyfriend couldn't believe that I had literally my entire savings in a checking account. To be fair, neither can I. Problem is, I know nothing about savings accounts or investing.

I've considered a HSBC or ING online savings account, but the rates aren't great - both are at 1.10%. I'm wondering if there's a better option for savings accounts if I have a higher minimum balance. I'm also young enough that the majority of my lifetime wealth is in future earnings, so I'm willing to be a little more risky than a basic savings account. I've read about Money Market accounts, CDs, etc... but I could use a human perspective from someone who isn't trying to advertise to me!

Thoughts? Advice?
posted by torietorie to Work & Money (18 answers total) 25 users marked this as a favorite
I keep a somewhat smaller amount in high-yield checking accounts that return about 4%; most have a cap of $10k or $25k (for interest purposes) and require 10-12 debit transactions per month, so it gets complicated to maintain more than one or two.
posted by ecsh at 6:04 AM on October 21, 2010 [1 favorite]

Keep three month's living expenses in savings, put 5K per year goes into an IRA, and put the rest into a discount brokerage account. Since you are confessedly not any kind of money guru, don't pretend you aren't: invest in market index funds.
posted by holterbarbour at 6:06 AM on October 21, 2010

Do you have a 401k and/or a Roth IRA? If not, I'd start with maxing out your contribution to those for the year. Any plans of buying a house soon? The more money you can put down for that, the better off you'll be as well...
posted by Grither at 6:08 AM on October 21, 2010

Do you have any debt? Student loans? Mortgage? Car loans? Put the money towards that before you think about returns from savings. The interest on even the lowest-rated debt will destroy any possible marginal gains you might get from high-yield accounts or CDs.

I recieved about an inheritance and had to make the decision whether to save it or use it to attack debt. By paying off my consolidation loan in full with 90% of the inheritance (which hurt, psychologically, let me tell you) I saved thousands of pounds in interest. Even if I'd put that money in the ridiculous interest rates savings accounts that were available (9-11% returns from Icelandic banks etc) at the height of the boom, I'd have gotten nowhere near that sort of return, and I'd still be in debt. Get a spreadsheet out and work out what you might save in interest on any debt you have versus what you might gain in interest from savings or investments.
posted by Happy Dave at 6:24 AM on October 21, 2010

Pick up a copy of I Will Teach You To Be Rich. I know a few people here aren't big fans, but I found it really helpful in figuring out the first few steps of what to do with extra cash. Ramit goes through general investment strategies and setting up / aside emergency and retirement funds. It is targeted to folks in their late teens through early 30s.

And, hell, it is only $10.
posted by chiefthe at 6:25 AM on October 21, 2010 [1 favorite]

Depending on where you live and your long-term plans, this could be a good time to buy a home. Prices are down, and there are lots of motivated sellers in the market.

Otherwise, holterbarbour and Grither's advice is good. Max out your pension contributions and buy indexed exchange traded funds (ETFs), which offer low expense ratios and good diversification.

You might also find this book helpful.
posted by quidividi at 6:31 AM on October 21, 2010

Index funds.
posted by Cool Papa Bell at 6:56 AM on October 21, 2010 [1 favorite]

this could be a good time to buy a home

No, no, no, no, NO. Rule #1 of having money is "keep it." Don't throw it away to bank interest and realtors. If you put that money into a down payment, it is suddenly illiquid and if you lose your income or have an accident, you will effectively be more than broke, you'll be tremendously in debt. Unless you KNOW you'll be in the same place for more than 5 years, buying makes no sense. And at your age (which is more or less my age) you can't know that. AND even though you MIGHT come out ahead after 5 years, you might not come out ahead until 10 years later. Come back to this when you're 30 or so.

Start slow. A high-interest checking account is a good place to start - sure, yields are low, but it'll keep your money safe and slowly grow it. Then you can slowly learn and look into CDs or conservative investments, but usually you want to keep your savings liquid and safe - and that means savings account.

And you absolutely need a retirement account - a 401k if your employer offers it or an IRA if they don't. You're apparently doing very well at saving money, and now it's time to multiply your gains by getting tax advantaged retirement savings.
posted by Tehhund at 7:04 AM on October 21, 2010 [2 favorites]

Basically what you need is to have different tiers of liquidity.

Tier 1: Checking account: This is the money that you need to have access to on a daily basis. Generally, you want about one month of living expenses in this account.

Tier 2: Savings account: This should be your emergency fund. This isn't an emergency fund as in, I just got laid off and I need to live off this money for three months. This is the, holy crap, its three a.m. and I need cash quick fund (or some other unforeseen emergency). Keep three to six months living expenses in this account or some number you're comfortable with but pick one for your target balance.

Tier 3: Some higher yield money market account. I use the money market that is part of my brokerage account. This is the money that you might need to access in an emergency but it is okay if it takes a business day or two before you get it. Basically, you're looking for a higher yielding cash equivalent.

Tier 4: Some kind of actual investment. A bond fund (type of mutual fund) that invests investment grade bonds, US Treasury Inflation Protected Securities (TIPS) (you would have to buy these on the secondary market to get maturities that would work), or something similar. There might be some ups and downs (except for TIPS which have virtually no default risk) but they won't be wild swings and will generally go up albeit at a slow rate. This is the money that you might access if you lose your job. You probably won't need it so you can tolerate some risk and if you do need to use and it has lost value, you can wait a little bit for it to go back up if you need to. Even then, the risk that it will have lost value from the time you invested is really, really low, if you pick the right product/get the right advice.

After that, you start investing in higher yield, higher risk mutual funds. Tier five might be something like an index fund or a high yield bond fund. The farther up the tiers you go, the higher the risk and (at least in theory) the higher the return. As you go up the tiers, you should expect to have wait longer and longer to touch that money. The number of tiers you use, the risk/return associated with each tier, and the balance you keep in each tier is up to you and how much money you have and how comfortable you are with investing. You highest tiers should alway be retirement accounts (401k, IRA/Roth IRA) since you won't need to touch that money for 40 years or more.

At the end of every month (or some regular time period you choose) after all the bills are paid, you transfer everything but one month's living expenses out of your checking account and in to your savings. Every month or every other month (or when the balance is high enough and you feel like it) you transfer enough out of your savings account and into the tier 3 account to bring it back down to your target balance. You keep rolling funds up the tiers but you can be progressively more lax about when that happens the farther up the tiers you go.

I'm sure there are similar concepts around but this is something I came up with on my own so if you talk about this "tiers of liquidity" business with someone else, they won't know what you're talking about until you explain it to them.

As you start to learn about investing, www.investopedia.com is an excellent resource to get explanations for any terms that you don't recognize.

I have two recommendations for where to go to get started. Any large bank will be more than happy to have you sit down with one of their financial advisors. These guys all get paid on commission and they get that commission when they sell you an investment. The quality of advisor is pretty hit-or-miss some could care less about you and just want a fat commission check, some of them give excellent advice and really care about their customers and assume that, if they take care of their customers, the commissions will come (as it should be) but they are all licensed advisors and know a lot about investing. IIRC, some laws passed not too long ago that require financial advisors too look out for the best interests of their clients but I don't know how that has changed things. I can tell you about Wells Fargo in particular because I used to work their as a retail banker. They have what they call a PMA or "Portfolio Management Account" for customers who have a "relationship balance" (all the money they have in checking, savings, and brokerage accounts plus all of their loan balances and 10% of the balance of a Wells Fargo mortgage) of over $25,000. It gets you some fat discounts and TONS of free stuff and virtually every product Wells Fargo offers including free trades with their self-service brokerage accounts (they call WellsTrade). I think it would certainly be worthwhile for you to think about putting all of your money in one bank and sitting down with an advisor at one of that bank's branches (I'd start with the bank you're at now assuming it is large enough to have a brokerage arm). You don't have to do anything with them but I'm sure they would be happy to have a conversation with you about investing. My wife and I have also had consistently awesome experiences with Fidelity. Their online brokerage accounts work pretty well, are cheap/free, and every time we've called them for advice, they've been far more helpful, knowledgeable, and competent than they really should be.
posted by VTX at 8:02 AM on October 21, 2010 [19 favorites]

I-bonds are a safe near 2% liquid way to keep a part of it. Banks love them.
posted by buzzman at 8:21 AM on October 21, 2010

So first of all, there's not really any secret to get rich from putting your money in the right place. If you spend less than you make for 20 years and keep it in a no-interest checking account, you'll still be better off than someone who maxes out their investment earnings but saves less. The difference between no earnings and the highest earnings you can reasonably hope for is about 10% per year, which adds up over time but still the most important part is saving as much as possible in the first place.

Your saved money can really be doing three things for you depending on how you use it: keep you safe from unexpected expenses, lower recurring expenses, and make more money through investment. A savings account is very safe (you literally cannot lose that money thanks to the FDIC, even if your bank goes under), and you basically have instant access to it. $50k is probably more than you need for that, once you have enough for a decent emergency fund you can be putting it to use elsewhere, figure out how much you need for emergencies and use the rest for something else. For lowering recurring expenses, that normally means paying down debt. If you have credit card debt or loans that have high interest rates, those should be your highest priority. With investing, your focus should be on keeping your costs low and getting the best long term returns. Taxes can be a big cost so specialized retirement accounts are a good idea, but those generally have yearly limits. A Roth IRA is great because you can remove your contributions whenever you want, so it can act as kind of a backup emergency fund of last resort. Remember though that for investments part of the reason you get higher returns than a savings account is that there is more risk, you should make money in the long term as long as you keep your costs down, but in the short term you may end up with less than you put in.
posted by burnmp3s at 8:27 AM on October 21, 2010 [2 favorites]

My favorite book for 20-something finance and retirement savings is "I Will Teach You To Be Rich." It's awesome. The rest of this post will tell you a simple way to invest for retirement that gets you 85% of the benefits with 15% of the work.

To invest and save for the long term the right way involves having to think about asset allocation (spreading investments across equities, small vs. mid vs. large cap, bonds, international equities, etc.). To avoid NOT having to become an investment wizard, the best/easiest thing to do is to invest in a low-load, index-based, target fund.

Specifically, I would recommend the 2045 Target Fund from Vanguard. What the "2045" is the "target" part, which means is that you'd be retiring on or around 2045 (last time I checked there are no 2050 funds, but that doesn't matter much). The fund automatically allocates assets across a range of investments, and rebalances itself to become more conservative as you get older.

Indexed funds always beat managed funds over a long enough period of time, and indexed funds are low load (that is, they skim less off the top every year for expenses...which really, really adds up).
posted by kryptonik at 8:32 AM on October 21, 2010 [2 favorites]

The fund automatically allocates assets across a range of investments, and rebalances itself to become more conservative as you get older.

I'm interested in how this works - do they make new funds every year with different allocations, and adjust the old ones? Could someone buy into the 2045 fund in 2020? What if Vanguard isn't around in 2045?
posted by odinsdream at 9:28 AM on October 21, 2010

odinsdream: "I'm interested in how this works - do they make new funds every year with different allocations, and adjust the old ones? Could someone buy into the 2045 fund in 2020? What if Vanguard isn't around in 2045?"

Every five or ten years they open a new fund. AFAIK, they're all open ended because they're designed to be the easy choice for people who may not have been planning for retirement at the right time. The greater concern isn't whether or not Vanguard isn't around (the law protects your account from Vanguard's creditors), but whether Social Security will raise the retirement age.

The funds themselves adjust over time according to a formula. You might check out the prospectus to see what that is. There is a slight risk, that if everyone follows this predictable formula, then demographics will determine a large part of demand for stocks and bonds. My assumption is that by organizing a chain of these retirement funds, that Vanguard is able to set up a market where everyone sells equity up the chain to save on brokerage costs. Try not to think too hard about Ponzi/MLM schemes on this one.
posted by pwnguin at 9:44 AM on October 21, 2010

Having that much money in checking makes me nervous - if you're going to get scammed/robbed from any of your bank accounts, it will probably be from checking since that is the one that is accessed the most. I'm far from an expert, but here's my plan. I would keep around 2x rent in checking, enough to cover monthly expenses plus a comfortable buffer you don't get ripped off by over draft fees. You can set up an emergency fund at ING or Ally or a local credit union - put enough money here that you could cover a minor medical emergency, car trouble, etc. These bank accounts give you some return but can be accessed for free within 1-2 days. Online CDs can have good deals too, and many only have minor fees - I think for the CD I have the penalty is maybe 3 months of interest. CDs are good for saving up for a planned purchase (ie you know you are going to buy a new car in 2 years). Any other money I would recommend investing either in index funds or a retirement account.
posted by fermezporte at 12:06 PM on October 21, 2010

A fantastic book that I first learned about investing from is The Only Investment Guide You'll Ever Need by Andrew Tobias. The title sounds bold, but the author is a very sensible guy, and he does recommend a few other investment books; his main point is just that the vast majority of investment books promising quick riches should be avoided.

In a nutshell, I'd definitely recommend that you stick with Index Funds. And Vanguard has a reputation for having some of the lowest fees and expense ratios. First and foremost, max out your Roth IRA every year for the tax benefits.

Stay away from individual stock picking and performance chasing; even the majority of professionals who study the ins and outs of stocks for a living have trouble consistently and successfully playing the stock market, so you'd have to be feeling pretty damn lucky to think you could do much better.
posted by Ryogen at 2:15 PM on October 21, 2010 [1 favorite]

I would shop around for a fee only financial planner. Then I would make a list of financial goals: retirement, emergency fund, buying a house (for example). Then I would ask the financial planner to develop an asset allocation for my goals. Then I would invest the money per the asset allocation given by the financial planner into low cost index funds so the money wouldn't get eaten by management fees.
posted by bananafish at 4:09 PM on October 21, 2010

Say you're in your mid-twenties and suddenly have around 50k you want to start investing/saving. How would you go about doing it?

I would call a pro and gladly pay their fees to avoid having to research investment products (yaawn!) or create a plan (rather than just fill in the variables and discuss.)
posted by desuetude at 9:31 PM on October 21, 2010

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