Fiscally Unsound Parent Offering Financial Advice to Offspring
January 3, 2021 5:41 PM   Subscribe

I have raised a saver, who saves all their money. They have $15,000 in the bank currently. What should they do with it?

For a variety of reasons I am not the best person to give financial advice- I am currently laid off, was a SAHM until I divorced, and started my career late in life. I am not where a 46 year old should be when it comes to retirement or other financial goals. However, I have raised a saver, who saves all their money. They have $15,000 in the bank currently. They are almost 20 years old, and have a good merit based financial aid package, and their dad is covering other college costs. What should they do with the $15,000 to make their money grow? Should they open a retirement account? If so, what kind? Should they look into CDs? If they went to a financial advisor, what should they look so they know the person is legit?
posted by momochan to Work & Money (23 answers total) 11 users marked this as a favorite
I find the r/personalfinance wiki "prime directive" flowchart for handling money very helpful.
posted by superna at 5:49 PM on January 3, 2021 [19 favorites]

Your kid should put $6000 in an IRA at Vanguard into a target retirement fund for 2020 contributions.

$7500 should go into a separate high yield (even though APYs are garbage right now) savings account as emergency funds and not be touched unless there's an emergency.

$1000 should go into another separate high yield savings account as a dream fund. Maybe your kid wants to travel after school. Maybe they have other goals that could become possible with cash. This is money toward those dreams.

$500 should stay in the checking account and should be encouraged toward occasional indulgences. Go ahead and buy that little wedge of fancy cheese. Buy that game you're interested in next time there's a Steam sale. Take a friend to lunch, your treat. I'm very responsible with money, always have been, and it took a long time in my life to find balance between saving and enjoying. No one needs a new BMW. But sometimes you really do need that cheese.
posted by phunniemee at 5:56 PM on January 3, 2021 [54 favorites]

Assuming they don't have any debt: they shouldn't change anything and should keep their money in savings.

When they're employed they should aggressively start saving for retirement, but at 19 almost 20, they should keep that money in savings for the time being. It's not going to grow, but it's zero risk, and 5 years from now it will give them a huge leg up on anything they decide to do (travel, grad school, move, pay off loans).

(I'm completely onboard with Prime Directive, Dave Ramsey, etc -- they changed my life. But at 19 almost 20, your kid can scrape by a few more years without making an IRA contribution.)
posted by so fucking future at 5:56 PM on January 3, 2021 [17 favorites]

Superna's link looks helpful at first glance. To elaborate a little:

Having all of that money in a checking account is probably not the best way to make it grow. That said, there are sensible reasons to have a fair amount of money in money in cash or very liquid assets (e.g., a savings account): Having a good chunk on hand when they graduate will be helpful for things like a deposit + first month's rent on an apartment or buying a car when they finish college, if they need to, if there's a little gap of time between them moving somewhere and the first paycheck showing up.

The interest rates on savings accounts, CDs, and short-term Treasuries is low now and likely to be low for awhile, so while they could shop around for the absolute best rates on these kinds of essentially-risk-free assets, it's probably not going to make a huge difference. (On the other hand, maybe it's fun!). If they want to have the money basically out of their hands but available to them when they graduate college, then you could tie it up in a CD or a treasury bond (e.g., through with the maturity right around when they graduate, and they'd probably get a slightly higher return than leaving it in a savings account. But we're ultimately not talking about very much money at a two-year horizon.

Over the long term, investing long-term in a stock index fund (e.g., through a Vanguard IRA) is probably the best way to go in terms of making it grow without gambling too much. Target date funds basically adjust the allocation of money over time from primarily stocks to a mix of stocks and bonds and then more bonds as that target date approaches. The reason for this is that stocks generally have a higher return on average, but are more volatile. So if you're willing to ride out the occasional bad year (e.g., a 2008), then you'll enjoy the gains from your 2019/2020s. But when you get closer to that target date, the assumption is that you'll want the money at the end of it and bonds make a promise about the nominal amount of dollars you get.

I was in a position similar to your kid's when I was in college due to a small inheritance and I basically kept it as cash. This was very helpful when I went back to school and needed to pay the equivalent of three month's rent in Boston. So I would say they probably aren't screwing up their financial future by holding it as cash right now, but it would also be pretty sensible to invest a chunk of it in something like an IRA and to start learning about different ways of saving than just keeping cash in a checking account.
posted by dismas at 6:11 PM on January 3, 2021 [8 favorites]

At that age, that amount of money will be incredibly helpful to keep as an "emergency" fund (but could include some nonessentials like travel or even eventually become part of a downpayment). I wouldn't lock it away into a registered retirement fund when there's a very good chance it'll be needed for a much more immediate expense. Definitely shop around to see the best interest rate you can get in a savings account (though they are all bad right now).

Speaking from experience as someone who had a similar amount of money (kept in a savings account) in the undergrad/grad school years - I found it very reassuring to know I could live a while without income or take care of anything unexpected that came up. Many of my peers weren't fortunate enough to have that cushion and I saw the stress that caused too.
posted by randomnity at 6:19 PM on January 3, 2021 [10 favorites]

Though they are a saver, earmarking a chunk for taking a few months to backpack across Europe or Southeast Asia or whatever is something that is pretty easy to do and comparatively cheap when you are young.

I am aware that this is not sensible, but I’m sitting here trending toward forty with a career and a marriage and a kid and while life is (in 2020 adjusted terms) great, the chances for taking a couple months off to knock around in the next several decades are...slim.
posted by rockindata at 6:24 PM on January 3, 2021 [6 favorites]

Saving for retirement at 20 when not employed is pre-Millenial advice. Nobody who is 20 should be locking funds in a retirement account. Your Gen Z offspring should be saving for a home downpayment. A high-yield savings account isn't going to do much at current rates, but mortgage interest rates are correspondingly low so...
posted by DarlingBri at 6:46 PM on January 3, 2021 [20 favorites]

At that age I also think that keeping it in a savings account as a bit of an emergency fund is totally reasonable. There are a lot of expenses that can pop up around that age with renting, moving, maybe not getting a job straight out of school, etc. I’m also a saver, but only started actually investing once I was reasonably confident that I wouldn’t need that particular money for a couple of years. In the end a lot of that early savings went into the down payment for my house, moving expenses, (modest) wedding costs, handling paycheck errors that took a few months to be resolved, and helping out family, and I was glad that it was readily available.
posted by tchemgrrl at 6:48 PM on January 3, 2021 [5 favorites]

Is this earned income? I believe it would have to be for a traditional or Roth IRA.

You say they are a saver, but are they also a budgeter/goal-setter? It took me a long time to get in the habit, and I wish I'd learned how in college. You don't need a financial advisor at this stage, but there are good online sources like r/personalfinance or the Bogleheads forum.

Phunniemee's breakdown is great, but be aware that savings rates and CDs are going to be low for the next 5+ years; you'll be losing in real terms if you leave it there. Consider putting a few thousand into a brokerage account (I have used Fidelity for 10+ years and have been happy with them; Vanguard's another option) with a generic ETF that tracks the market will do better. If they do need it sooner than expected, they can sell.

If your kid has a cause or organization that is meaningful to them, consider adding a donation into their budget. It's a really good feeling. CharityNavigator will help them verify that the charity is fiscally responsible.
posted by basalganglia at 6:51 PM on January 3, 2021 [5 favorites]

I would argue that the skills that saved them the $15k are the important part, and the $15k itself is just gravy. If they’re off to college, keeping it in savings for emergency funds/future travel/post college expenses like a car, security deposit, etc. are the way to go.
posted by stoneandstar at 6:56 PM on January 3, 2021 [12 favorites]

I agree that saving for retirement shouldn't be the focus. There's a lot your child might want to do first: a big trip at the end of college; buy a house; buy a car; be okay in case of emergency.
posted by bluedaisy at 6:58 PM on January 3, 2021 [4 favorites]

I would avoid the usual investments for the time being. With 350,000 dead already and surely more lockdowns coming, it seems ridiculous to expect that the stock market won't plummet at some point. At this age, it might be safer to wait a while with the money more liquid than to risk losing it all and having to start over again. But I tend to be pretty risk averse. Now is a good time for them to start researching how finances work, and to think about what they are comfortable with in terms of what they do with money.
posted by rikschell at 7:29 PM on January 3, 2021 [2 favorites]

Roth IRAs have the benefit that any contribution amount itself can be withdrawn for no penalty, so if it’s possible that’s the direction I would go.

What can’t be withdrawn is earnings on those contributions— for that you need a qualified expense (usually, retirement; but up to 10k of earnings can be withdrawn for a house down payment, for example; I think there are also some health expenses that qualify).

Roths are post-tax vehicles, but the contribution limit for a year is set by your taxable income. So if your kid had a part time job for part of the year, they might still be able to contribute. The max contribution for anyone is 6k/year, but your kid could only contribute that much if they made at least 6k in taxable income. If they made 4K, they can only contribute 4k. (There’s also a phase out if you make 6 figures but I don’t think that will affect your kid yet).

Also contributions for 2020 can be made until April 15, so if your kid does have taxable 2020 income, they could contribute for 2020 still. For 2021 they could again contribute up to 6k (or their taxable income if it’s smaller).

As for what to do with the money once it is inside the Roth, if that’s what they get, that’s a rougher question. Some common advice is a targeted retirement date mutual fund; other possibilities include index funds (S&P 500 index funds are a popular choice).

One last comment about Roths: they are a good tax advantaged retirement vehicle for the young, but become less advantageous as you get older. Why? Well, most middle-age people earn more, so their last dollars are taxed at a higher rate. Roths are taxed when you contribute (unlike regular IRAs which are taxed when you withdraw) so you want to contribute to them when you have the lowest tax rate possible, and for them to be useful at all, you want to contribute only when your current tax rate is lower than what your retired tax rate will be. True for most twenty year olds, less true for 40 or 50 year olds.
posted by nat at 7:32 PM on January 3, 2021 [4 favorites]

I mean, what kind of job prospects does your kid have? If they're going to graduate into a $100k+ career with no debt, hell yeah put that into a Roth while they still qualify for a Roth. As nat says, you can take it out again.

[source: my own regrets]
posted by batter_my_heart at 8:35 PM on January 3, 2021 [1 favorite]

Frugality is a tremendous tool, and delaying gratification is a superpower. Your child seems to have developed those. Good for them, and good for you!

Someone with those tools will find their own way just fine, though, imho. So while the comments above already offer the right answers, I propose that spending it, NOT saving it, in order to maximize future earnings is a smarter play -- and spending on something bigger than a car to get to work, bigger than clothes for interviews. More like taking that unpaid summer internship, attending those conferences abroad, paying tuition for extra classes, extra tools, books, passion projects.

Paying rent at 22 with this money, in order to hold the dream job, saying yes to office happy hours when you're the lean new hire -- these things could prove golden. A couple percent here or there, heck, even doubling by lucky investing... is nothing next to making salary jumps later.

But I might also push to make sure your child spends on life itself. What money is for! Their $15k now, their $150k in a decade? How will they know how to spend it well -- the "fruits" of frugality -- if they haven't practiced: travel, gift giving, hobbies, romance, study, charity, friendships.

You sound rich in life experiences, while your child is rich in money. Perhaps teach them your ways! It's better to have a full soul and an empty bank account than vice versa, after all.

Maybe they do gather the rosebuds and I'm just projecting! In that case: Don't go to financial advisors; just read bogleheads or r/personalfinance.
posted by mahorn at 8:51 PM on January 3, 2021 [11 favorites]

Nthing that IRA funds have to be earned in the year that the IRA is for (barring any extensions this year, the'll have up until April 16 to create one for last year). If they qualify for an IRA, they would also almost certainly qualify for the Earned Income Credit, which they should take advantage of.

In general, unless the dad has indicated that he'll help them out with things like first apartments after college and such, I'd encourage them to look at short term investments that are unlikely to lose money over the next few years (at the cost of not having as much potential return), because the quality of life benefits of not having to scrimp in very early adulthood can pay better benefits over time than long term savings.

If they went to a financial advisor, what should they look so they know the person is legit?

They don't need one at this time. But if at some point they do want to go to a financial advisor, they should look for one that charges an hourly fee (and doesn't get a commission from anything they recommend and explicitly has a fiduciary duty to their clients, which if you're not familiar with the term, means that their recommendations have to be in the client's best interests. Crazy that that isn't the default, right?
posted by Candleman at 10:04 PM on January 3, 2021 [4 favorites]

Your kid is off to a great start! Given the combination of their age/life stage and possible economic instability ahead, their top priority should be to maximize flexibility, resilience, and quality of life over the next 1-5 years. In plain terms, that means leaving most of the money in cash and avoiding investment vehicles that have early withdrawal penalties or are subject to significant market volatility. This will allow your child to do things like pay the deposit and moving expenses for an apartment, hold out for better work opportunities, absorb an unexpected expense without having to take on debt, buy higher-priced but well made clothing and housewares instead of having to make do with cheap crap, etc.
  • Your child does not need a financial advisor at this point.
  • Avoid CDs, the interest rates are barely better than plain savings accounts but are less flexible. Not worthwhile unless you have a LOT of money you don't mind locking up for a while. Instead, look for an FDIC-insured money market account. The interest rate will be a little better and your kid can still protect and access their funds as needed.
  • Do not put $6K into a retirement account, that is too much money to lock up at this point. However, it's good to build the habit of contributing to retirement funds regularly. Assuming they are eligible, $1K-$2K into an IRA would be a reasonable choice.
  • DO NOT try to time the stock market either up or down. Is a market correction coming soonish? Maybe. Does anyone know exactly when that will be? Absolutely not. The stock market is not a direct indicator of societal health or the prosperity of your average household. If your kid is interested in investing and willing to tolerate some risk, again, $1K-$2K or so is reasonable here.
  • Put about $1K aside as a post-graduation "fun money" or reward fund. Your kid is on track to reach a big life milestone and has been saving money diligently, they should feel comfortable rewarding themself for their achievement. This money could go to travel, spending time learning something fun that's completely different from their college major, dinner with a friend or SO at a really high-end restaurant (post-pandemic of course), buying nice hobby equipment, whatever is most meaningful to them.

posted by 4rtemis at 4:53 AM on January 4, 2021 [2 favorites]

This is going to echo a lot of the great advice above, but I found myself in a similar position in college and on track to a well-paying job. What I ultimately ended up doing was:

- Putting most of it into a savings account with better-than-average but still not great returns (American Express usually has pretty good rates).
- Spending 2-3k on a 2 month summer-after-college backpacking trip across Asia.
- Floating relocation expenses post-graduation. I think I ended up needing roughly 5k for a cross-country move, temporary housing in new city, flight home to see my parents before I moved, security deposit on a new apartment, car registration, ikea furniture for my new room, etc. A lot of it was money I eventually got back, but it took 2-4 weeks before my first paycheck showed up, the person who took over my room in college town was slow paying me back that security deposit so I needed to be able to cover two simultaneously, and it took a couple of months before work reimbursed me for some of those moving costs. My credit limit was too low to charge all of it, so I needed cash to cover most of the costs.

If I got a time machine to tell myself what to do about retirement saving, it would be to get it all set up in the first month of my post-college job. I think it took me a year until I finally set it all up correctly because there was so much other stuff going on at the time. I don't feel in retrospect that I should have set it up while I was still in college - there was just to much ambiguity about where I would end up, if I would be headed to grad school or into industry, and a bunch of other things where having the optionality of cash was much more useful.
posted by A Blue Moon at 7:19 AM on January 4, 2021 [1 favorite]

A lot depends on details that we don't have. At least, they should put it in a high yield savings account since its not needed immediately. Beyond that, what are their career prospects? Do they expect to go to graduate school? Do they have a significant safety net beyond this money? Do they have other expected expenses or debts? Do they have dreams with costs?

The specific advice in this thread is a little too specific, imo. What are their medium and long term goals? They are young and there's nothing wrong with sitting on the money in a high yield savings account until their future is a little more in focus, if it isn't quite yet. An enviable position!
posted by Kwine at 8:39 AM on January 4, 2021 [1 favorite]

Start a small ROTH IRA, and when they land a job, auto-deposit into it.
posted by wenestvedt at 1:55 PM on January 4, 2021

Response by poster: Thank you everyone for your good advice, I learned a lot, and will pass it on. To follow up on some questions, this is money my child has yearned over a number of years, but also got a boost from pandemic unemployment because their summer job was canceled. Their father covers almost all living expenses, and will most likely continue to cover those costs, and also has provided a car etc. Kid will most likely end up going to graduate school, and will also most likely spend some time traveling once the pandemic is over, but they will also get money from family/family friends for both of those things too. Not clear on the career, but is currently studying computer science and art.
posted by momochan at 2:11 PM on January 4, 2021

No one needs a new BMW. But sometimes you really do need that cheese.

Oh and to circle back to this because I keep thinking about it and it's so well-favorited, these are actually both wants and here are some things to say about either of them that could be reasonable depending on the rest of your circumstances:

"I want some fancy cheese and in my financial position, I don't have to plan for it, I can just get it"
"I want a new BMW and in my financial position, I don't have to plan for it, I can just get it"
"I want some fancy cheese, and I want to figure out how to budget for it"
"I want a new BMW, and I want to figure out how to budget for it"
"I want some fancy cheese, but not enough to figure out how to budget for it"
"I want a new BMW, but not enough to figure out how to budget for it"

Here are some unreasonable things to say about them:

"I need a new BMW"
"I need some fancy cheese"

It's really important to distinguish between wants and needs when you are budgeting (It's important to make a budget if you're not making a budget!). It's also ok to prioritize wants that are more expensive and make a plan to accommodate getting them. It's even ok to prioritize wants that are out of step with the prevailing local culture!
posted by Kwine at 8:06 AM on January 5, 2021 [2 favorites]

I'd put $6000 in a Vanguard Roth IRA. Allocate it to an index fund; VTSAX, an index that follows the total stock market index, is a good start. You could also use a targeted retirement fund. Index funds are a safe bet, because if the entire US economy craters and never recovers, we've got bigger problems, and $6000 won't help all that much.

Don't listen to anyone telling you "the stock market is going to drop, don't invest"—timing the market is a fool's errand. The name of the game is to get in early, contribute regularly, and let it ride for the long term—through good and bad markets.

Why tie up $6000 right now, when your kid won't need it for 45 years?

Because if your kid's IRA averages a modest 6% rate of return over the next 45 years, and they contribute $6000 every year, in 45 years, that account will be sitting at $1.35 million: $270k of that will be the contributions, and $1.08 million will be the interest gained.

Since it's a Roth IRA, that money will be able to be withdrawn tax-free in retirement. Plus, the contributions (not the gains) can be withdrawn prior to that penalty-free, in case of an emergency.

I wish I had started my Roth IRA at 20!

Keep the rest of the money in a high-yield savings account.
posted by vitout at 9:18 AM on January 5, 2021 [1 favorite]

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