What would you do with $2k for your kid?
March 2, 2022 1:34 PM Subscribe
Apparently my son (18) has a little bit of money saved up that he doesn't want to spend frivolously. It's not a lot, only about $2k, but it's a lot to him. He wants to "put it away" until he decides he needs it, but he would like if it grew a little bit while it sat there....
So he doesn't really need the money right now and wants to put it somewhere where it'll make him a bit of money. The hope is that he won't touch it for many many many years, but at 18.. who knows? Savings accounts pay miserable interest, crypto is too volatile...
Stocks? Funds? CDs? something like bettermint? It's not like he needs immediate access to the money at any time, but he'd like to be able to add to the balance easily, and he'd like to be as hands off as possible, and he'd like to be able to get the cash back in a few days if he runs into a bind.
Anyone have any good ideas?
So he doesn't really need the money right now and wants to put it somewhere where it'll make him a bit of money. The hope is that he won't touch it for many many many years, but at 18.. who knows? Savings accounts pay miserable interest, crypto is too volatile...
Stocks? Funds? CDs? something like bettermint? It's not like he needs immediate access to the money at any time, but he'd like to be able to add to the balance easily, and he'd like to be as hands off as possible, and he'd like to be able to get the cash back in a few days if he runs into a bind.
Anyone have any good ideas?
I'd not recommend a money market or savings account. I earned a whole dollar in interest in my savings account last year, and less than $100 in my money market account.
posted by The_Vegetables at 1:49 PM on March 2, 2022
posted by The_Vegetables at 1:49 PM on March 2, 2022
Yep, a Roth IRA is awesome. Invest in a Vanguard index fund, pegged to his retirement age.
posted by wenestvedt at 1:50 PM on March 2, 2022 [1 favorite]
posted by wenestvedt at 1:50 PM on March 2, 2022 [1 favorite]
Nthing Roth IRA, but he can only do it if he has earned at least that amount in the year he contributes. If he has some earned income but falls short of $2k, I suppose he could spread out the contributions over a couple of years.
posted by redlines at 1:53 PM on March 2, 2022 [7 favorites]
posted by redlines at 1:53 PM on March 2, 2022 [7 favorites]
Agreeing with the others: money market account if he wants it as fluid as possible, but the advantage of the Roth that hasn't been mentioned yet is that you can withdraw your earnings free of taxes and penalty as well if you're a first-time homebuyer (up to $10K, I think). So if he thinks he wants to save for a future house, that's a good way to go.
posted by telophase at 1:53 PM on March 2, 2022
posted by telophase at 1:53 PM on March 2, 2022
I would put exactly half into a safe savings account (with interest re-invested) and the other half into some kind of index tracker. Then after 3 or 5 years or whenever you can compare the returns, which is a good learning opportunity.
posted by Lanark at 1:59 PM on March 2, 2022 [1 favorite]
posted by Lanark at 1:59 PM on March 2, 2022 [1 favorite]
He can't contribute more to a Roth IRA than he earned in that year.
If he thinks he can stand to wait one (1) year without touching the money, he can buy I-bonds through Treasury Direct. They're at about 7% right now; although they will reset halfway through to a new rate, the rate is pegged to inflation so is unlikely to drop dramatically over that short period of time. You can't withdraw for one year and if you withdraw before five you lose the last three months of interest, but it will still significantly outperform a savings account over that time period, while still being very secure. At that age I suspect he's going to want that money for something in the short-medium run, so it might be nice to arrange for him a relatively easy first investing experience.
posted by praemunire at 2:29 PM on March 2, 2022 [5 favorites]
If he thinks he can stand to wait one (1) year without touching the money, he can buy I-bonds through Treasury Direct. They're at about 7% right now; although they will reset halfway through to a new rate, the rate is pegged to inflation so is unlikely to drop dramatically over that short period of time. You can't withdraw for one year and if you withdraw before five you lose the last three months of interest, but it will still significantly outperform a savings account over that time period, while still being very secure. At that age I suspect he's going to want that money for something in the short-medium run, so it might be nice to arrange for him a relatively easy first investing experience.
posted by praemunire at 2:29 PM on March 2, 2022 [5 favorites]
Kid BlahLaLa just put $2000 into a Vanguard Target Fund matched to the year he will turn 65. It will presumably be a lot more money then. (I don't know shit about finance stuff but this is what our financial planner told him would be the best use of his money.)
posted by BlahLaLa at 2:45 PM on March 2, 2022 [2 favorites]
posted by BlahLaLa at 2:45 PM on March 2, 2022 [2 favorites]
Nthing that if he's eligible to put it into a Roth IRA; that's the best spot with one exception. If he thinks there's any strong chance he might want to use the money in the next few years, he should consider iBonds, which you can't buy in IRAs. If you're not familiar, the TLDR is that they'll basically hold their value against inflation. Breaking even might sound bad compared to making money but other safe ways of storing cash such that they won't potentially lose money have such low interest rates that when you factor in inflation, you are losing money. My "good" savings account pays 0.5% interest, for example.
You can't cash them out for a year and there's a minor penalty if you cash them out between 1 and 5 years, but other than those limitations they make a good place to park emergency savings.
If he is willing to commit to longer term savings or embraces risk, I'd put it into VTI/VTSAX(if you're willing to bump him up to $3K) or VOO/VFIAX (same) or their Fidelity/Schwab equivalents. Bond returns are so low right now and he's young enough that I wouldn't bother with a target date fund. If he's going to take a risk with it, he should just go for it and hope for the maximum payout (or split some of it into iBonds). Over time, in the context of the last decade - past performance doesn't guarantee repeat performance - the difference between VTI and the 2050 target date fund is big.
However, I'd caution that the stock market could easily lose money or be stagnant for the next few years. We've been overdue for a correction for a while and even before the current Ukrainian situation, there's been lots of concern that the next few years will be dicey. With everything going on right now, I'd say that people that can't afford to lose money in the short term shouldn't put it in the market.
Something like buying a used car or setting up an apartment nicely could turn out to be very important to him in a few years. This can be mitigated if you can and will help him out with cash if the market goes down.
posted by Candleman at 3:18 PM on March 2, 2022 [5 favorites]
You can't cash them out for a year and there's a minor penalty if you cash them out between 1 and 5 years, but other than those limitations they make a good place to park emergency savings.
If he is willing to commit to longer term savings or embraces risk, I'd put it into VTI/VTSAX(if you're willing to bump him up to $3K) or VOO/VFIAX (same) or their Fidelity/Schwab equivalents. Bond returns are so low right now and he's young enough that I wouldn't bother with a target date fund. If he's going to take a risk with it, he should just go for it and hope for the maximum payout (or split some of it into iBonds). Over time, in the context of the last decade - past performance doesn't guarantee repeat performance - the difference between VTI and the 2050 target date fund is big.
However, I'd caution that the stock market could easily lose money or be stagnant for the next few years. We've been overdue for a correction for a while and even before the current Ukrainian situation, there's been lots of concern that the next few years will be dicey. With everything going on right now, I'd say that people that can't afford to lose money in the short term shouldn't put it in the market.
Something like buying a used car or setting up an apartment nicely could turn out to be very important to him in a few years. This can be mitigated if you can and will help him out with cash if the market goes down.
posted by Candleman at 3:18 PM on March 2, 2022 [5 favorites]
(or the 2060 target date fund vs. VTI, for comparison's sake). There's not data on the 2065 fund yet.
posted by Candleman at 3:23 PM on March 2, 2022
posted by Candleman at 3:23 PM on March 2, 2022
Clarification - "I'd say that people that can't afford to lose money in the short term shouldn't put it in the market" - this is always true, but extra, extra true at this time.
posted by Candleman at 3:26 PM on March 2, 2022
posted by Candleman at 3:26 PM on March 2, 2022
Why not rolling CDs?
Because 5 year CDs are paying 1.3% and core average inflation for the past decade is 2.21%.
posted by Candleman at 3:30 PM on March 2, 2022 [5 favorites]
Because 5 year CDs are paying 1.3% and core average inflation for the past decade is 2.21%.
posted by Candleman at 3:30 PM on March 2, 2022 [5 favorites]
+1 to The_Vegetables. Vanguard lets you invest in a "targeted retirement" fund based on an expected retirement in (say) 2070, and it will automatically rebalance its mix to reduce your risk exposure as you age.
posted by adamrice at 3:31 PM on March 2, 2022
posted by adamrice at 3:31 PM on March 2, 2022
At the current rate of inflation, Treasury Inflation-Protected Securities (aka TIPS) might be worth consideration.
posted by Nerd of the North at 4:18 PM on March 2, 2022 [1 favorite]
posted by Nerd of the North at 4:18 PM on March 2, 2022 [1 favorite]
If he files taxes for the year he opens the Roth IRA (he can open the Roth for 2021 until April 18th), and he did not make above a certain amount in 2021 (assuming he opens it for 2021 not 2022), he can file for a saver's credit too, and then throw that in his next year's Roth IRA
posted by erattacorrige at 7:07 PM on March 2, 2022 [3 favorites]
posted by erattacorrige at 7:07 PM on March 2, 2022 [3 favorites]
You can't cash them out for a year and there's a minor penalty if you cash them out between 1 and 5 years,
A minor penalty for cashing your own money out between 1-5 years? That's terrible. Do not invest in these unless he's not going to use his own money for far longer than that.
posted by The_Vegetables at 7:57 AM on March 3, 2022
A minor penalty for cashing your own money out between 1-5 years? That's terrible. Do not invest in these unless he's not going to use his own money for far longer than that.
posted by The_Vegetables at 7:57 AM on March 3, 2022
A minor penalty for cashing your own money out between 1-5 years? That's terrible.
Would you rather earn ~2-7% interest and forfeit 3 months of interest if you cash it out early or earn 0.5% interest and have no penalty?
posted by Candleman at 8:47 AM on March 3, 2022 [3 favorites]
Would you rather earn ~2-7% interest and forfeit 3 months of interest if you cash it out early or earn 0.5% interest and have no penalty?
posted by Candleman at 8:47 AM on March 3, 2022 [3 favorites]
Yeah, the math on that one is pretty simple, at least until the day comes when we're seeing 5% high-yield savings accounts again.
posted by praemunire at 1:28 PM on March 3, 2022 [1 favorite]
posted by praemunire at 1:28 PM on March 3, 2022 [1 favorite]
Yeah, invest it in a stock index fund or a target-date fund as described above.
But I would also suggest using the "dollar cost averaging" technique when making that investment, and thereby teach him a whole other thing about investing. Instead of investing that entire $2000 at once, invest $200 every month for the next 10 months (or $400 for the next 5 months, whatever). This means that you won't happen upon the bad luck of dumping that entire $2000 lump sum in on a day when the market was abnormally high, settling back down the next day and leaving you a couple percent down right out of the gate. Yeah, it does mean that you have to do the purchase steps 5 times (or 10 times) instead of just once, but OK now you'll really learn how to do it :)
Dollar cost averaging is also what you are effectively doing when you set up a savings plan to invest a little bit in the market every paycheck, no matter what the market looks like. So he will get to learn that now, and be ready with that understanding a few years from now when he starts earning pay beyond a subsistence wage.
posted by intermod at 8:22 PM on March 3, 2022
But I would also suggest using the "dollar cost averaging" technique when making that investment, and thereby teach him a whole other thing about investing. Instead of investing that entire $2000 at once, invest $200 every month for the next 10 months (or $400 for the next 5 months, whatever). This means that you won't happen upon the bad luck of dumping that entire $2000 lump sum in on a day when the market was abnormally high, settling back down the next day and leaving you a couple percent down right out of the gate. Yeah, it does mean that you have to do the purchase steps 5 times (or 10 times) instead of just once, but OK now you'll really learn how to do it :)
Dollar cost averaging is also what you are effectively doing when you set up a savings plan to invest a little bit in the market every paycheck, no matter what the market looks like. So he will get to learn that now, and be ready with that understanding a few years from now when he starts earning pay beyond a subsistence wage.
posted by intermod at 8:22 PM on March 3, 2022
Learning is better than investing.
Work with him to research 10 potential investments:
- crypto
- company stocks (sure, why not GME?)
- bonds
- mutual funds
- gold
- a donation into a local charitable organization
- buying plants and planting them in a public space
- a "how to" book
- collectables etc.
Set up a way to track the "Value" of each investment over time.
posted by rebent at 11:02 AM on March 4, 2022
Work with him to research 10 potential investments:
- crypto
- company stocks (sure, why not GME?)
- bonds
- mutual funds
- gold
- a donation into a local charitable organization
- buying plants and planting them in a public space
- a "how to" book
- collectables etc.
Set up a way to track the "Value" of each investment over time.
posted by rebent at 11:02 AM on March 4, 2022
This thread is closed to new comments.
If you are looking for an exact fund through Vanguard, I like VTSMX, but there are tons of choices. Fidelity and other brokers are also options, so you are just looking for one you like the best.
posted by The_Vegetables at 1:47 PM on March 2, 2022 [20 favorites]