Small amount of money: stock, or cash?
January 12, 2007 8:19 AM   Subscribe

Is holding a small amount of money in the form of insurance stock a smart move for a mid-20s grad student?

I have the option of receiving about $1,800 from an inheritance in one of two forms: cash, or stock. While cash is always nice, it does have a way of going away fairly quickly, especially when one has a decent sized credit card bill to pay off. Stock, on the other hand, can be a very smart long-term investment, but is it worth it if the invested amount is so small?

A bit of background: I am in my mid twenties and am a grad-student type - hence, very little on-hand cash, a credit card bill to pay each month (never very high, but enough to constantly carry a balance), and a typical amount of student loan debt that I'll pay off in my mid thirties after my next degree. The stock is in a life insurance company that my great grandfather once had a policy with, and the stock has since been handed down to his daughter (my grandmother), and now rests with my father, who would like to pass it on to me. I wouldn't cash it in or plan on having any money any time soon to add to the investment, so I'd just be sitting on it for the long term. I can see this being a smart idea, but I can also see looking at this stock in ten, twenty, thirty years and realizing that the amount of money it has yielded me has been pretty pointless. On the other hand, if I take the cash, even if I set it aside in a savings account, it will likely end up going to an expense - classes, travel for my career, etc - within the next year or two.

Which is the smartest move? Help me, MeFites - I'm clueless!
posted by AthenaPolias to Work & Money (14 answers total) 1 user marked this as a favorite
 
Take the stock and you will have a little savings; you never know when you might need it. Like you say, you won't simply cash it and spend it. Take the cash and it will just end up as a higher grade of ramen being consumed. However, if you plan on making large sums upon graduation, maybe having cash now is preferable.
posted by caddis at 8:40 AM on January 12, 2007


Will the $1,800 pay off your credit card balance and give you enough left over to avoid carrying a balance in the future? If so, take the cash and cut up your card. It's in your long-term best interest to avoid paying high interest on your credit card. Odds are good that you'll pay more interest than you'd make on the stock.

If you decide you'd rather keep the money invested, don't leave it all in one stock. If the stock does well you could make a decent return, but if the stock does badly you could lose it all. Mutual funds exist specifically for the purpose of pooling risk, and are a much wiser investment than individual stocks. And, assuming you're annual income is at least equal to the amount of money that you plan to invest, there are ROTH IRA mutual funds that will give you tax benefits if you hold on to the money into retirement.

You'd be better off taking the cash and using it to invest in a ROTH IRA than leaving it alone in a single stock.
posted by croutonsupafreak at 8:44 AM on January 12, 2007


Smartest move depends on your personal preferences.

Paying down your credit card with the cash is mathematically equivalent to investing in a stock that provides a guaranteed, risk free return equal to your credit card interest rate. Because no stock provides a guaranteed risk free return (e.g. Enron), paying off credit cards with high interest rates is much better than investing in the stock market. Depending on your interest rate for your credit card, paying off your credit cards is the smartest thing you can do at this time. Take the cash and pay off the credit card. Then be vigilant with your spending don't let the balance creep back up if you can.


At the same time, if you'd mentally benefit from keeping the stock and thinking of your great grandfather, grandmother, etc everytime you check your balance, that might be worth more to you in happiness over the course of your life than $1,800 less in credit card debt.

If you want to keep it invested because you don't care about the amount of CC debt you currently have, and it would make you happy to have some investments growing and do some saving, then right now this instant go to vanguard.com and open a general account and buy $1,800 of the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) fund and then wait for your $1,800 to grow about 8.6% per year and when you retire in 40 years you'll have almost $50,000.
posted by pegstar at 9:05 AM on January 12, 2007


Listen to pegstar and croutonsupafreak. Having no credit card debt, ever, is the single most important thing you can do for your personal finances.

I'm not sure exactly what the law is, but you definitely want to check first on the tax consequences. The stock has probably appreciated a lot since your great-grandfather bought it. If the estate sells it and gives you cash, it may have to pay capital gains taxes on the sale. If you choose to receive the stock, you want to understand how the IRS will calculate taxes when you decide to sell it. Hopefully someone here has more details.
posted by fuzz at 9:42 AM on January 12, 2007


Short: Buy Vanguard Star (VGSTX) in a Roth IRA or put it in a high yield CD found at bankrate.com

Longer:
Let me see if I understand:

You are about to recieve $1,800 which you consider to be somewhat of an inheritance. You are yet to start out your career. Being young, you are still learning to spend responsibly. That's extra hard given your limited income.

You're concerned that if you put your money in a savings account or pay off your credit cards that it will be "gone" and that somehow the legacy of the money will be gone as well. You are considering leaving the money in stock because you will be less likely to spend it. Money has an emotional value. Too few realize that.

The mathematically smart thing to do is to pay off all your credit cards. Unless you can find an investment with higher returns than your credit card interest rate, there is no better mathematical move you can make than paying off your credit card balance.

Things aren't always that simple though. Again, money has an emotional value.

First off, DO NOT leave the money in the stock. Pegstar's comment referencing Enron is right on the money. Leaving the money in stock makes you very vulnerable to earning substandard returns at best or losing it all at worst.

If you wish to preserve that money for emotional reasons I suggest two possible courses of action:

But first, take $50 of that money and buy yourself a book or two to learn about how to prudently safeguard and grow your money. A good book will give you a greater return over your lifetime than just about any other investment. I recommend you try one of the following:

The Cofeehouse Investor
The Four Pillars of Investing
The Boglehead's Guid to Investing

These books use plain language to explain how to develop a low-maintenance investment portfolio and how to tell when someone is trying to sell you an investment product which is not in your best interest.

As for the rest of the money:

1) Go to bankrate.com and find a high yield 6 month or 1 year Certificate of Deposit. That will keep your money safe and earn you a small return while you decide what to do with it.

2) Consider starting a retirement fund. For tax reasons, you will most likely want to put your money in a Roth IRA which is a government endorsed retirement plan. Putting your money in a Roth IRA will give you substantial tax benefits. You will lose those benefits if you pull the money out to spend for non-retirement, non-house purchasing, purposes. Besides, knowing that this inheritance of sorts will provide for you in old age will give you peace of mind.

A Roth IRA is merely an investment plan. You can place many different types of investments in a Roth IRA. I recommend you buy a mutual fund named Vanguard Star (VGSTX). Vanguard is a highly respected company with an unsually ethical approach to investment. When you purchase a Vanguard fund you are also becoming a small owner in Vanguard. The concept is similar to being a member of a credit union. The end result is that Vanguard has more of a commitment to doing what's in your best interest than many other financial companies do.

Vanguard has a fund minimum of $3,000 except for the Star fund which has a $1,000 minimum. When your STAR fund exceeds $3,000 you can always transfer it to something else like the Total Market fund recommended above.

Email in profile. Feel free to write if you have questions.
posted by sleepyflywheel at 10:22 AM on January 12, 2007 [1 favorite]


Just to clarify: You can not put more money into an IRA than you earn in a year. So if you're living on student loans, an IRA is not an option.
posted by croutonsupafreak at 10:42 AM on January 12, 2007


One mistake some people make is to consider inherited stock as if it were some family heirloom like the china and silver that they should hold onto. The proper way to think about it is to imagine you inherited $1800 cash. Would your first choice be to buy the insurance stock? If not, then you should sell it.

Assuming you sell it, others have given you some good choices -- invest in an IRA if you can using a low cost index fund for the long run or pay off your credit card debt.
posted by JackFlash at 11:03 AM on January 12, 2007


Response by poster: Excellent and interesting answers so far, thanks so much everyone! Just a point of further clarification - I noted that I tend to carry a balance on my credit cards because it seemed important to mention, but I also left out that I have a fairly good-paying full time job, so I do have a source of income for the credit card payments to come from - i.e. I'm not desperate for cash to pay off tons of plastic debt. I'm simply conscious of the fact that if I were to get this money in cash I'd pay the bill down in one month, rather than over two or three, to be fiscally responsible (and fwiw, I have a low APR, so my finance charges are quite small).
posted by AthenaPolias at 12:17 PM on January 12, 2007


What's your low APR? Chances are it is still higher than your expected return from the stock (as someone mentioned, the market average is around 10% long-term). So it's better to just pay off the credit card debt immediately.

Since you have a decently paying job, take the money that you would have used to pay down the card (or as close to the $1,800 as possible) and put it in an IRA so it can grow tax-free. That way you use the inheritance to eliminate bad debt (credit card=compound interest working against you), as well as growing the money tax-free. I think Albert Einstein said that compound interest is the most powerful thing in the world, or something along those lines. Take away taxes, and that growth is even bigger.

What you actually choose to invest in, within the IRA, is a more complicated question. The easy answer is an index fund that mirrors the S&P 500 or the Russell 2000. The hard answer is "it depends." If you feel savvy enough to evaluate some stocks and find good bargains, you could get bigger returns albeit with more risk.
posted by bangitliketmac at 12:43 PM on January 12, 2007


It's a very good idea to have some money in a separate account that makes it (psychologically, at least) harder to spend. On the other hand, you don't want to have it all invested in the stock of one company.

For some simple advice on exactly how to invest it, see this.
posted by alms at 12:51 PM on January 12, 2007


if your credit card has a higher interest rate than you'd expect to make from an insurance stock (S&P Insurance Index for hurricane-free 2006 was 7.5 percent) then i'd knock down some of that credit card debt.
posted by Salvatorparadise at 1:14 PM on January 12, 2007


I'd just repeat that its very tough to beat a guaranteed interest rate (Credit Card) with a risky asset (Stocks, Bonds).


bangitliketmac has the right idea.



Also, please remember that carrying a balance on your credit card is
equivalent to spending money for the privilege of spending money.
posted by pegstar at 2:13 PM on January 12, 2007


this thread got weird in the middle. what's the big deal with vanguard? why did three posts in a row recommend it? i smell a fish. can someone please explain how this is legitimate?
posted by twistofrhyme at 3:10 PM on January 14, 2007


Two people recommended Vanguard, not three. One person just used the word a bunch of times. And they both have enough other answering history to suggest they're not Vanguard shills. One of the two posters returned to the thread with additional, non-Vanguard related advice later. Anyhow, the company has a pretty good reputation. Its funds are regularly featured in Money magazine, Fortune magazine, and the Wall Street Journal.
posted by croutonsupafreak at 4:45 PM on January 14, 2007


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