What should I do with my money?
October 30, 2007 7:09 AM   Subscribe

I am trying to figure out what to do with some money and I have often seen useful suggestions on MeFi, so I thought I'd ask.

Here is the deal: I am 22 years old, not entirely certain what I would like to do with my life working for a temp agency in Chicago making ~20/hr. My monthly expenses usually total somewhere around $1300/mo. including rent, insurance (car and health), though I have been known to be less than thrifty, but never to the point of going into debt or becoming broke. Otherwise, I have no debt and no big plans to acquire or do anything requiring me to spend crazy amounts of money, except possibly grad school. That being said I have recently been informed that there is a fairly substantial amount of money with my name on it --> ~$60,000 in two separate accounts. I am not concerned about tax consequences currently, but rather what to do with the money. I have looked elsewhere but it seems like everyone and their mom has an investment strategy website so it is difficult to determine what's legit. Any suggestions on the best way to become better educated, or simply what to do with the money would be greatly appreciated.
posted by bernsno to Work & Money (21 answers total) 13 users marked this as a favorite
Put it in an online high yield savings account for now (like at ING direct or HSBC direct). As you keep on researching and educating yourself, you'll be able to earn a bit of interest.

Personally, I would pay off any debt I have and save the rest in the high yield savings for retirement.
posted by spec80 at 7:12 AM on October 30, 2007

Start here.
posted by knave at 7:12 AM on October 30, 2007

ETFs are an easy way to match the stock market's performance if you want to just squirrel the money away for several years. Using it to pay for grad school might also be a good investment if you will end up with a marketable degree; in that case a simple savings account or CDs would be a safer short-term place to park you money (Look for something FDIC insured if you use it for school).
posted by TedW at 7:16 AM on October 30, 2007

Stick it in a high-yield savings account. Then research IRAs and max yours out. Maybe create a CD ladder, keeping enough money on hand to max out your IRA every year.
posted by Anonymous at 7:23 AM on October 30, 2007

The first thing you need to do is figure out what risk level you're comfortable with, which is to some extent associated to the question of what time frame you'll need the money in. If you're not going to touch the money for 10 years or more, it belongs mostly in stocks and/or mutual funds. The stock market offers the highest average rate of return long-term; the S&P 500 historically gives you an average of 9-10% annually on your investment. But it's important to keep in mind that that's an average--it could be down 30% in a single year, so it's not suitable for money you'll want to spend in the next few years (perhaps those grad school expenses?) That money belongs in more conservative but less risky investments, such as bonds or perhaps even a high-yield savings account. It's also wise to keep a good amount of money (I've heard six months' salary cited as a rule of thumb) easily accessible as an emergency fund, so that's probably a savings account as well.
posted by DevilsAdvocate at 7:24 AM on October 30, 2007

(On non-preview: ETFs go with stocks and mutual funds in the high-yield but high-risk category I mentioned above. Should have included those too.)
posted by DevilsAdvocate at 7:27 AM on October 30, 2007

Most mutual fund companies offer target date retirement funds. (Target 2030, or something like that). They reduce the amount of risk in the fund over time, by shifting your money from stocks to bonds.

If you stuck 30 or 40 grand in there, you'd have one hell of a head start on retirement. Compound interest will take care of the rest. Assuming an 8% return, which is well below the market average, that 40 grand would be worth well over a million by the time you're 65. That's not even counting any money you'll add to the account over time.
posted by chrisamiller at 7:34 AM on October 30, 2007 [1 favorite]

I would max out my yearly Roth IRA contribution, for sure.
posted by Eringatang at 7:36 AM on October 30, 2007

Assuming the cash is now in a traditional bank account, at the very least get that money asap into a high-interest savings account like Ing Direct (which I find reliable and easy to use).

Then start thinking about how to turn it into a retirement account which might have much higher returns over the long run (IRAs and the like) so that you don't have to work temp jobs still when you're 70. There are gobs of "Retirement/Investment for Dummies" types of books in the public library or the big box bookstores you can scan for more tips. Beware of investment advisors you have to pay a lot of money to for their services, some of them are seriously useless (or worse) in my (and friends') experience.
posted by aught at 7:37 AM on October 30, 2007

If you don't know anything about investing, find a good financial planner / money manager to invest it for you. They can describe your options and still give you the freedom to choose how adventuresome you want to be with the money.

Finding a good one is the hard part of course. Rule 1 is to avoid commission-based managers; you'll want someone who gets paid a percentage of your total account value at the end of the year - that way their only incentive is to grow your account, not trade a lot. Aside from that, get recommendations and interview them thoroughly.
posted by chundo at 7:50 AM on October 30, 2007

Best answer: I've given this advice before, (see also here and here) but its worth repeating:

In general, the important thing to do here is first figure out what your goals are.

1) What is your time horizon? Are you willing to invest it and let it sit until you retire? Will you want it for the down payment on a house that you live in, or a child's education, or just plain spending money at some point? If the former, consider a Roth IRA (which allows you to withdraw for a down payment on a first house or child's education); if the latter, you may want to put it into a more liquid investment.

2) How much risk can you tolerate? Are you willing to risk losing 25% of your investment if you might gain 25%? Or would you accept ensure a 5-10% gain in order to ensure that your losses are minimized? There are a number of online calculators at mutual fund firms and banks that allow you to calculate your tolerance for risk and volatility - and thus the kind of investment vehicles that are most appropriate for you.

3) How much time are you willing to devote to tracking and managing your investment? Are you willing to research and manage your investments for several hours a week, or do you just want a place to park your money and forget about it?

4) You may not be concerned about the tax consequences right now, but you should nevertheless consider them, as they may be substantial down the road. Putting at least some in a tax-sheltered account makes sense; the main question is how much you want to put in.

Finally, there are lots of places to educate yourself. Try the Motley Fool to start with.
posted by googly at 7:51 AM on October 30, 2007 [1 favorite]

Please consider socially responsible investing (Wikipedia link) (info for beginning individual investors on socialinvest.org).

By investing your money in public companies, you are giving them power. Please consider what kind of companies you want to have that power.
posted by amtho at 8:02 AM on October 30, 2007 [1 favorite]

I'd take out just enough to pay a financial adviser for a few hours of advice. It's important that you not pay them commission. I'd go to the meeting with a few long-term goals and an open mind.
posted by sondrialiac at 8:13 AM on October 30, 2007

Rereading my previous comment, I realized that point (1) is a bit poorly worded. To clarify:

- A Roth IRA is a good investment if you are willing to let the money sit until you retire, but might want to withdraw it for a first home or a child's education.

- A more liquid investment (savings account, CD, money market, conservative mutual fund, etc.) is more appropriate if you think that you will want to use it as spending money in the next few years.

Both these points bear on a fifth goal:

(5) How much liquidity will you require? "Liquidity" simply refers to how easily your investment can be translated into spendable cash. Real estate is a very illiquid asset, because in order to get access to your investment you either need to sell the property or take out a loan; a savings account is a very liquid asset, because you just have to withdraw the money to have access to it. Mutual funds are somewhere in between - there are liquid in the sense that you can easily sell them, but illiquid in the sense that, because of their volatility, you may have to sell them at a loss if you need the cash immediately.
posted by googly at 8:17 AM on October 30, 2007

All of these are good suggestions, and I'll pile one more on: maybe you want to donate it to another AskMe user currently saddled with debt? =)

Realistically if I were you and I had this windfall, I would first and foremost pay off my debts. I would use X-amount to buy something nice (eg: new TV or stereo or something) and invest a smaller percentage in something high-risk, maybe high-yield and very short term (eg: stocks) and the rest in much more conservative long-term growth. Truthfully, investing in precious metals is always a sure bet over the long term, and right now with currency fluctuation as it is gold/silver are incredibly stable. Of course, you won't get nearly the return on it as you would with some more savvy investing, but I'm minimizing risk and maximizing investment with this scenario. FWIW
posted by indiebass at 8:40 AM on October 30, 2007

Open a Roth IRA
- $4k for 2007
- $5k for 2008

Open a brokerage account
- $25k in an International ETF / Mutual Fund
- $25k in a Value ETF / Mutual Fund
- $21k in an ETF that tracks the Dow Jones or S&P 500
- $20k in 5 month Treasury note for house down payment in a few years (20% of $100k)
posted by charlesv at 8:59 AM on October 30, 2007

Just a clarification to googly's point--when people talk about IRAs, there are two different types (called traditional and ROTH). If you have a long-term horizon for this money, you definitely want to think hard about ways to shelter the gains you make on it from taxes. IRAs are a way to do that; when you take a chunk of money and tell the IRS that you've designated it IRA money, you stop having to pay interest on the earnings every year. This is a big deal because of compound interest / compound earnings--every little bit that gets siphoned off of your money every year is a bit that could have been compounded over and over and over in the future.

Both types of IRAs can only be funded up to the amount of earned income you have every year (to a maximum limit of about $4,000, although it changes every few years). Since you have job, you'd be fine.

If you put $4,000 into a traditional IRA, you get a break on paying income taxes this year on $4,000 of your income from your job (woo-hoo!). However, at the other end (when you're 65), you have to pay taxes on all of it (both the amount you originally put in plus all the earnings). In general, once you designate money as traditional IRA money, the IRS won't let you touch it again until you're 65 with a couple of exceptions: they'll let you take some out for the purchase of your first house, or for certain other qualified purposes.

If you put $4,000 into a Roth IRA, it's the same deal with sheltering your earnings on that money from taxes. However, you don't get a break on your current taxes (that is, it's considered funded with after-tax income), but on the other end, you don't have to pay taxes on either the amount you initially put in, or the amount that it's grown. That's a fantastic deal if you're more than 10 years away from retirement--you'll probably end better off with a Roth if you're younger. However, since the Roth is funded with after-tax income, it's also *much* more flexible with respect to withdrawals. You can withdraw the initial amount you put in whenever you want, for any reason, with no penalty from the IRS. (They don't let you put it back in, though, so if you take it out you lose the opportunity to continue that beautiful tax-free growth.) You're just not allowed to take out the earnings that the $4,000 has made while in the Roth before you turn 65 without penalty.

So, definitely put your money in a high-yield savings account while you figure this out. But I'd also strongly suggest putting $4,000 a year (or the maximum allowed each year) into a Roth--by doing so, you're not really losing the ability to take it back out if you decide you want to use it for something else. Since you're limited to $4,000 per year, every year you don't do this you're losing the opportunity to designate that $4,000 as tax-free. (All the other advice about ETFs and funds still holds true--designating money as IRA money doesn't mean you have to put it in a certain type of investment. Almost any investment you can make with regular dollars you can also make with IRA dollars. My Roth IRA is pretty much all in ETFs, and my brother's is in a very conservative money market fund, which is like a high-yield savings account, because he's thinking about taking it out to pay a downpayment on a house in the next few years.)
posted by iminurmefi at 9:45 AM on October 30, 2007

At your age and with low annual earnings the ROTH is a one-two punch. You're not missing much tax savings (since contribs aren't deductable) and you have a long time for those tax-free earnings to accrue.

Given the quantity and your life situation, I'd prioritize thusly:
  • Put 3-6 months of living expenses in a highly liquid place that makes decent interest (ING or Immigrant Direct)
  • Next, put in your maximum ROTH contribution for the year (4k this year)
  • Next, do you have access to a 401k at your job? If so, you can max out your contributions (at this point in the year you can probably just do 100% of your earnings through Dec 31) and pay yourself some salary out of that money to survive on. (Don't cheat and go over what you really make! We'll know!)
  • Next... much more nebulous.
Personally I'd dump the remainder in Vanguard funds, 50% to an international index, 50% to a domestic index. Maybe your capacity for risk is lower, in which can you can buy a ladder of CDs (some in 6mo, some 1y, some 18mo... etc) so you have some availability.

Personally I'd suggest that availability of that money is a bad thing. You want to be able to cope with emergencies but when you can get it the temptation to spend it is great. The only thing worse than squandering it all in a chunk is having it disappear in 10,000 pieces.
posted by phearlez at 10:06 AM on October 30, 2007

If you're thinking of going to grad school soon you may want to be cautious about "locking up" the money in a traditional IRA or a 401k (though if I understand the above you'd be OK w/ the Roth.
posted by Jahaza at 10:17 AM on October 30, 2007

I'd take out just enough to pay a financial adviser for a few hours of advice. It's important that you not pay them commission. I'd go to the meeting with a few long-term goals and an open mind.

This is very poor advice. Investment and financial planning is not a one-shot deal. You need to be constantly re-evaluating your needs and your investment performance. If you want to do things yourself, do them yourself. But if you use a financial advisor (which I strongly recommend), you should be prepared to view them as a partner to your financial success, and choose one that is compensated according to your success. Meeting once and then going your separates ways is a complete waste of money - their advice will be useless in three months' time.

The three main types of advisors you'll run into are:

1) Advisors that charge a flat fee per year, based on the number of meetings you want, etc. Places like Ameriprise do this; this ends up being about $500-1000/year regardless of your wealth.

2) Advisors that charge a per-transaction commission. This means that every time they make a trade with your account, they take $30 or $40.

3) Advisors that charge a yearly fee based on a percentage of the TOTAL VALUE of your account. This is usually about 1.5-2%.

#2 is just all kinds of bad, because it compensates them for doing a lot of activity, regardless of whether it benefits you. #1 is decent, and you'll generally get solid advice from them, but they have little economic incentive to really make your account perform.

In my opinion, #3 is where you want your advisor to be. As you grow in wealth, you will be paying more (although at around $50-60K, you'll only be paying about what a flat-fee advisor would charge) - but that makes growing your account that much more important to him. An advisor that is incentivized to watch your account closely can often make several percentage points of difference over a year, more than covering their fees.
posted by chundo at 2:10 PM on October 30, 2007 [1 favorite]

I'm less responsible than the other replies you've had so far - sorry! If it were me, and I didn't have anything holding me down, I'd get out of Chi-town, take a chunk of it and travel the cheaper parts of the world (Asia, South America - where ever interests you) and learn some stuff about myself, come back and get into grad school.

Retirement is important, but your early twenties are for adventure. IMHO.

Congrats on the windfall and good job on being responsible - don't fritter it, make it count.
posted by Craig at 2:45 PM on October 30, 2007

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