wtf do I do with all this money

March 21, 2008 3:22 PM

Strange things happen to me regularly, and the last one left me with about $3000. I'm only 21, have no consumer debt and don't need to use any of it. I want to put it away, but I have no idea how.

I know there have been a thousand threads about investing, but being a liberal arts major I'm a little overwhelmed by it all. I've always wanted to learn how to invest intelligently but I've never had any capital to start out with, so this seems like a good time to start.

I don't want to put this all in a retirement fund I can't touch until I'm fifty, because I'm young and reckless and that does me about as much good as lighting it on fire. I'm looking for short-term (5-10 year) returns. Where should I start?

posted by borkingchikapa to Work & Money (20 answers total)

The market is terrifying, and you want to be able to access it soon if you need to. It sounds Paranoid Grandmother Afraid of Them Banks-y, but I'd just stick it in a savings account with the highest return rate I could find, and move it around between banks every couple of years as necessary. It'll probably be an online bank, but YMMV.
posted by universal_qlc at 3:35 PM on March 21, 2008 [1 favorite]

Uh, where by "Banks" I mean "all these newfangled means for saving money with bizarro terms I don't understand."
posted by universal_qlc at 3:37 PM on March 21, 2008

Have you started your IRA yet? If not, 21 is a pretty damn good time to do so. That's what I'd suggest.
posted by Justinian at 3:42 PM on March 21, 2008

I would like to disabuse you of the notion that putting it into a retirement account does you as much good as lighting it on fire. Let's run some round numbers. How about you keep $1,000 to blow on snorting cocaine off of a hooker's @$$, and then stick the other $2,000 into a Roth IRA. (The max you can put into a Roth in 2008 is $4,000 - assuming you have at least $4,000 of earned income). Now, because it's a Roth IRA, it is post-tax dollars which means you will never have to pay taxes on the proceeds. And let's say you put it in a nice, vanilla no load index fund with very low management costs, and let's say you make the long term market average of about 12%. The rule of 72 tells us how long it will take your principal to double, just divide 72 by the interest rate and that gives you the number of years. So that money will double, on average, about every six years. You are 21 years old.

Age 21 - $2,000
Age 27 - $4,000
Age 33 - $8,000
Age 39 - $16,000
Age 45 - $32,000
Age 51 - $64,000
Age 57 - $128,000
Age 63 - $256,000

In other words, that two thousand dollars at age 21 is worth about a quarter of a million dollars at retirement, all tax free, all without ever saving another penny. But what if you skip the cocaine and hooker and put in all $3,000?

Age 21 - $3,000
Age 27 - $6,000
Age 33 - $12,000
Age 39 - $24,000
Age 45 - $48,000
Age 51 - $96,000
Age 57 - $192,000
Age 63 - $384,000

You are young, and time is absolutely your best friend when it comes to long term investing. If I were you I would keep a small portion of that money to blow on fun stuff since it is a windfall, and I would take full advantage of time to turn the rest into a goldmine. Take it from a forty year old guy - it seems like only a few days ago that I was 21.
posted by Lokheed at 3:45 PM on March 21, 2008 [12 favorites]

Sod being responsible, its $3,000, pop it in a bank account (just a normal savings account) and use it for an awesome trip once you've graduated. Or for moving city for a job, or towards post-grad (it you want to be a little responsible).

There are so many things coming your way in the next couple of years that it actually is probably not worth doing anything complicated, the marginal difference will be small. And you'll appreciate having that little cushion.
posted by cluck at 3:52 PM on March 21, 2008

In other words, that two thousand dollars at age 21 is worth about a quarter of a million dollars at retirement, all tax free, all without ever saving another penny. But what if you skip the cocaine and hooker and put in all $3,000?

Yeah, but by the time he's 63, inflation will have eaten away a lot of that money, nocking the effective interest rate down too just 8.3% or so.
posted by delmoi at 3:55 PM on March 21, 2008

If you're looking for short-term like that, I'd put it in a CD, like this one.
posted by Maia at 3:56 PM on March 21, 2008

Lokheed: A reasonable rate of return after inflation is closer to 7% (Here is an article claiming 7.2% for the US market over 80 years). Assuming an annual return of 7% (leaving the 0.2% for management and other fees), $2000 will be $34289 of today's dollars in 42 years. Not bad, but a far cry from a quarter of a million dollars.

You have a couple good choices if you want to keep things very simple: You can put it in a high-interest savings account or term deposit and earn a bit of return after inflation and have your money be very safe, or you can invest in a ETF (Exchange Traded Fund) that tracks a market index and potentially earn higher returns, but at the cost of greater risk. To buy an ETF, you'll need a brokerage account, but that shouldn't be too difficult.
posted by ssg at 4:09 PM on March 21, 2008 [1 favorite]

First if you're going to put it into a bank, pick one with a good rate. ING (on-line bank) has the advantage of good rates and *relatively* easy access to your funds if you need some (at least easier than a Cert. of Deposit). Also, getting in the habit of keeping your extra savings in a place at least a little inconvenient to get to is your friend, avoids impulse spending (unless you misuse the plastic).

Second, if your mind set is that you're young and don't really need the money (windfall and all) and tax avoidance is not a concern, then you can make some speculative investments in a couple different stocks (i.e., try to figure out what stocks are low now but will not be in the future, based on changes in society or technology or company management). There are a few possible results:

1. Both stocks tank
2. Both stocks do well
3. One stock does well and the other tanks
4. One stock does well, the other languishes or starts to decline, in which case you can move it to a Savings account

The point of that idea is that you will learn what you don't know now (how to open an account at a discount broker, how much it costs to buy and sell stocks, tax implications of short vs. long term capital gains, buy low sell high, keeping parallel investments with a kind of survival of the fittest, etc. That is, learn by doing.

Those are two very different approaches, but of course it's your money and only you know what is best.
posted by forthright at 4:15 PM on March 21, 2008

Fair enough, I didn't adjust for inflation. And I rounded up to 12% for easy math, the last time I spent any time looking the long term market average was around ten or eleven percent. My main point was to emphasize how much time can do, all by itself.

BTW - the other advantage of a Roth, which I forget to mention, is that because it is after tax dollars that means the principal can always be withdrawn with no penalty. Of course that destroys the time value of the money, but if something comes up down the road and you need to put your hands on the money, you won't pay any extra fees.
posted by Lokheed at 4:16 PM on March 21, 2008 [1 favorite]

I totally agree with what Lokheed said, except that I would diversify more.
1/3 in in the US broad market iShares Russell 3000 (~3000 companies) ticker symbol IWV.
1/3 in the Vanguard FTSE all-world ex-US ETF (~2200 non-US companies) ticker symbol VEU.
1/3 in the Vanguard total bond market ETF (~2280 US bonds) ticker symbol BND.
When it's time for you to retire, you'll be damn glad you did.
posted by Daddy-O at 6:19 PM on March 21, 2008 [1 favorite]

Let's not forget that a recession--when monetary matters look REALLY shitty, and banks are in a panic, IS EXACTLY THE TIME TO START BUYING.

We all know the old saw, "Buy low, sell high." The only people who really buy low are the few who keep their heads in times like this AND BUY SHIT LIKE CRAZY.

I'm not saying that you should throw your money after stupid investments. I'm just saying that you should absolutely find something on the market and buy it while it's depressed. This IS the time.
posted by SlyBevel at 6:56 PM on March 21, 2008 [1 favorite]

2nd-ing an ING savings account. Sure, saving for retirement is wise, but, as you said, strange things happen to you and having easy access to $$, while earning some interest, seems like a good idea.

Even if strange things don't happen that much, having 3 large in the bank at 21 is a good cushion for things you may need or want down the road.
posted by altcountryman at 7:45 PM on March 21, 2008

Buy some Apple stock and sit on it. I am pretty confident you will be quite happy when you are 30. You are only 21 so you will have a lot more money moving through your life as you get older. If not Apple pick another "fun" stock that you like and see what happens.
posted by bkeene12 at 7:46 PM on March 21, 2008

And I'm sure you know we're all nosy/curious about what kind of strange thing landed $3,000 in your pocket. Hopefully it's not No Country For Old Men crazy.

If it is, I change my recommendation to coke & hooker, tonight.
posted by altcountryman at 7:48 PM on March 21, 2008

AAPL
posted by Scoo at 10:35 PM on March 21, 2008

A couple things:

• The Roth IRA contribution limit in 2008 is $5,000, not $4,000.
• Putting the money into a Roth IRA is easy, and it's not as irreversible as you might think. You can withdraw your contributions at any time, for any reason. (Your earnings, however, are subject to taxes and penalties if withdrawn early.)

Being young isn't a very good excuse for being dumb with your money. I've been there and done that. Like nearly everyone else who has been in that position, I wish I had saved my money instead. Lokheed has some good advice. Your older self will be very grateful if you put most of this money into a Roth IRA and invest in a broad-based index fund.

Do some reading on the power of compounding. It'll take you ten minutes, and it just might change your life. I'm not joking.
posted by jdroth at 11:02 PM on March 21, 2008 [1 favorite]

I'm going to give you the "bad" advice and suggest that you sock half away and use the other half as a starter for an awesome world-spanning trip. You're young and you can afford to dissapear for a few weeks. My wife and I recently did 6 weeks abroad, went completely broke (Spent about 2800, not bad for 6 weeks) and enjoyed ourselves immensely. Now we both have real jobs, I get 1 week of vacation a year and I have the money, but not the time. Enjoy it while you've got it!
posted by GilloD at 6:49 AM on March 22, 2008

Roth IRA. I am also 21, and just opened one up. It's nice to know that I have a retirement fund started already, plus with a Roth IRA, you can take money out of it without penalty if it's being used for education or house purchase. And with the market in the toilet, now is a good time for a long-term investor to buy.
posted by fvox13 at 10:00 AM on March 22, 2008

Do your parents have a financial adviser that they trust? Call him/her and go from there.
posted by radioamy at 11:09 AM on March 22, 2008