Investing 20K

In My Humble Opinion
1

I have an inheritance of twenty thousand dollars that I am looking to invest. Being a young person from a poor family, I know almost nothing about managing money. I will of course talk this over with a professional, but I want to go in informed.

This is likely the only money I will ever have. I am barely able to make living expenses right now. I will need access to the money for emergencies or if a good reason to start spending it comes up (like grad school). I also have twelve thousand dollars in very low intrest student loan debt. I’m willing to accept some risk.

So, what would you do?

2

Allow me to introduce myself. My name is photopat and I have a great deal that you’d be a fool not to take advantage of. :smiley:

Seriously, I’d suggest banking a portion of it, maybe half, and putting the rest in mutual funds. That way you can access some of it right away, while it will still accrue interest, and the mutual funds will give you a start on investing, while still being able to pull money back out if you absolutely have to.

Take all this with a grain of salt, since I’m not a financial advisor and have my own money problems. It’s just a suggestion. Somebody else will probably come along soon and give you better advice.

Good luck.

3

First, I’d get a good personal finance book. “Personal Finance for Dummies” was the first one I read, and it’s not bad at all. In particular, be very careful which “professionals” you talk to, because a lot of them could be a major waste of money.

If I’d already read a bit about personal finance, this is probably what I’d do: I’d break off a chunk as an emergency cash reserve and put it in an investment that I know won’t fluctuate much in value, but will make some interest–I’d consider either a money market mutual fund or a short-term bond index fund. I’d stick the rest in an equity index fund (like a Fortune 500 index) and let it sit there until retirement. If I knew I was going to be going to grad school in a few years, I’d skip the equity index fund and put it all in a money market or short-term bond fund.

As for which broker to go with, I’ve been very happy with Vanguard. They have a good selection of funds, they have low prices, and they have an excellent web site. Here are links to some of their funds:
[ul]
[li]Vanguard Prime Money Market Fund (VMMXX)[/li][li]Vanguard Short-Term Bond Index Fund Investor Shares (VBISX)[/li][li]Vanguard 500 Index Fund Investor Shares (VFINX)[/li][/ul]

4

I’m re-reading this one right now: (A Random Walk Down Wall Street)

www.amazon.com/exec/obidos/ASIN/0393325350/qid=1098821882/sr=2-1/ref=pd_ka_b_2_1/104-3570947-0750309

5

Okay, more information is called for…

Dumb as it may be, I’m not going to worry about retirement right now. I hope one day to have a real job (right now I make minimum wage) and I can worry about it then. Right now I have trouble with rent and eating on a daily basis.

I want to use this money to improve my life. I plan to use it for grad school, or the beginnings of a downpayment on a house, or to start a business one day. I’ve found that the difference between rich people and poor people is that the rich are able to use their money to make more money. I’ve had very few oppertunties in my life and I guess I see this as a chance to have some of those dreams that people in my family and the people I grew up with never got.

And all tht stuff about seeing a pro was just to keep the first fifty posts from being “go see a financial advisor now!!!”. =)

6

Actually, I’m not sure you should see a financial planner. My understanding is that their fees can be several hundred dollars, which is likely more than their advice will net you. Your situation is fairly simple, in that you don’t have any real tax concerns (being poor) and just want to put your money somewhere it can grow.

Go to the library or bookstore and start reading personal finance books. There aren’t actually that many options, and the books I’ve read have laid things out fairly simply. Here’s my incredibly uneducated summary:

money market account: slightly higher interest than a savings account but not FDIC insured, i.e. it can go down in value or go away if they institution goes under

CDs: slightly higher interest than a savings account, but you can’t access your money for a fixed period of time. You can set up overlapping CDs, though, so that a fraction of your money is available at any given time.

stocks: you buy shares and gamble that they will be worth more at some later point than when you bought it. You should probably know a lot about the company and industry to make knowledgeable choices.

mutual funds: a much better way to buy stocks, in my opinion. The fund buys a mix of stocks from many different companies, reducing the risk if one company tanks. Different funds have different annual fees, so shop around. Index funds have a predetermined mix of stocks, e.g. corresponding to the Dow Jones index or S&P 500, so there’s less management and the fees are lower. These are usually a decent bet if you don’t know what to buy.

There’s also bonds, which I know fuck-all about, but which I’ve heard can be more stable than stocks, or tend to go up when stocks go down, or something. I repeat: I know fuck-all about bonds.

Good luck. If all else fails, get the money in twenties and roll around in it.

7

If your going to be using the money within the next year or two, then I’d stick it in a money market mutual fund. You’ll get a much better interest rate then at a bank, although your deposit won’t be FDIC insured. This isn’t too big a deal, though, because the chances of loosing money in one of the major MMMF’s (like the Vanguard one I linked too) are extremely remote. The share price in a MMMF is always $1, so you don’t have to worry about “selling when it’s low” because the price never changes.

If your going to be using the money in more then two years but less then “indefinately,” check out a short or intermediate term bond index fund (like the one I linked to). Unlike a MMMF, the price will fluctuate, but compared to a more risky (and potentially rewarding) investment, the fluctuation will be relatively small. There’s a chance you’ll lose money, but it’s a negligible chance and any amount lost will probably be relatively small. The advantage (over a MMMF), is that you’ll typically get a higher return.

Finances aren’t like medicine or law: the “financial advisors” you’ll have access to are, largely, worthless. In general, no one worth his or her salt is gonna give a rats ass about only $20k. The best course of action is to read an introductory personal finance book (seriously–the Dummies book ain’t bad).

8

Do note that mutual funds are a lot more general then that–a mutual fund can invest in pretty much anything, not just stocks. For example, money market mutual funds (which are similiar to a money market at a bank, although they’re not FDIC insured and usually have higher return rates) invest in commercial paper, CD’s, etc., bond mutual funds invest in bonds (either a mix or a specific type, e.g., short-term government bonds), precious metal funds invest in precious metals, etc.

9

You mentioned grad school. There’s a great plan called the 529 which allows you to save money for school and have it grow tax-deferred. What that means is that you don’t pay any taxes on the growth until you take it out of the plan, and then the growth is only taxed as normal income. You can take money out of the account for other purposes, but you would pay a 10% penalty on the growth.

For example, say you put $10000 into the 520 and it grows to $10500 in 2 years. If you decide to go to grad school, you can take money out of the account and you pay normal income taxes on the growth ($500) and no taxes on the $10000. If you decide not to go to grad school, you can take the money out, but you’ll have to pay a 10% penalty on the growth (10% of $500 = $50) and count the $500 as normal income. The original $10000 can be taken out tax-free in either case.

Every state has a 529 and each one is different. Some will be better than others for your situation. Vanguard.com is a pretty good one overall.

As far as normal investing goes, your best bet for getting your money to grow is to think long term. You are not going to be able to double your money in a year or anything like that. And I am talking about you specifically. Some people can make huge profits in a year, but they have access to resources and knowledge that you don’t have. You should go with something safe and stable.

Mutual funds which track the S&P500 are pretty good investments. Vanguard has good funds since they have very low expenses. And you can get your money out of a mutual fund at any time.

If you can hold onto the money for 5, 10, 20 or more years, it can really grow to a lot. The longer you can hang onto it, the more it will be worth.

10

I’d stay away from mutual funds, too many hidden expenses with them. Since you need to stay liquid, I would go with the CD or interest checking account. Neither one of them are going to give you much interest, but if you get into a mutual fund you could very well lose a large percentage of your investment.

11

Depends on the mutual fund. The chance of losing money in a no-load money market mutual fund (from, say, Vanguard or Fidelity) is inconsequential, and your probably going to get a much greater return then pretty much anything a bank will offer.

12

I just wanted to say that I think it’s great that you’re thinking about how to invest this money (whether in your education, stocks, or a future business), rather than eating it. Many in your shoes would party the money away.

I also agree with Giraffe that talking to an advisor likely isn’t worth the money you’ll gain. But perhaps it will make you more comfortable in your decisions.

As your goals for this money are relatively short-term (i.e. this isn’t retirement money, you’ll likely pull it out within a couple of years), I’d recommend you do something like this:
$12k interest bearing savings account
$4k bonds
$4k large cap stocks

13

That’s probably true. But with all the mutual fund shenanigans going on the last couple years, I tend to avoid them, many of them have been proven to be crooks. Also, it’s just harder dealing with a mutual fund, you will have to write letters, etc., when you want to close your account. I don’t think it will be worth the small percentage of interest you will gain, since the OP seems to have to remain very liquid.

14

If he doesn’t use the money for five years, and gets 1% interest in a bank savings account and gets 4% interest in a money market mutual fund, he’ll earn $4,419.93 in interest in the MMMF, and $1,025.98 in interest in the savings account. Unless he goes to grad school right off the bat, the extra income from a MMMF may be significant.

As for the convenience factor: with MMMF and often with short-term bond funds, you can frequently write checks on them (usually with certain limitiations–only a few checks per month, and they have to be over some minimum amount), so it’s not that hard to get your money out. With Vanguard, I think the only time I ever actually had to write something on paper was when I printed out a form and mailed it in to open the account. Their electronic system is very good.

15

I’ll just add a footnote. If I did invest in mutual funds for the short term, I would definitely take a look at the ones you mentioned.

16

No one has mentioned I Bonds. You can buy them online directly from the U.S. Treasury. They’re backed by the full faith and credit of the U.S. - no chance of losing anything.

The interest rates are better than CDs and money market accounts, and the rate is adjusted every six months for inflation (in other words, if you buy I Bonds now at a certain rate, and hold them, the rate will change every six months). So, if interest rates start climbing, you’re not left holding some low-interest investments. If interest rates fall, of course, the rate on your I Bonds will fall. The current rate is 3.39%.

You can’t touch them for one year, but after that, you can redeem them whenever you like (there’s a three-month interest penalty if you hold them less than five years). Your online I Bond account is hooked to your checking account, so if you redeem some of them, the proceeds are in your account the next day.

Income tax on the interest is deferred until you actually redeem them, and they’re exempt from state and local income tax.

You can buy them in denominations of $50 up to $10,000. Of course, you don’t actually get a fancy piece of paper when you buy them - it’s all electronic. You can buy up to $30,000 worth of I Bonds in any calendar year.

Read all about it here.

17

Check out mutuals.com. They have been very helpful to me and made a lot of money for me.

18

A couple thoughts:

1/ Try to put some money into an IRA. The money isn’t immediately accessible–you pay stiff penalties if you withdraw it before you reach retirement age–but it grows and compounds tax-free. Some IRA plans, I believe, are structured to allow you to borrow against them if you need to.

2/ If you go to an advisor, remember that many earn their money by selling products that earn them large commissions–which might not be the best deal for you. It might be smarter to do as much reading as you can, and then pay a fee-based advisor for his time to answer whatever specific questions you need help with.

3/ Somebody will probably try to sell you life insurance as an investment plan. Unless you have dependents relying on you for support, you probably don’t need life insurance right now. But make sure you have some kind of medical insurance.

4/ Motley Fool is a pretty good source for a lot of general information and advice. They also have a lot of specialized discussion boards, one of which is called “Learning to Invest.”

19

Absolutely right. If you do have dependents, you probably want some life insurance. But don’t ever buy life insurance as an investment. Term life insurance is a good thing to have, for the protection of someone who’s relying on you for support. But what’s usually sold as some sort of investment is “whole life.” Steer clear.

20

This is your first priority. Get your debt paid off, and you’ve got eight grand left to start an excellent investment. Mutual funds are OK (but you must educate yourself and shop around, some have really shitty deals) but I am a particular fan of index funds. They have cheaper overhead and get you better diversification. Over the long term, $8,000 in an S&P500 index (or even something more specific) should do quite well. You can withdraw the money easily and add money to it. I use Vanguard for my index funds needs, they let me do everything through their website, including automatic transfers from my checking account when I get my paycheck.