Ds2 does contract work so doesn’t have a 401k, other than one from a previous job that just sits there. He fully funds a Roth each year. Excellent credit score and is careful with his money.
I recently came into some money and was going to gift him some. I thought it would be helpful to give him advice along with the money, but I’m not sure what to say. I know that he’d like to buy a house at some point so maybe not put it in something that will be tied up for several years?
Thoughts? All my investing was through my work 401k until the past few years, when I got serious about retirement and learned about IRAs, Roths and brokerage accounts. I’m not sure what someone in their 20s should do with their money. I guess I should add that I think the amount will be about $10k.
CD rates are good right now - just have him invest in that. (usually best rates are 11-13 months) The money will not be tied up for long and can be used for anything he wants when he needs it (no retirement restrictions).
This is the advice I have given my daughter, which she has been following now since she graduated college.
DD has money for down payment in Vanguard index funds and CDs. If he plans to buy his house soon I would probably advise on CDs or high yield saving accounts. If it’s within five years then probably index funds.
Another idea is to open a brokerage account and he could put the 10k into something like the Vanguard Treasury Money Market fund (5.29% return currently). Similar to CDs, though easier to get money back out whenever he might want the money. Very conservative investing.
If he want to take some risk with his money, opening the brokerage account (a taxable account) and putting the money into something like Vanguard Total Stock Market index fund is another option. That option doesn’t protect principle but is tax efficient.
My son just bought a 2 year at 4.95 thinking rates will fall. But also bought a 1 year at 5.35%
For a low income person who is risk averse it’s pretty good.
You can do ‘better’ in high interest stocks that should hold like Altria, Verizon and utilities but not without risk.
But stocks to buy if you think interest rates will be cut are utilities, tobacco and companies like agnc and nly who have held up their massive dividends while share prices collapsed.
If rates go down, they ‘should’ go up. It’s a conservative play but nothing like a risk free cd.
This is what I was thinking. We recently opened a Vanguard brokerage with the MM fund, but I wasn’t positive that within the brokerage you can invest more aggressively, because, like I said, I’m all about retirement savings now. He’s talked about doing a high-yield savings account and may have already done it.
If he has a brokerage, he can go conservative or more risky. He can buy individual stocks or funds - either index, sector (like utilities) or trends like growth or value or small or international. Today you can do multiples as minimums are small. .
My son is only doing CDs. He’s down on his two sticks (like $100-not much) and doesn’t like the feeling.
We are unfortunately, likely at the high point for CDs.
An investment account or high yield savings account, with the goal that when he has to buy the next car, he won’t have to take a loan to buy it. Goal after that is a down payment for a house.
Here is a tip for getting better CD rates. If you just go to your local bank, their rates may not be competitive. However, you can choose from a larger selection of CDs from within a brokerage account. So opening a brokerage account is probably a good idea for a young person, even if they are not interested right now in stocks. My daughter easily opened a Merrill account which is linked with her BofA account. Merrill makes it very easy to search for and select CDs. All of which have better rates then she would get from BofA. She was also then well placed to do other types of investments if she wanted. They also make it very easy to transfer from your BofA accounts into your brokerage account.
So much for low cost vanguard. Looks like from yesterday.
Maybe open a Schwab account !!
That’s what my kids have. Haven’t checked closed fees. They link to a Schwab checking account and buy CDs thriugh the marketplace like described at b of a above.
This isn’t very glitzy. But does your son have an emergency fund account…money put aside just in case he gets laid off, or has an unanticipated expense? We told our kids to fund an emergency account and both did.
If your son doesn’t have his…this $10k would be a great start.
You can look at this two ways, short term or long term.
If you want him to have access right away, the previously mentioned high interest savings accounts are performing for now.
If you want to guarantee growth, you could lock it in a trust for 10, 20, 30, or however many years you want. If you did that, I’d put it in VASGX. It’s a low cost balance fund that favors equities.
Persons who do contract work typically have other tax-advantaged retirement options besides just a Roth. He might review eligibility for options like SEP IRA or solo 401k.
What’s appropriate to say depends on why you are gifting him the money. Is there an intended purpose/reason for the gift? Is there a particular financial challenge that you’d like to assist with or that he is struggling with?
It depends on the person. Different persons have different financial situations and different long term financial goals. For example, does he have any debt? If so, what is the APY? You mentioned wanting to buy a house at “some point.” Do you have any idea in how many years he’d like to buy and approximate funds needed for downpayment? Are there any other key financial need likely to occur in the near future, and does he have adequate funds to support unexpected financial events, such as mechanic charging thousands to fix car?
As a general rule, it’s desirable to invest in retirement beyond just the $7k to max out IRA, and as noted earlier there are likely tax advantaged options available. However, if he is likely to withdraw relatively soon, then a short-term investment may be more desirable. With the high federal funds rate of 5.5%, short-term treasury products pay ~5.5% APY and are state/local tax exempt.
For example, 3-month t-bills are at 5.49% APY = 5.38% APR, and are state/local tax exempt. A simple way to take advantage of the 5.5% federal funds rate is to open at account at Vanguard and deposit the $10k. Vanguard’s default sweep account for deposits currently pays 5.40% APY = 5.27% APR. It’s ~0.1% below fed rate because it has a ~0.1% expense ratio. He can then take his time to decide what to do with the $10k. He can keep it in the cash sweep earning 5.4%, if he wants to spend it relatively soon. The funds are available to withdraw at any time without penalty. Or if he wants to increase retirement investment beyond the $7k/year Roth IRA limit, he can likely open up a different type of retirement account at Vanguard. He could also purchase after tax investments with the $10k at Vanguard, outside of retirement account, including the t-bills mentioned earlier…