I started my son with Roth at Fidelity, as well as their money market., it made it easy for him to just move money there. He put other money into one of their balanced funds… Money he inherited is in Vanguard, but I used fidelity because he was living in Cambridge , and there are many actual stores. I went for ease and safety.
Suggest investment interested kids visit the forum at bogleheads.org. Lots of young people post there asking advice and getting it.
Looks like the best one year CD rate is around 1.3%, and the best saving account at Ally Bank is around 1%. I might recommend that to my son. He seems a little skittish as far as investing, even though he invests in the Roth every year. I would actually like to offer him 2% to borrow some money. He could get more than any other safe investment, and we could pay down our HELOC (currently at 4%). We could borrow 50K and give him $1K at the end of every year, he could get it back any time he wanted, and we could pay it off if we chose to. The problem is, we just feel funny about borrowing money from our kid. Even though there is zero doubt he would get his money back (and he would be fine with it), it just feels too weird. Unfortunate, because it would be win/win.
Why not offer your S 3% instead of 2%? It would still be a savings to you and presumably he is in a lower tax bracket than you. It is awkward borrowing money between family–what do you do if repayment is slow (or there is NO repayment)? The lender may suddenly want/need the funds – would that create a strain on the relationship? It is also an opportunity cost to the lender–the funds could be invested in something that gets a better return, like a low expense ratio broad index fund that averages a much higher return rate.
It wouldn’t be worth it for us to offer him 3%. We get to deduct our HELOC payment from our taxes, theoretically becoming a deduction worth 39.6%, but limited by AMT, so it gets complicated. We have the ability to borrow money many places at 2%, but that involves shuffling credit cards, and I’m getting tired of that. We’re just trying to pay off everything we can, so we can retire early.
I don’t loan family members money. If the need is great enough, I give it to them. I don’t want to deal with worrying about repayment. But if we borrowed money, we could repay in about the ten seconds it takes to transfer money from our HELOC.
I would actually prefer him to invest in something with a good return, honestly though, I don’t know what to recommend. It seems that every time he puts money in an index fund, the timing is bad. I’m sure his account has done okay, but not near of what it should have, if he’d just dollar cost averaged over the years. If he put the money into a taxable account, he’d end up paying a pretty high tax rate on gains, 30% or so. I just don’t want his money sitting there getting nothing, but I don’t want to make a recommendation that he could lose money on. Maybe I will ask what he thinks, are there some stocks or funds that he actually believes in. Funny, my track record managing my own money has been pretty good, but for some reason, it hasn’t been so good with his money. I’d rather my account go down 100K, than his to go down 2K, so I really don’t want to advise him very much!
Have him check out Bogleheads.org. Over the long term, investing in low expense ratio index funds should yield a good return. He needs to figure out his asset allocation so that he can sleep well at night while letting his money grow long term.
I’ll tell him to, but I suspect that he might not care enough about his money to do so. He just keeps raking in the bucks, not interested in spending, not interested in investing. I know he’ll sleep well at night regardless, but I don’t know if he has much faith in the market. Perhaps it will spark some interest for him.
Also check credit union rates - my local credit union has an 11 month CD rate of slightly over 1%. Earlier this fall it was 1.3% for 11 months. I parked some of DD’s loan money there that I knew we didn’t need this year but will need in the upcoming years. At that rate, she will earn back the fees charged and then some.
Money will be very useful when one first graduates, so keep it liquid as others said. There is NO REASON to begin saving for retirement until the first real job appears (but of course one should definitely start then, even $100 per month).
Unless you do have access to special CD rates.