OK – so you’ve just finished college and you’re visiting your uncle, who pulls you aside and says, “Hey, Sammy, I’ve got something for you, to help get you started.” He hands you a check with your name on it and $10,000 in the amount box. On the “for” line at the bottom, it says, “Happy graduation – for your future.”
After you’ve read the check a few times, to make sure you read it right, you start to think of what you could do. You think of that shiny new car on the dealer’s lot and think this could be a down-payment and maybe a few car payments. You also think of a big screen TV, a new stereo, and a trip to the beach. But then you start to think about what a nice thing it was for your uncle to do and you want to do something with the money that will have a lasting effect on your life. But where to start?
Here are some things you could do with the money that will make you uncle’s gift truly improve your life.
1. Create an emergency fund. If you don’t have some money set aside, losing your job would create a crisis in your life, with questions about how you will pay your rent and buy food to eat. A way to avoid this is to set aside enough money to pay for things if you go into crisis mode for long enough to find a new job. For many people, saving up enough money to pay for 3-6 month’s worth of necessities will be enough to make it through the dry spell. It is also helpful to have money set aside to pay for things like critical car repairs and medical deductibles so that you don’t go into debt when the unexpected happens.
Put that $10,000 into a special money market fund that you do not touch unless you have an emergency, and then, should you need to dip into it, make sure you devote every spare dollar to replenishing that fund once the crisis passes. If you find you rarely touch the money, you could put a portion into a CD (like maybe $7,000 of the $10,000 since $3,000 is enough to pay for things like car repairs) as well to gain a little more interest, but be sure it is somewhere that you can withdraw it if you need to. With a CD, you’ll lose a little interest if you take it out early but you still have the ability to do so. If you park it in a mutual fund, the fund may be down right when you need to make a withdrawal.
2. Get into a mutual fund. If you already have an emergency fund, another thing to consider is putting the money into a mutual fund and let it grow for a future date. If you leave it alone, you might be able to use that money to pay off your home loan several years early. It also might pay for your kid’s education (I know your kids don’t exist yet, but it never hurts to start early) or even retirement expenses.
Start by going to Vanguard or one of the other fund companies and setting up an account. The, pick two mutual funds and divide the money between them. Good selections would be a small cap and a large cap index fund since they will have low fees and give you exposure to all segments of the US stock markets. You could also buy a growth index fund, which has done well over the last several years, and a value fund, which has outperformed growth during other periods of the past. The important things are to keep fees low (less than 0.5%) and to spread the money out into different areas of the market. Once you have your original investments, get into the habit of sending in additional money from time to time, just buying whichever fund you have less of at the time.
3. Get a Value Line subscription and buy three stocks. Individual stock buying is more tricky than buying mutual funds, and many people will do better just putting their money into funds. Still, if you buy the next Microsoft or Home Depot, you can turn a small sum into a fortune with individual stock investing. The trick is to find companies with a lot of room to grow and then plan on holding them for many years as they expand and become more valuable. A subscription to Value Line Investment Survey, at a cost of a few hundred dollars per year, will give you access to full-page write-ups on several hundred stocks, along with all sorts of financial data and tables of stocks screened by different factors. Looking at the stocks ranked 1 for Timeliness and 1, 2, or 3 for Safety, two of Value Line’s rating parameters is a good way to start to narrow down your choices. Then, look for stocks that have seen their earnings grow consistently for many years.
4. Pay off part of your student loans. Sure, the interest rates on student loans aren’t that high, but it is still good to get your loans paid off and out-of-the-way so that you can go on with your life. Really, you should pay off your student loans before you buy a home because it will be far easier to pay off your loans before you have a house payment to contend with. Get on a serious plan and keep living like you’re a student for another year or two, and you’ll have them paid off before you know it.
5. Create a home upgrade fund. Instead of using the money to buy furniture now, put it into an S&P500 index mutual fund. Then, every three years, withdraw 10% and use the money to buy a home upgrade. One year it could be a new living room couch. The next time, it could be marble countertops. Because the fund should make about 10-12% per year after inflation on average, the amount you have to spend will increase with time. You might end up putting a new addition onto your home when you’re in your fifties if things go well.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.