Miser mom asks:
One of my sons is going to come into a temporary cache of a lot of (for him) money: he’ll be getting something like $700-$800 each month for about a year. Where should he put this money?
He is 18 and lives at home — and will continue to be living at home, in high school, until he’s 20 (by which point, the money will have stopped coming in. We’d like him to set the money aside so that he can use it when he starts out on his own, by which we mean post-secondary education (most likely, a school of technology, where he’ll learn something like welding — not a 4-year college).
He has a savings account at our credit union, but that earns like zero-point-zero-zero-something interest, PLUS it’s accessible via his ATM card, which is a remote temptation for him. CDs? E-banking? Roth IRA?
I should mention that he has 529 plans and UGMA accounts that will *more* than pay for his education, so the money will eventually just be spending money. Or possibly the seeds of his retirement account.
Unfortunately, when you need money in the short term there aren’t a lot of good options. So if the plan for this money is to put down a rental deposit for an apartment, then his best option is a CD or term share (the credit union version of a CD). The rates on these won’t be great but it will lock up the money so it is difficult to get to until the date it is needed. And generally the rates are a little bit better than most savings accounts. You may want to shop around to see what’s out there.
He can only save for retirement in an IRA (Roth or otherwise) if he has earned income. (Social Security and Disability do not count as earned income.) Retirement is a great place for this money to go since jobs requiring physical labor often also require earlier retirement ages as they wear the body down, though who knows what life will be like in 30 or 40 years. If he has earned income, whether to choose the short-term savings or the IRA (invested in a Vanguard Target Date fund or a low fee Total Stock Market Index) depends on whether or not you plan to help him with his housing when he starts post-secondary education because renting an apartment can require some combination of last month + deposit + realtor’s fee in addition to the first month’s rent, which can be pretty hefty for someone just starting out.
If you’re definitely planning on having him use it at age 20 even if it gets used for housing, then choose the CD/termshare option. Short term savings needs to be in safe, non-risky savings vehicles. You can take on more risk with long-term savings.
If he doesn’t currently have earned income and you do plan on helping him out with initial housing expenses, another possibility is to lock this money in a CD or savings account until he starts earning income of his own and then putting this money into a Roth IRA (again in a Vanguard Target Date Fund) while living off of his earnings. His future self will really appreciate that he’s done so at age 62 or whenever in the future he is wondering if he can ease off of full-time work.
As always, we may be wrong, we’re not experts, consult with actual experts and/or do your own research before making any important monetary decisions.
What do you think, Grumpy Nation?