My 19 year old son called me from college last night. He had attended a seminar on personal finances and said that it had gotten him thinking about starting some kind of investment fund. He is an RA during the school year, making approximately $250-300/mo and does odd jobs for several people during the Summer, making a little more. He has virtually no expenses as meals at school are paid for so he might spend $50 a month. He said he thought even if he could only invest $50-100 a month, that would be better than waiting several years to start investing. Man, I wish I had thought that way at 19.
Anyway, what are some options for him at this point? An IRA of some type, something else? I know there are some financial wizards here on CF.
Thanks!
Get him start a Roth IRA. Better to have the growth be tax free as I only expect taxes to go up if we ever plan to have this country solvent.
Both my kids have Roths and both have regular mutual fund accounts we helped them start when they were younger.
Boat drinks, Waitress I need 2 more boat drinks!
I’m not an expert. I’m not a financial advisor, but I will share my opinion.
I think the big guys might have programs for students; I’m not sure but its worth checking into. Etrade, Scottrade, TD Ameritrade. There’s many of them now. Me personally, I would encourage him to invest in an index that follows the S&P500 until he reaches the $10K mark. Put his job money away in a bank account until he saves $500, then move that money over to your trading account (you can do this electronically and its easy). Buy when you save $500/$1000 at a time. Its not worth it to buy stocks when you only save $100 at a time. That trade costs you $7. You have to make 7% on your stock to just break even. Invest $1000 at a time and you only have to make 0.7% to break even. I would encourage him to only purchase in $500 chunks or more. After you build the $10K, then start investing in individual stocks. There tends to be less risk involved in indexes. While he’s building up the initial next egg in the index, monitor various stocks you are interested in and watch the ups and downs that occur through news/earnings reports. You’ll be surprised how much you can learn by doing this and simply taking 10 minutes a day to read the news on your particular stock/company.
Its easy to want to jump in and chase penny stocks; don’t do this. At his age, yes, he can afford risk, but a long term plan is what you want to teach him. Starting at 19 and showing financial maturity like this, there’s no reason he shouldn’t retire early with a great nest egg.
May all your favorite bands stay together…
If I was him, I would also go with the Roth IRA… But, on the flip side, he needs to understand that he needs to stay as far away from credit cards as possible. Earning 8% in an IRA gets wiped away if you are paying 19% interest on a credit card. The best “investment” that he can make at his age is understanding that debt is slavery.
Just put it into savings. He will need that money in a few years in order to stay debt free while starting his career. Emergency expenses, paying bills while searching for a job, getting engaged, replacing his car. All things that he will not want to be in debt over, so if he can set aside $4k-$5k in a savings account while in college, he will be ahead of his peers. Starting an investment portfolio at 19 just to have to borrow on a car, or buy his girlfriend a Christmas present or engagement ring on a credit card is pointless. Stay debt free, get a job, and then start putting 15% a year of his income to retirement when he is making $60k-$100k.
Just my .02. Glad he is thinking about this early though.
“Wailord”
1979 17’ Montauk
90 Johnson
Wilderness Ride 115
quote:
Originally posted by Geronimo
Just put it into savings. He will need that money in a few years in order to stay debt free while starting his career. Emergency expenses, paying bills while searching for a job, getting engaged, replacing his car. All things that he will not want to be in debt over, so if he can set aside $4k-$5k in a savings account while in college, he will be ahead of his peers. Starting an investment portfolio at 19 just to have to borrow on a car, or buy his girlfriend a Christmas present or engagement ring on a credit card is pointless. Stay debt free, get a job, and then start putting 15% a year of his income to retirement when he is making $60k-$100k.
Just my .02. Glad he is thinking about this early though.
“Wailord”
1979 17’ Montauk
90 Johnson
Wilderness Ride 115
We’ve taught our kids there are 2 kinds of savings, short term and long term. Short term is cars, bigger than one paycheck fun purchases, etc. Long term is planning for their future.
Baby Girl is 22 now and just graduated from Clemson in December. She moved to Chicago using a little money from her short term savings. 2 summers ago she had an AWESOME internship, so she saved about 1/3 of her earnings and bought a pretty nice car at the end of the summer. She put another 1/3 into her long term savings and the rest into her bank account.
I agree with 23 in buying in blocks. Baby Girl and The Boy both use eTrade
She
Boat drinks, Waitress I need 2 more boat drinks!
Agree completely. I just wouldn’t bother with long term until the short term is healthy. putting $50-$100 a month will take a couple of years for the short term to be where needs before worrying about long term. I would establish a goal first, and try to hit that mark before investing in places where you won’t touch it for 40 years.
Love him or hate him, Dave Ramsey isn’t a bad place to start.
$1000 in savings
6 months of expenses- for him sounds like only $300 if he isn’t paying any cell phone, gas, insurance, etc.
Then start putting away for longterm. As his monthly expenses increase, so should his reserve account.
“Wailord”
1979 17’ Montauk
90 Johnson
Wilderness Ride 115
1st - cover any current debt
2nd - build a rainy day fund for unexpected expenses
3rd - if he doesn’t have a car and needed items for post college, save for that, better to use cash for the car unless he gets a great interest deal like 0.9% or whatever
4th - once the basics are covered then long term investment, put it in Roth in an Index Fund
once these are under control the savings can be divided where needed, the rainy day fund will need to increase once he has rent, phone, utilities, auto taxes, etc.
Pioneer 197SF
Agree Geronimo
We’ve been on the Dave’s plan for about 13 years now. Became totally debt free December, 2009
We started with Total Money makeover
Went through FPU a few years ago
Planning to attend the Legacy Journey next time it’s offered at our Church
Boat drinks, Waitress I need 2 more boat drinks!
Good advice from everybody.
Now that I’m mostly retired I’ve learned the benefits to being debt free, and planning for the short and long term. Also a Dave Ramsey fan:smiley: The best thing young people can do is avoid debt.
Capt. Larry Teuton
Swamp Worshiper
the Ramsey plan is interesting and I’m sure a great plan for some people but if one has the discipline to manage money then debt is a good thing
a car loan at 0.9% or 1.9% is a great deal if your money is in the market earning a return, my last 3 cars were financed at these rates, if someone will give me $35K for 5 years at 0.9% I’ll take it all day
a credit card with benefits is a great deal if it has no annual fee and you pay it off every month, it’s a 0% loan and it builds credit, with my cards I earn a cash back, hotel points and airline miles
your insurance rate (and other things) for homes and cars is partially based on your credit score, I don’t know how you build a good credit score without having debt
Pioneer 197SF
Getting that kind of rate means you left thousands on the table. Sometimes $7500-$10k. Low interest loans aren’t bad for buying things you can’t afford. But saying debt is good, well I am not going to go there.
Getting an Am Ex and paying the bill every month is fine for disciplined people. Unfortunately they are few and far between so Ramsey plays it safe and says all CC are bad. If you have one, and pay the balance each month, that isn’t debt.
And your credit score doesn’t go down if you are debt free. It goes through the roof. Besides, if you pay cash for what you want, why do you care about a credit score? I haven’t used my credit score in almost 7 years.
To each their own.
“Wailord”
1979 17’ Montauk
90 Johnson
Wilderness Ride 115
quote:
Originally posted by Geronimo
Getting that kind of rate means you left thousands on the table. Sometimes $7500-$10k.
How so? If you purchase a $25K car with a 1.9% interest rate over 60 months, the total cost of the loan is $26,226. If you get 0.9%, then the total cost of the loan is $25,576.
In an inflationary environment at 3% each year, debt can definitely be a smart move if you are responsible. The reality in this situation is that $25,576 5 years from now is actually less money that paying $25,000 in today’s dollars… So, it’s actually a smarter move to take on debt at 0.9% in this scenario.
That assumes that your savings is in cash. Cash sitting in the bank actually loses value. That’s why inflation hurts people on fixed incomes.
sorry but you are simply incorrect
bought 3 cars in last 11 years, negotiated the deals, pricing was done, beat the data on TrueCar, was then offered the financing, the rates were 0%, 0.9% and 1.9%, I had the cash but took the financing
proper use of a credit card has many advantages, have received many free hotel nights, 3 free flights and a few hundred $ a year in cash back, just spent 3 nights at the Hyatt for free 2 weeks ago
I didn’t say that your credit score drops without debt. I said that it will increase by managing debt properly. Young people need to work at getting a good credit score. Helps with insurance rates and other things. Older folks may rarely need or use a good credit score. That’s not true with younger folks. If you are young try renting a car without a credit card. It’s difficult or impossible.
Pioneer 197SF
Thanks for all the input. We’ll have a lot to talk about when he comes home. As for credit cards, his mother and I rarely carry any debt on ours but, I see some merit to using them occasionally if paid off at the end of the month. At 19, he has no credit history and eventually he will need such (for a home loan, insurance, etc.). We’ll discuss the best and safest way to establish one. I just wish my parents had talked with me about money. I would have started my miserly ways years ago.
“Apathy is the Glove into Which Evil Slips It’s Hand”, but really, who cares?
We have 4 credit cards and use them often, but pay the full balance every month, so don’t pay any interest. It’s almost impossible today to get by without a credit card. Hotels, rental cars, online purchases, day to day expenses instead of carrying cash. We have zero balances, zero debts, and a credit score over 800, so I don’t think being debt free has hurt my credit any.
The whole trick to credit cards is never charge more than you can pay when the statement comes. It took me about 20 years and many sleepless nights to learn this.
Capt. Larry Teuton
Swamp Worshiper
quote:
Originally posted by DFreedom
Thanks for all the input. We’ll have a lot to talk about when he comes home. As for credit cards, his mother and I rarely carry any debt on ours but, I see some merit to using them occasionally if paid off at the end of the month. At 19, he has no credit history and eventually he will need such (for a home loan, insurance, etc.). We’ll discuss the best and safest way to establish one. I just wish my parents had talked with me about money. I would have started my miserly ways years ago.
“Apathy is the Glove into Which Evil Slips It’s Hand”, but really, who cares?
Doug
One thing we learned when Baby Girl moved to Chicago is that she should have had some credit history. The folks leasing her an apartment didn’t care that she has a paid for car, 20k in savings, zero debt, and a great paying first job. They pulled a FICO and saw nothing other than 1 year of on time rent payments while she was at school, so we had to co-sign her lease.
She went to the bank the following Monday and got a credit card that she uses for day to day expenses and pays off each month.
We came home and called The Boy up at Clemson, called our bank and got him a Student credit card from Citibank. It has a small available credit line and he uses it for day to day expenses and pays off the balance each month. Hopefully when he graduates in two years he’ll have a smoother transition into adulthood
You’re on the right track. Just keep talking to him about life and money.
Boat drinks, Waitress I need 2 more boat drinks!
quote:
Originally posted by skinneej
quote:
Originally posted by Geronimo
Getting that kind of rate means you left thousands on the table. Sometimes $7500-$10k.
How so? If you purchase a $25K car with a 1.9% interest rate over 60 months, the total cost of the loan is $26,226. If you get 0.9%, then the total cost of the loan is $25,576.
In an inflationary environment at 3% each year, debt can definitely be a smart move if you are responsible. The reality in this situation is that $25,576 5 years from now is actually less money that paying $25,000 in today’s dollars… So, it’s actually a smarter move to take on debt at 0.9% in this scenario.
That assumes that your savings is in cash. Cash sitting in the bank actually loses value. That’s why inflation hurts people on fixed incomes.
Inflation hurts everyone…except the creditors.
quote:
Originally posted by skinneej
quote:
Originally posted by Geronimo
Getting that kind of rate means you left thousands on the table. Sometimes $7500-$10k.
How so? If you purchase a $25K car with a 1.9% interest rate over 60 months, the total cost of the loan is $26,226. If you get 0.9%, then the total cost of the loan is $25,576.
In an inflationary environment at 3% each year, debt can definitely be a smart move if you are responsible. The reality in this situation is that $25,576 5 years from now is actually less money that paying $25,000 in today’s dollars… So, it’s actually a smarter move to take on debt at 0.9% in this scenario.
That assumes that your savings is in cash. Cash sitting in the bank actually loses value. That’s why inflation hurts people on fixed incomes.
My point about a car purchase was more so about getting wrapped up in all the “deals” that make people think they should buy a new one. However, many times I have seen new cars with .9% interest in lieu of a $7,500 rebate.
You can buy a new car and make a sound decision and be fine if you do your homework. Just like you could buy a new house in 2007 and be fine. However, the majority of people will get sucked into the idea of having to own a new shiny car, or that bigger house, and they are right back where this economy was 8-9 years ago. All I am saying is, be smart, buy what you can afford, not for what payment you can make, live within your means, and don’t walk around saying that “debt” can ever be “good”. It just can’t. You can’t give me any scenario where I would rather owe the bank money than sit with it out
“He who has the most cash wins” When I say “cash” I mean paid for car, 3 mo. Treasury Bills and AAA rated State specific General Obligation Municipal Bonds, paid for house, paid for boat, RV, vacation home, gun collection, jewelry, art work, furniture, precious metals, bank savings, and diversified investments in the proper accounts such as IRA’s. As far as I’m concerned credit scores are tools of the lending industry to lure prospects into borrowing money. Buying new cars with a great credit score, and a low or no interest loan, doesn’t absolve the owner of the huge depreciation of that never new again car. Shop hard and buy used with cash. Drive a beater if necessary. As far as credit cards go, the debit card alternative will allow you to purchase and rent products and services without the monthly bill and fees that go with the credit card. If I’m going to use a credit card to purchase products or services for reward points it’s going to be the card issued to me by my employer, and I’ll file the expense reports required for the reimbursement. Home mortgages are based on the possibility of inflation working in your favor, and the asset appreciating as the property is improved by the owner. Not putting 20+% down on a home purchase is stupid. 30 year mortgages are equally stupid. Paying PMI is a rip off.
A 19 year old needs to save cash, and learn on how to live below his income. Establish a budget based on reality. Once a planned amount of cash is accumulated, and income is secured at a predictable employment status…2 years minimum, then allocate the 15% allowable to an employer sponsored defined contribution plan. Study investing 101. Learn the risk variations of stock, bond, and cash investments. Learn about risk management and diversification. Learn about fees and expenses. Learn about tax ramifications, and tax planning. Invest outside of, and over and above your defined contribution plan, when your budget allows it. Start a relationship with a brokerage firm that puts a premium on l