I’m a concerned mother. I have a 19-year-old daughter who is a college sophomore, and she is about to inherit a fortune of about $800,000. Because she’s still young, I don’t want her to have access to all the money. However, I am not the best person to advise her, if I tell her the sky is blue, she will tell me it’s green. What is the best way for her to invest the money and set herself up for the future?
According to her, she wants to keep some money to at least live on for the next two years. After this, she has no other solid plan.
Dear Concerned Mother,
Even though $800,000 is a lot of money, owning it should and should not change her life. I’ll explain this.
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When your daughter gets her first job, she can buy a property for $300,000 and pay off a mortgage of $ 100,000. Better still, she can live mortgage-free with just property taxes and maintenance costs. Doing this would put her on a great path towards financial freedom.
Owning a house that early would make her the envy of her peers. Many people work for years to get themselves out of the rental trap and try to get a property of their own.
Fortunately, houses appreciate in value; therefore, owning one would free her up financially to enjoy her life.
With the help of an adviser who doubles as a fiduciary, she can plan her education so she’ll be able to put her fortune to better use. She could find planning and budgeting to be fun tools that can help her avoid debts.
She should try not to invest in clothes, vacations, or cars, and other things like that. They would only drain her account very fast. Indulging in those lavish purchases could lead to a lifetime of bad spending habits.
She should also take care to avoid using the money in ways that would separate her from her peer group. Bragging about her windfall will only plant the seed of resentment and jealousy among her friends and acquaintances. Many people don’t want to be friends with someone who flaunts their wealth; unrestrained spending can deplete empathy as well as bank accounts.
She would get to see that planning a future with that much money at her disposal is a lot of fun. And unlike parties and the likes, it has a reward, financial independence and peace of mind.
Leisure is essential, she could enjoy life too. With professional advice, she could set aside an income for leisurely activities and other pursuits that will add to her quality of life. She could have modest fun with her friends, it doesn’t have to be a five-star lifestyle.
Investments: Stocks, CDs, Roth IRAs
In the last couple of years, the return on CDs has increased. The rates are currently in the 4% plus range for jumbo CDs between three and seven years that need a minimum deposit of $100,000. It’s a reasonable rate of return if she wouldn’t touch it. A certificate of deposit is like a time-limited savings account. The interest she’ll earn should be reported as taxable income to the IRS. Unless the money is stored in a tax-advantaged account, like an IRA CD.
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She could invest about $50,000 in the stock market. She should invest with shares in companies that have a higher return on equity, lower leverage and consistent earning profiles. Earning money on her first investment and the investment return will help her learn about compounding. She should also go for a mutual fund or exchange-traded fund instead of individual stocks.
She can take advantage of her income, when she starts working, and make contributions to a Roth IRA. The gift of saving for retirement could be worth a lot more than the $800,000.
Sadly, there is no tactic she can use to spend $800,000 that will make her happy for the rest of her life. She will have to study and work hard for the life and career she wants. She would still have to fight for her place in the world like every other person. The money would just give her a great head start.
Hopefully, when she starts her career, she would have given herself more choices to choose a rewarding job that she loves. She should use the slow and steady approach to get the most out of her fortune and end up with a happy outcome.