Help a Reader: Spending an Inheritance

Here's a comment/question I recently received:

I am a recent college graduate. I have aspirations to go to PA school. I have the grades, I just need some medical experience. My mother passed away two years ago and left my sibling and I each roughly 60 thousand dollars. I have no college debt and am going to be moving to Syracuse, NY soon. I have never had a lot of money and I don't know how to save it. My sister thinks I should buy property in Syracuse, instead of renting. However, I don't know anything about owning a home. I don't intend to do anything wild with the money. I simply want to stretch it as far as I can in the future. Can anyone with any financial experience give me some advice?

And suggestions for him?

Comments

[Isabel]

Put it into index funds. The economy will come back eventually, but there's no telling when. In the meantime, think of it as stocking up during a "sale" -- it's easy, and a pretty sure bet, whereas property is more risky because of all the factors involved. And even if it is a buyer's market, ,it doesn't make sense to buy property right now unless you know you're going to be there for a long time.

[Nicholas Paldino]

Put a down payment on a house, and take out a student loan. You will save more money that way.

[Christopher]

A part of it should be to make a fully funded emergency fund, if he/she doesn't have one already.

[Kevin]

Sounds like he's not really sure what he wants to do yet, so I would caution against buying a home until he really wants to settle down. I would make sure to have an emergency fund then either invest the rest in an index fund or keep enough out if he thinks he'll want to buy a home and invest the difference. If/when he enrolls in PA school try to get low interest loans or go to school while working.

[Darin H]

Don't buy a house if you aren't going to live there 4-5 years at least. After you set aside some for an emergency fund, I'd put some into CDs and the bulk of it into an index fund or and index ETF (like Vanguard's VTI)

Go to PA school, rent, and stretch the dollar.

[Colin]

Ideas:

1) Emergency Fund 10% - HSBCdirect.com
2) Fully Fund Roth 8.33% - vanguard.com
3) LT Savings (S&P500 Index) 25% - vanguard.com
4) ST Savings (School) 20% - HSBCdirect or Vanguard
5a) Down payment (if living in Syracuse for at least 7-10 years) 35%
5b) If moving; split that into LT & ST as you see fit based on LT & ST goals.
6) Have fun with the rest.

[ToughMoneyLove]

My suggestions: (1) Fully fund a Roth IRA; (2) Fully fund an emergency fund - six months worth of non-discretionary expenses; (3) put balance in CD ladder for tuition if starting school in next 12-24 months; (4) stop listening to sister - residential real estate is not a good investment now (if ever) in upstate NY with its lousy weather and high property taxes.

[Anonymous]

$60k divided:

$10k Emergency Fund ($5K ING Savings Acct, $5K Rolling CD Ladder depositing interest into $5K ING Savings)

$2.5-$5k: Go see some part of the world you've never seen that includes a language barrier

Remaining $45k: Buy "The Only Investment Guide You'll Ever Need" and read the whole book, paying attention to the What to Do with a Windfall chapter.

Don't buy in Syracuse. Rent for at least a year and see if you think it's a place you might stay long-term. Between move-in day and 1 year, read a few personal finance books on buying a house, and figure out if buying may be right for you given your time horizon in Syracuse.

[ChrisR]

I would echo what the others have been saying... (1) Put six months worth of expenses into an emergency fund in a high yield savings account or CD's, (2) Find a place to rent at reasonable rate for the area, (3) if you've had some income this year open a Roth IRA, and fully fund it ($5,000), investing in an index or total stock market fund, (4) split the rest between covering some college costs, saving for a down payment on a house, etc.

[DoctorS]

INDEX FUNDS ARE THE WAY TO GO!!! You dont have to use all of it but a significant amount. Check it in there and dont plan on touching it for at least five years and you should see a decent return on them.

I wouldn't buy a house unless you find a good situation with solid people renting the property from you. Figure out a way for you to make money more money off that large sum!

[Mike]

I was actually in your place when I turned 21, though it was an uncle who died and not my other remaining parent. The best thing I ever did was to get an education about money through reading.

You said in your letter that you don't know that much about savings, so I would recommend that you learn everything you can about the world of finance. Radio, TV, blogs, books, listen to it all, take it all in, then figure out what makes sense to you in your own circumstances. Don't believe the first things you hear, because certain financial advice only works under certain circumstances. A lot of financial advice is given with the intended audience being old people or rich people(high tax bracket), seeing that you're neither you should be alert to if the advice makes sense for you. If you don't know what books to buy check out this blog and others like Get Rich Slowly who has a great list of books he recommends.

If you want to know what happened to my money, first I tried stock picking with mixed results, a few years later I bought a very balanced portfolio of ETF's, which I mostly didn't touch because the returns were good and the worry/hassle factor was really low. I kept most of the money and now I take draws from it to supplement my young family's monthly income needs, because without it we would be living with one of our parents.

My last bit of advice is to think about your mom when you decide how you're going to spend the money and what she would have wanted for you. You have the money because your mom loved you and thought enough ahead to take care of you in case something were to happen to her. Make her proud of you and you'll be proud of yourself.

[Jim]

If you plan on further schooling in the relatively near future then I would invest your money in a safe investment such as CDs. I would not put your money in stock market if you know you'll need it in less than 10 years. The chances of losing a significant amount in less than 10 years in stocks are too high to risk. I'd make sure that you have your future tuition / school expense needs covered with safe investments.

If you haven't already, I would fund a Roth IRA to the annual maximum. You can take your contribution out of a Roth at any time and since this money is after tax a Roth is the best place to put it. If you need the money for school then you can take it out but if you don't need it right away you can let it build interest tax free for later use or eventual retirement.

I wouldn't buy a house unless you have lived somewhere for a while and you are relatively sure that you'll be staying in one place for years. If you are only sure you'll be somewhere for 1-2 years then you should definitely rent. If you'll be there 3 years or more for sure then it starts to make more sense to buy. You can also try a calculator to compare rent vs. buy:
http://www.dinkytown.net/java/MortgageRentvsBuy.html

Jim

[Strick]

Put it in the bank (MM). You're moving and trying something new, no time to be making long-term decisions like investing/buying a home. Re-Evaluate your situation next year.

[Todd]

Most of the advice above is good. I would highly recommend you follow the "get a Roth IRA" suggestion as one of your top priorities. Assuming that you make less than $101K per year (and that you have earned income), you can open an IRA with the annual maximum of $5,000. I'd suggest opening an IRA account at Vanguard, they are excellent.

[aaktx]

PA's incomes are between 75k-150k depending on the area of expertise. Training time/schooling is between 2-4 years based on specialization. Spend your money on your education(especially being a physician assistant). It is the best investment you will make and graduate into an excellent field with no student debt. Investing comes down to your time horizon. I would purchase the index funds if I did not need the money for 10-15 years.

[Similar circumstances]

I was lucky/unlucky enough to come into a similar amount as I was heading off to graduate school 10 years ago. I bought a property. I spoke with a few people I trusted and respected and got similar advice to what you see above (almost all of which is good). Why did I go with property?

I was in Boston, like Syracuse its a good market. It gave me the most leverage in terms of a mortgage (and leverage at your age is good). Property near a university tends to fluxuate less and has a built in renter base year in and year out. Finding managers also proved easy. Finally, I opted for a flexible mortgage that allowed me to pay off some capital with additional payments. This meant I could load the place up and pay down fast. This made a HUGE difference in my overall net worth (and in my debt load).

I took a student loan for my education - cheapest money you'll ever get.

Real estate isn't popular these days but its simple if you pay attention.

Finally, I'm very sorry about the loss of your mother during such an important time in your life. Mine loved the west and I spent a few grand on a family holiday in her honor out there. Truth be told, it was more rewarding than looking at my net worth . . . even years later.

[Slinky]

Since they stated what they want to do with the money - stretch it as far into the future as they can...I say invest it in a low cost index or etf and take monthly distributions. It would be best to account for inflation when deciding how much to withdraw. Since they say they know very little about savings and investing, I would recommend getting an advisor to help pick the actual investments. Just be careful of the way the advisor gets paid, so you know if they are suggesting things because they will make more money.

[Greedy B*stard]

Just give it all to me :-)