Money Question: Where to Put the Money?

moneyquestion.pngSince I started this Diary, I received quite some emails from readers on various issues, mostly related to investing as that’s the main topic here. Whenever I got those questions, I tried my best to answer them. However, I feel that sometimes I don’t know enough to give a comprehensive answer, or my background may not put me at the best angle when looking at the problems. Early last week, I had an email conversation with a reader regarding her mother’s investment. After a couple of rounds of emails, her question can be summarized as follows:

Money Question: My mom is 50 years old and she has $1,100 in her ING account. What would be the best choice for her? She probably won’t need the money in the next 20 years.

I circulate this question to a group of blogging friends, asking for their opinions. After some discussion, we decided that instead of giving answers separately, we can collect everybody’s thoughts on this issue and put together a What’s Your Money Question? series to not only get bloggers involved , but readers as well. Although none of us is a financial professional, we all have passions in finance. With everybody’s unique background and experience, the inputs collectively can be more helpful than one person’s view. After all, blogging is all about interactivities between bloggers and readers.

The following are my friends’ takes on this issue.

SVB from The Digerati Life:

I’ll advice mother to place her $1,100 in the total stock market as represented by the ETF: VTI (Vanguard Total Index). I have 3 reasons and assumptions for recommending this approach:

  1. mother is 50, so I assume that she has a reasonably sized net worth built up through the years and has no debt
  2. the amount of $1,100 is fairly small and possibly represents a small portion of her assets to be fairly negligible so she could assume some risk with it
  3. mother won’t touch it for 20 years so that’s enough time to keep something in VTI, which allows for a position in the stock market with reasonable risk

Lazy Man from Lazy Man and Money:

I’m going to make the assumption that she has an emergency fund. I’m also going to assume that your mother has no debt. That out of the way, if I had $1100 extra dollars, I’d open up a brokerage account and buy stock symbol VTI – Vanguard’s Total Market Index. This invests in diverse array of companies, which over 20 years, should average a 9-10% return on the money. At that point, the money should be worth around $6,700. I’d make this contribution in a Roth IRA account and she won’t have to pay taxes when she withdraws the money – a nice bonus.

What’s the best brokerage? You’ll want something with minimal commissions. I like TD Ameritrade myself as I’ve used it for a long time. If I were to start from scratch now, I’d give Zecco.com a try. They provide commission-free trades, which will save you a couple of dollars. (However,) Zecco.com is a bad idea if she chooses the Roth IRA plan – they charge a $30 fee for IRA accounts. She’d be better off in TD Ameritrade in that circumstance.

Henry from Binary Dollar:

This is tricky as we don’t know what’s meant by “she doesn’t need it for the next 20 years.” Is her retirement account already fat? Does she have an emergency fund?

If she doesn’t need it and doesn’t have an emergency fund setup, then put that into a money market account for a rainy day. Since she’s getting older, the inevitable medical expenses are going to start creeping in so that emergency fund is very important to her well being. These are things that people might not think about when they say they “don’t need the money anytime soon.”

As always, consult a financial adviser before making your decision.

Ben from Money Smart Life:

If she doesn’t already have some type of long term care insurance she might want to look into buying a policy. However, keep in mind long term care is not for everyone. Check out this longer term care article for more information.

Golbguru from Money, Matter, and More Musings:

  1. “She probably won’t need the money for the next 20 years” is just a perception … and you have to take into account that she *may* need it anytime after her retirement. (Unless she has some other reserves that she would use for the next 20 years, in which case $1,100 will be a comparatively very small amount and nothing much to worry about). So from a practical point of view choose something that will be *easily* made liquid around 10 years from now
  2. Now, let’s look at some numbers for this 10 year time frame; $1100 is not a big amount. It follows that returns won’t be very big either. At 5% APY (current savings rate and 10 year CD average rate), that amount will grow to about $1800, and at 10% APY (average stock market return – optimistic) it will grow to about $2800. Although, the percentage increase is a lot, in terms of absolute terms, it’s not very significant. Plus, there will be some taxes and fees that will eat into the returns.
  3. Who manages her finances? I am asking this because, I don’t expect all 50 year olds to know how the modern stock transactions take place. You would probably want her to keep the money where she can easily access it without too much trouble (or ask someone else to access it without too much trouble). Putting the money in the stock market is certainly a profitable proposition…but you should think about how feasible it is for your mother to make use of that investment. Personally, I feel stock markets are for people who understand it; there are a lot of pitfalls for rookies.
  4. Considering the factors above, I think the money is right now in an OK place. However, you (her son/daughter) may want to provide some leverage and increase the amount and think about buying some kind of a fixed-income annuity for her.

And my answer: Since her mother won’t be using the money for the next 20 years at least, then the money can definitely be invested. In this case, a target fund may be a better choice since the fund requires little management from her mom if she doesn’t have the time and knowledge to do the job herself. As for which target year to choose, I think 2025 or 2030 may be a better choice because she started quite late and a late target date can give her more exposures to stocks for better returns. Of course as time goes by, she can always move the money to a more conservative investments. As to what to invest, Vanguard offers some great funds, however most of them require at least $3,000 to begin with, making Vanguard an impossible choice. With, for example, T. Rowe Price or Fidelity, the minimum initial investment is waived when using an automatic investment plan. I checked both TRP Retirement 2025 and 2025 and Fidelity Freedom 2025 and 2030 and it seems that TRP is a better choice in both costs and returns. However, TRP has a $10 annual fee for asset less than $5000 and Fidelity has minimum $200 monthly investment even with their automatic plan. Thus, I think TRP is better than Fidelity in this case.

Now I am asking readers to join the discussion: If you were asked the same question, what would you recommend? Or do you have a money question that you’d like to hear some independent opinions? If so, please leave a comment or email me the question. The next edition of What’s Your Money Question? will be held at Money Smart Life.

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12 Responses to “Money Question: Where to Put the Money?”

  1. The Digerati Life |  Apr 11, 2007 at 10:01 am

    Sun, thanks for the inaugural edition of What’s Your Money Question? :D This is great.

  2. Savvy Steward |  Apr 11, 2007 at 3:07 pm

    I think the above are all great suggestions. $1100 is not that much. It’s one thing if that is an initial investment, but if no further investments are going to be made in the next twenty years then maybe it’s better to actually use the money.

    One option is to either apply it to her mortgage so that she will be debt free sooner, or if she already has the house paid off, invest the money into a facelift/project for the house.

    Spending the money now, she can enjoy the benefits of an upgrade to her house, and then when she goes to sell it, the upgrade will have added to the value of the house. Obviously there is risk, but if you have the right house and make the right type of upgrade, it will appreciate in value. An investment with potential return and something you can enjoy immediately.

  3. moom |  Apr 11, 2007 at 6:22 pm

    Without having the big picture it’s impossible to give advice. Taking the question at face value – this money isn’t needed now but assuming the mother doesn’t have anything in long-term self controlled assets – I would open a Roth IRA and invest in one of those target funds for 2025 or so. Need to make sure you don’t pay any loads or big brokerage fees. Ameritrade charges $50 to buy most no-load funds though some are fee free.

  4. TFB |  Apr 11, 2007 at 6:48 pm

    I like golbguru’s answer the best, which is an example for seeing the larger picture. If Mom is a millionaire, what happens to $1,100 doesn’t matter. If $1,100 is all Mom has, there’s a much bigger issue than what happens to this $1,100. If Mom has other money and she already has a good investment plan in place, just blend it in. If Mom has other money but doesn’t have a good plan, she needs a good overall plan first.