Gerri Willis of CNN Money answers a reader's question:
I am a 26-year-old professional. My parents just generously gave me $10,000. I want to use this money to begin saving for my retirement. I will contribute $4,000 to my Roth IRA. Any advice on what to do with the remaining $6,000? – Meghan, California
Her sound advice was the following:
If you don't have an emergency fund, think about setting aside some dough for that as well – you'll want three months of living expenses that you can tap at any time. Put the money in a money-market or high-yield savings account.
Jim over at Blueprint for Financial Prosperity had vastly different ideas as to what to do with the money. Most of them were frivolous, like gambling, taking an expensive vacation, or buying a new car. He probably was giving his readers an opportunity to fantasize about a windfall without any strings attached, which is all fine and dandy as long as it remains fantasy.
Problem is, there are strings. At the end of the day, the only proper response to this gift would be to do the “boring/responsible stuff” with the money. I know that my parents would be disappointed with me if I blew the money. It would never occur to me to go take a cruise.
I view such parental monetary gifts as a test. Usually, parents who are able to give such large monetary gifts to their children made the typical, boring, responsible money decisions that allowed them to achieve financial security. They may want things to be easier for their kids that it was for them, but it's just as likely that they want to see their kids fish rather than eat the fish that's handed to them.
The parents may say: “Here's $10,000, Meghan.” What they're thinking: “Let's see how she treats this $10,000.” If she treats it well — saves it, invests it, makes it work for her — more might follow. If she treats it frivolously — putting it all on red — more might not. Or it might follow later with much more stringent restrictions, as in an allowance from a trust until she's 50. She failed the test.
There are no guarantees either way, but blowing a $10,000 gift doesn't encourage more money to follow.
the boring stuff is unfortunately the best thing to do. However, I always feel that when you get gifts like this, you are obligated to do something fun. Go buy an outfit, eat at that steak house you never would go to, buy some new tech toy or a box set of your favorite artist. Keep it small and simple, and realize the small sacrifice you are making today for a better tomorrow.
Me personally, put the 4k in IRA, put another 4k in my online savings for next year’s IRA, put 1k in my emergency savings, and the other 1k I’d mark for xmas presents and a gift for myself.
Buy Gold
It's remarkable when people ask these types of questions because the person being asked has no idea of the financial condition of the person asking.
In any situation, I think the person would have to evaluate all the costs. If she's carrying unsecured debt that costs her more than she can earn in the market, it might make sense to pay down her debt. If she's carrying a 0.9% car loan, it might make less sense to pay that down than to throw the money in to a 4% account.
When you consider compound interest, it might be beneficial to put $4000 into a Roth or Tradtional IRA, and put the extra $6000 into a nice index fund instead of throwing it into a low interest savings account.
Then again, if her parents are giving her 10 large, there is a possibility that she might be in a very high income bracket where $10000 is no big deal, or dead broke and needing of assistance. There's just no way to tell.
I'm rambling now. Geez. Sorry I'm such a spaz.