How Should She Invest?

[retiringby50]

I just looked through some of my old questions, including how to teach children about money, which never got answered and in a blink of an eye, my baby is now 24!

Through living at home and mostly because she's been homebound during COVID, she just told me that she saved $40K! That's on top of $6,000 x 3 that I've told her to put into her IRA since she's been working.

That $40K is in an online savings account lumped together as "emergency fund", but I'd like to give her some guidance on how to invest the money for better returns. I feel like I need to share additional info but don't know what would be relevant, so here goes:

- We are in northern CA, so saving to buy her own house is unlikely. We have a rental she can rent from us if she wants to move out; we're not charging rent right now and don't plan to
- She's not dating, so I don't anticipate marriage in the near future; we're all pretty traditional, so I anticipate there would be a standard engagement where she and he would save for the wedding, and parents would chip in
- her used car still runs well and can probably last for another 5-10 years, although I feel like if she's going to make a big purchase, it would be for a new car - "made it" and all that.

Should we decide how much should really be in an emergency fund and then put the rest in an index fund?

 

[njhowie]

Should we decide how much should really be in an emergency fund and then put the rest in an index fund?

While living at home, is she paying any of the household expenses? Anything?

In general, I'd say to keep 6 to 12 months expenses in emergency savings in the event of a job loss. However, in your situation, since expenses are going to be significantly lower than the norm, you/she need to find a comfort zone. Maybe that's $5k, maybe $10k. Without understanding more about her monthly expenses and spending habits, as a starting point I wouldn't go any lower than $5k on the emergency savings and move the rest to some index fund(s). Over time you should get a better feel for the right amount of emergency savings.

 

[sengsational]

I have 2 daughters of similar age. My advice for asset allocation is 100% equities for savings beyond the emergency fund. If a big enough stash, a slice of international might even be advised. The logic is that they can always earn their way out of a jam if the market tanks. While it's true that they could loose their job and run through the emergency fund, encountering the dreaded "sell low" scenario, I don't think it's likely that they'll not be able to get another job. Of course there could be another 1929-32 era, but if that's the case, most everyone is in a world of hurt, and just having the opportunity to sell low will be a blessing.

 

[OldShooter]

The best for her, long term, would be to put 100% of the money in a total market index fund and for you to be the emergency fund if it becomes necessary.

 

[Love This Community]

Agree with oldshooter. Although, having an emergency fund bucket for each kid is the right thing, if your have the means to support kids through tough times, why do you want them to start from ground zero. Glad we are discussing this topic since I always thought that we somehow don’t leverage the bank of close family members ( totally understand that money can sometimes cause a rift)

 

[38Chevy454]

The best for her, long term, would be to put 100% of the money in a total market index fund and for you to be the emergency fund if it becomes necessary.

That's a good plan. It maximizes her potential returns over the long run; while still having a safety net. You can afford the safety net and she pays you back once recovered back in good financial shape. In the meantime that 100% investment stays invested and the magic of compounding works on.

 

[ERD50]

The best for her, long term, would be to put 100% of the money in a total market index fund and for you to be the emergency fund if it becomes necessary.

I pretty much agree with the 100% total market, but I think she should learn to be her own emergency fund. I don't think relying on parents for that is a good thing to teach.

But if living at home works for everyone, the emergency fund could be smaller, as some noted. But with a car purchase in the future, maybe still some allocation to bonds would make sense, she might get a bad taste of the market if she had to pull money from the market in a downturn.

I know, odds are with you over the long run with the market, but I think it may be best to not risk scaring a beginner in the off chance (but very real chance) of having to pull when the market is down.

-ERD50

 

[SevenUp]

Should we decide how much should really be in an emergency fund and then put the rest in an index fund?

Yes, exactly that.

Might be worth going through Prioritizing investments and/or Investment Order with her.

 

[retiringby50]

While living at home, is she paying any of the household expenses? Anything?

She's not paying towards household expense. We really don't need her because she's very responsible with her money. Other than food and toiletries, she pays for everything else (entertainment, clothes, gifts, etc.).

I pretty much agree with the 100% total market, but I think she should learn to be her own emergency fund. I don't think relying on parents for that is a good thing to teach.

But if living at home works for everyone, the emergency fund could be smaller, as some noted. But with a car purchase in the future, maybe still some allocation to bonds would make sense, she might get a bad taste of the market if she had to pull money from the market in a downturn.

I know, odds are with you over the long run with the market, but I think it may be best to not risk scaring a beginner in the off chance (but very real chance) of having to pull when the market is down.

-ERD50

I think I'll have her keep maybe equivalent to 3 months' rent as her emergency fund then. If she loses her job/investments, we'd still pay for her food but would expect her to go without all the non-essentials

And yes you mentioned the other things that I couldn't put into words...maybe allocating some of the funds into bond so that she doesn't have to worry about market if the car breaks down. And the main reason I haven't suggested putting into an index fund is "scaring a beginner" off. It's one thing to see the money allocated for 40 years later go down (it hasn't) but another for regular savings.

Might be worth going through Prioritizing investments and/or Investment Order with her.

I'll check out the links. Thanks.

Now to compare index funds...

 

[street]

The best for her, long term, would be to put 100% of the money in a total market index fund and for you to be the emergency fund if it becomes necessary.

I like that plan as well.

 

[SnowballCamper]

Another member usually posts this link https://www.etf.com/docs/IfYouCan.pdf as a response to similar questions. It is a great short read for young, new investors.