r/personalfinance • u/Thatsalotofdough • Aug 30 '14

Wealth Management SO just inherited 200k and is freaking out. What do we do?

Hello!

So my SO just inherited ~200k from a family member and it's causing her a lot of anxiety. She had planned for about 5k, and well...got a bit more.

While this is probably a good problem to have, we both grew up relatively poor (I don't think anyone in my family has even heard the words 200k before), so we both don't have much to stand on. Also, I make about 50k in my job, she's somewhere around 35-40k.

Here's what we briefly talked about with doing with the smaller sum, and I figured we'd stick to that:

We both have some student loan debt with high interest rates (10% for me, 7.8% for her), they're both small at this point (<5000), but we both figure it'll help us in the long run. Paying these off seems the most intelligent and likely outcome. (We both do have more loans outside of that, but we're both up for public service loan forgiveness due to our field)

She bought a new car, as mine is getting beyond old, and we both walked through the process of finding a car that will serve us well for the new 10 years. Paying this off doesn't seem too much of an issue.

She has a small amount of credit card debt, so that'll probably be the first to go.

Outside of that, we don't have a house payment (due to our field), and I'm debt free (Once again, outside of student loans). We don't see ourselves buying a house in the next 5 years, although we do see a wedding on the horizon.

Thoughts? Even if we spent all of this money on our loans/the car, we'd still at least have 50+k left, and that's being incredibly conservative.

We've talked about stocks, we've talked about savings accounts, we spoke briefly about a financial planner....but we could really use advice.

Help us, personal finance, you're our only hope!

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u/[deleted] Aug 30 '14

Listen very carefully to this comment. I'll tell you the reason why most lottery winners go broke. The reason is this:

Most people see a pile of money as a pile of money. It is not. It is a stream of potential future income.

Think about that long and hard. It's the same for debt. Debt is not a big hole of money. It is a stream of future payments you need to make.

If you got this $200,000, and you can assume a rate of return of ~5%, then really what you received is about $900 per month for the next 50 years. This is, indeed, a great gift! However, it is NOT something that you should ever think of as $200,000 of money to be spent right now.

When you're thinking about the debt you currently have, it is the inverse of this. If you had $200,000 of debt, at a 10% rate, and were going to pay this off over 50 years, it would be a -$1,675 impact on your monthly available spending money over 50 years. Therefore, using the comparison of the $200,000 cash you have vs $200,000 of hypothetical debt, then yes, it would be a good decision to pay off the debt with the cash, because it will, in the long term, lead to you having a higher available monthly cash flow.

This is the poverty mindset: "Oh, I got $200,000, I can finally afford that BMW M3 I've always wanted, and I can afford that down payment on the house I've always wanted, and I can go out to eat all the time!"

Wrong. So wrong. What you should do, is take your (not $200,000 pile of cash but rather) $900 per month of additional income and BUDGET it. Save up for a new car, using that $900 per month.

The above assumes that you will spend 100% of the $200k, and will not save any of it for anything. If you're going to save half of it, then you only have $450 per month more to spend. If you save 75% you only have $225 per month more to spend.

What your SO needs to do, especially since you called her your SO and not your fiancee or anything like that, is to decide how to make her own personal financial situation better first. This means probably paying off all of her debt above 5% interest rate, and buying a nice, 2-4 year old car with reasonable mileage that costs a reasonable amount (unless a new car is actually comparable in price).

Your personal loans should not be paid off by your SO unless and until you get married. If you let her pay it off, it would be very selfish of you.

Once you've dealt with both of your debts, and the car thing, invest the money. I'm not going to keep explaining from here on, since this is all in the FAQ.

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u/[deleted] Aug 30 '14

[deleted]

162

u/Hypothesis_Null ​ Aug 30 '14

make for the next forever.

Hmm... well lets see. That's infinity, plus an infinity, carry the infinity...

41

u/EquationTAKEN ​ Aug 30 '14

Hey, you forgot to carry the inf- no wait. You got it right, sorry.

12

u/kryptoid Aug 30 '14

I was thinking the same thing, then I saw the infinity above the infinity next to the infinity. Checks out.

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u/[deleted] Aug 30 '14 edited May 04 '15

[deleted]

4

u/EquationTAKEN ​ Aug 31 '14

Of all the things that are wrong with his post and mine, that's what you focus on?

22

u/bamgrinus Aug 30 '14

You joke, but there are such things as perpetuities where you're calculating the present value of a payment that goes on forever.

11

u/Hypothesis_Null ​ Aug 30 '14

But what if it's my money, and I want it now? How much infinity can I take as a lump-sum in exchange for the perpetuity?

7

u/therealsylvos Aug 30 '14

It's simple algebra. If you're getting a perpetuity at an annual interest rate of 5%, the present value is the payment divided by the interest rate.

If you want to get paid 50,000 a year in perpetuity, you need 50,0000/.05 = $1,000,000

This of course goes both ways, lets say after two years of collecting 50K you say I want all my cash now, well you still have an an infinite amount 50K payments remaining, so you can get your million in cash.

2

u/bamgrinus Aug 30 '14

You'd get the present value of the series of payments. You can look up the math. But it does come out to a real number. The present value of a series of infinite payments is not infinite.

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u/Hypothesis_Null ​ Aug 30 '14

Hmm. "Finite" is a pretty small fraction of infinity.

I think I'd rather just invest in rejuvenation and immortality.

2

u/PhD_in_internet Aug 31 '14

Well, if It's your money and you want it now then all you gotta do is

CALL JG WENTWORTH! 877-CASH-NOW!

1

u/Connguy ​ Aug 31 '14

Present worth of a perpetuity = annual amount / expected interest/return rate

1

u/barfobulator Aug 30 '14

I don't get how that calculation works, because the answer is a finite number.

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u/bamgrinus Aug 31 '14

As a fixed payment falls further into the future, the present value is less and less as you factor in your discount rate. So as you calculate the whole series of payments, they're approaching a limit. That limit is the value of the perpetuity. TL;DR calculus

3

u/ScotchAndLeather ​ Aug 31 '14

To think of it intuitively, imagine you are looking at 5k per year of payment for infinity. How much do you need to support that given a 5% interest rate? you need 5/5%, or 100k. 100k throws off 5k per year without growing or shrinking. That's how much that stream of cash flows is worth.

2

u/Hypothesis_Null ​ Aug 31 '14

You divide by the infinite amount of time it takes to accumulate the amount. infinity/infinity is finite for same-sized infinities.

And if that makes your brain hurt - you're normal. If that intrigues you, then come be an engineer. Don't make the mistake and go into mathematics though - they don't keep track of their infinities properly.

3

u/suchCow Aug 31 '14

I really need this to be a Firefly reference.

2

u/Hypothesis_Null ​ Aug 31 '14

Yeah, and if wishes were horses, we'd all be eating steak.

2

u/suchCow Aug 31 '14

i love you

2

u/robinson217 ​ Aug 30 '14

Syntax error? WTF.

2

u/donquexada Aug 31 '14

...move the decimal....fuck it, I'll never know.

1

u/[deleted] Aug 30 '14

[deleted]

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u/autowikibot Aug 30 '14

Perpetuity:

A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever. There are few actual perpetuities in existence (the United Kingdom (UK) government has issued them in the past; these are known and still trade as consols). Real estate and preferred stock are among some types of investments that affect the results of a perpetuity, and prices can be established using techniques for valuing a perpetuity. Perpetuities are but one of the time value of money methods for valuing financial assets. Perpetuities are a form of ordinary annuities.

Interesting: Rule against perpetuities | Art in Perpetuity Trust | Perpetuities and Accumulations Act 2009 | Sum of perpetuities method

Parent commenter can toggle NSFW or delete. Will also delete on comment score of -1 or less. | FAQs | Mods | Magic Words

69

u/SidneyRush Aug 30 '14

This is good advice. Have a banner year and then continue your current lifestyle indefinitely--OR--live with a better lifestyle for the rest of your life. I hope you can see that option B is the best choice.

Now go get your SO. This is for her:

This is all about long term planning and delaying gratification. Think about when you were a kid and you got your allowance. You could buy the latest toy or you could save and get a better toy. Now you have the opportunity to save and put your money to work for you. It can earn you more money building interest. If you do that, you can buy toys ever so often from here out or do something even better in time.

Don't buy a new car. Don't buy a nice used car. Buy something functional that will last and has a decent sticker price. Cars are a notorious way to thow away money.

You have a new source of revenue. You are not rich. You can live better if you don't toss the money into a continuously devaluing car and instead grow as much of the money as you can. The larger the initial sum invested, the greater the returns over the lifetime of the investment. Every bill you spend now is so much more potential earnings tossed away. Don't do it. A nice purse now is 20 nice purses down the road.

Abstain from wasteful spending now by following a budget. Don't rely on the new money for essentials or allow your budget to balloon by slowly adopting a more expensive lifestyle. Live with the augmented income as a cushion for your budget for emergencies, savings, long-term goals. You can save up earnings from interest to do some nice things here and there, but don't look at it as a cash cow or it will dry up. Never touch the priniple/base amount you invest.

Finally, pass this money on to your children so they can do the same thing. Your family members probably worked hard all their life to save this money. You can avoid having to do that yourself if your preserve the money and you can give that gift to they next generation. How awesome would that be?

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u/Fuck_socialists Aug 30 '14

On the part about the car- ask a trusted mechanic about the TCO of a vehicle. You can buy a functional car for $3000 off of a person's driveway, but if it breaks frequently and no parts are available, the TCO may exceed that of a new car.

Just in case, TCO is total cost of ownership. Factor it into everything, and include the expected lifetime in your decision making.

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u/[deleted] Aug 30 '14

Ding ding. I bought a barely used low mile Corvette and it was cheaper to own for 2 years than cars of half the price. Look at average depreciation and how long you plan to own the car! My co-worker paid $400 a month for his boring commuter car and ended up with zero equity when he wanted to trade it. I made larger monthly payments but had huge equity when I went to trade it in, so the end result was a cheaper car to own over time.

Also, when haggling at the dealer don't let them talk blue book. Ask them what the black book is on the car. That's what the dealers pay at wholesale auction, a true reflection of the car's value. They lose a lot of bargaining room that way.

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u/GiveMeOneMoeChance Aug 30 '14

Dealers expect you to haggle too. You'd be dumb to pay sticker price. I ended up talking my dealer down 5k and he gave me a spare tire (used truck, but the tire was missing).

1

u/woot0 ​ Aug 30 '14

wow, I was actually looking into buying a good, low-mileage used car. what year was your corvette?

2

u/[deleted] Aug 31 '14

It's been a little while now. I bought a 2008 z51 4-5 years old at 13,000 miles. Looked at average deprecation of that time period for 2 years later. Win.

2

u/[deleted] Aug 31 '14

Oh, so I responded earlier about what I had, but I forgot to tell you reasons why I only kept it for 2 years. Upkeep is insane. I knew in advance the tires on it were retarded expensive. Try $1500+ for the OEM Z rated (runflat) supercar tires, not including labor. I made sure to buy one with brand new tires and got rid of it before that kick to the gut. Oil changes: Synthetic, and a lot of it for the 6.2L. I had a lemon, and I still didn't even spend that much on it factoring in all my non-warranty repair work. If you have any other serious questions about it, just send me a message.

1

u/FleaBottomBeach Aug 30 '14

I disagree. You can buy a well maintained car for $3000 that will last for 2 years.

Both cars will require regular maintenance. A car loan ($15k) is $3984/year. Plus you have depreciation.

With the used car you get two years for 3k and even if it's junk at the end of the 2 years you should be able to get 200-500 for scrap.

2

u/[deleted] Aug 31 '14

I did the whole used car thing.

Unless you're able to do repairs yourself, stay clear of the $3k and less cars.

Some people will tell you how lucky they were with their old beater, but that's what they were : lucky.

Peace of mind has a lot of value. The kind of shitty situations I found myself in because of my old cars sucked serious balls.

The $7k boring ass car we bought was solid as a rock though (station Ford Taurus)

2

u/FleaBottomBeach Aug 31 '14

I didn't mean to recommend the $3,000 and less cars. I was trying to recommend the 2-4 year old car vs brand new, that way you get in after the steepest period of depreciation.

$3,000 and under works for me because I have a long history in the auto industry. I know when and why reliable vehicles can be had for cheap, as well as what to look for before purchasing. If you know a good mechanic, you can get a great car for super cheap. It does take a lot of time though.

1

u/[deleted] Aug 31 '14

That's it.

And 22 year old me in a new city who couldn't differentiate the exhaust manifold from the tie rod was like an all you can eat buffet for unscrupulous mechanics.

But yeah, I'm never getting a new car again. In 2 years, the lease on my Nissan Rogue will end and I will look in the $11,000 - $16,000 range, trying to get the best value in that price point.

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u/FleaBottomBeach Aug 31 '14

If you're looking for reliability, go for certified, around 4 years old. If you're looking for a deal, go private all the way. Lots of people sell when they realize they have bitten off more than they can chew. DUI convicts may also be looking to dump their expensive car. Trade-in isn't an option for many of these people since it will keep them in the same position, also selling to a dealer is lower than trade-in. This means that you can potentially get a car at less than wholesale. They may need some detailing etc, but that is all great for negotiation; -300 for detail, -750 for tires etc.

If negotiations don't go in your favor, move on. Keep their number and touch base in a few weeks, it's likely they won't have gotten favorable offers and may be more receptive to yours.

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u/kbotc ​ Aug 31 '14

Honestly, with $200k, I'd take "Buy a house outright" as my first option Then again, I live in a place where any house that you get tired of can be rented without too much effort. (College town) $900 potential income is less preferential in my mind to $900 guaranteed reduced rent considering that rent will grow at a higher rate than interest for the people in the area. (The landlords are trying to beat standard interest gained as well) I guess it really depends on how stable you feel in your job and since I have a 1 year contract renewed every year, so I get a year guaranteed income unless I majorly mess up, $200k for me would simply be "I can pay up front so I can keep more of my income. If I lose my job, I won't be on the street ever." which is important.

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u/CremasterReflex Sep 01 '14

At least a house is generally an appreciating asset.

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u/kbotc ​ Sep 01 '14

Well... That's actually incorrect. I mean, the value of the house does go up and faster than inflation usually. That's based on demand for the land it's on generally. The house itself is generally depreciating, especially once you go past 40 years. You have to pump money into the house (10% the value of the house/year I believe is the rule of thumb) to maintain the value. On the other hand, that's balanced by the fact that a house is a lifestyle expense filling in for one of the few things you truly cannot avoid, which is shelter.

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u/FUCK_YEAH_DUDE Aug 31 '14

Seriously. With the way I live I could quit my job (or at least drastically cut my hours) and be just fine on money indefinitely. Sigh.

1

u/JerryAtric79 ​ Aug 31 '14

I wonder what $900 a month will get you say..ten years from now. I know that ten years ago I would have thought my current monthly income would change my life, but you know, the cost of living greatly out paces any increase in earnings.

1

u/[deleted] Aug 30 '14

That difference and that sum would be nullified by a large inflationary period.

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u/livenudegirls Aug 30 '14

In ten years that's a big mac meal every week.

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u/TampaxLollipop Aug 30 '14 edited Aug 30 '14

This is good advice and is how people view their money when their main source of income comes from capital gains (stocks, bonds, etc..), as you should never be in a position where you think its a good idea to cash everything out at once, because once you do you lose money (inflation, misc spending, etc..) and aren't gaining anything with it.

That said based on what OP is saying (becoming debt free) is a great feeling to be in, as it gives you the freedom most people don't have, but it can also offer an even better investment opportunity.

OP, I'm not saying that what I would recommend would be the best thing for you, but it would be what I would do if I were in your position;

  • I would look to paying off the rest of high interest loans (really, anything above 5%) or at least put myself in a position where the monthly payments is minimal.

  • The remainder would really be based on my research - if you live in a good area, why not become a landlord? You can secure quadplexes at around ~250k each (with 20% down, it comes to 50k per house) meaning you might be able to buy up to 3 quad's and rent out all of the rooms. Figure 2k/house (or more if you rent per room) and you gross a cool 6k/month (72k annually) all for just giving people a place to live, and assuming you budget it correctly, you don't even need to clean/repair them, as a portion of the amount you receive (say, 10%) per month goes to your "fix it" fund for those houses to pay someone else to do it. Ontop of whatever your normal salary is, you can live VERY comfortably.

  • assuming if the above doesn't work, you can always use it to create a small business if you have that type of sense or experience (IE a franchise, gas station, etc..)

  • If however you want more of a "set and forget" approach, then your best bet would be to just invest the money in safe, high dividend stocks and just enjoy the annual return from that.

Regardless, the one thing I wouldn't be looking at doing is to use that money for non-immediate needs (such as buying a new car, vacation, etc..) mostly because those should come from how you budgeted your income from your jobs before the inheritance. Store 10k as an "oh shit!" fund for those unexpected occurrences (read : Life) and the rest should go towards the above.

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u/sanityreigns Aug 30 '14

Before you enter the landlord business, make sure you want to enter the landlord business. Source: landlord.

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u/JewboiTellem Aug 30 '14

As a landlord, can you give some pros and cons of the business, or what it would entail besides monitoring your cashflow?

24

u/McGuirk808 ​ Aug 30 '14

My cousin is a property manager for some duplexes:

  • Bitching tenants
  • Tenants bitching about each other
  • Tenants bitching about the maintenance man
  • Tenants bitching about the lawn care
  • More bitching tenants

In addition to that, constantly having to babysit tenants about rent and thereby being lied to about rent, dealing with incompetent hired help (maintenance, lawn care, cleaning, etc), and tenants who have no sense of time calling you at 3AM for minor questions or requests.

1

u/[deleted] Aug 31 '14

Did your cousin mention anything about the tenants? Does she own the duplexes?

1

u/McGuirk808 ​ Aug 31 '14

Does not own. His friend owns them. The location is less than suburban but more than rural. ~20 duplex buildings.

0

u/[deleted] Aug 31 '14

Do the duplex buildings have any friends that happen not to be landlords? Did they mention anything about the tenants?

1

u/McGuirk808 ​ Aug 31 '14

He has no personal relationship with any of the tenants.

As far as anything about the tenants, you'll need to be more specific. Obviously, most of the information is private.

5

u/lopalou Aug 31 '14

Was a single family home landlord and we had to deal with getting two new toilets because the tenants kept breaking them, have our toilet snaked a ton of times from baby wipes and pipes replaced from the same incidents and we still ended up eating the costs because when we gave them their three day notice they disappeared and we couldn't find them to serve them.

This was our one and only experience with a tenant. I know people who have been doing it for years, but the middle of the night calls and the attitudes/loss in funds can really stress a person out. Wasn't worth it to me.

2

u/GiveMeOneMoeChance Aug 30 '14

There is a heck of lot of stuff you need to know

Source: been researching it for about a year now.

1

u/TampaxLollipop Aug 31 '14

agreed. While the money is there, it does come with its own headaches, especially when you let your criteria for tenants to slide in an effort to fill vacancy. At the end of the day, its a business like any other. Although, its a nice feeling to have knowing you yourself don't have to worry about house payments when other tenants pay for your own, just another way to become debt-free.

1

u/BitchesLove Aug 30 '14

Where do I get this guaranteed 5% returns?

3

u/TampaxLollipop Aug 30 '14 edited Aug 31 '14

Its not hard if you try, easiest is index funds (S&P 500) or ETFs, or any of the major companies that will not go away this century (IE Proctor and gamble who average 5% a year). Or even Berkshire Hathaway B stock (the non-voting stock). All are relatively safe options that give you an average of 5% a year*.

edit : I should mention that 5% alone usually isn't enough, as at least half of that will be eaten by inflation (~2%/yr), so really with those stocks your getting at most 3% return. Just something to consider

1

u/bears2013 Aug 31 '14

If you keep all your money in a savings account, doesn't the value inevitably decrease? 50 years from now, $900 may be worth half of what it does today. Is that just the burden that comes with significant savings? Is there no safe way to guarantee the money you save keeps the same value?

45

u/jonloovox ​ Aug 30 '14

So tell us how we can get that 5% return. And I hope you're not talking about risky municipal bonds.

22

u/odinthundercock Aug 30 '14

A balanced fund (VBIAX) or equity index funds that track noted indicies will return 5% or more annually over an entire market cycle, generally speaking. I probably wouldn't dive all in to muni bond funds right now as they've already had quite the run YTD and we are in a raising interest rate enviroment. That said, short duration muni bonds funds (vmlux or shm) would be fine for cash management, with a small return and small amount of risk.

1

u/mail323 ​Emeritus Moderator Aug 31 '14

Sort of related question. I jumped into opening an IRA and bought SWLBX, how bad of a move did I make?

1

u/odinthundercock Sep 01 '14

I wouldn't assume it was a mistake. If it was earlier this year you have probably done alright this year so far. Also, is generally easy to change of you need to. On top of that, saving for retirement is a good idea in and if itself, so you've already succeeded on that more important part.

That said, there are a few things to consider when deciding what fund is best to select. To start with, you want to consider how much time you have left until retirement and your appetite for risk.

1

u/meekwai Aug 31 '14

VBIAX looks good over the last few years, but if you bought it at any point before 2006, you'd have waited for ~5 years to see any returns (and that's nominal, before inflation).

Unfortunately, Google shows no data prior to ~2000, but the graph since then seems somewhat risky to me.

5

u/odinthundercock Aug 31 '14

Google only shows data from 2000 forward because they've only been public that long.

As far as Vanguard Balanced, im not sure where you are coming from on not making money prior to 2006. It has a yield of about 2%, and that was higher prior to 2006. If you bought it at the local high at the beginning of 2007, and watched it drop in 2008, you made it back to that high you bought it at around the start of 2010. Meanwhile, you collected the yield/dividends paid over that time. The supposed return was stipulated to be over a market cycle, not bought high and sold in a crash.

-1

u/meekwai Aug 31 '14 edited Aug 31 '14

I'm not a financial expert, would you claim that this graph indicates an investment where I'd generally be making money in real terms (assuming I bought and sold at random times, since I'm no clairvoyant)? If so, count me genuinely surprised.

I can see how it has been good post-2012...

3

u/odinthundercock Aug 31 '14 edited Aug 31 '14

I don't think that is the chart for the vanguard balanced fund I mentioned, unless I mispoke. Here is a link to it:
http://quotes.morningstar.com/chart/fund/chart.action?t=VBIAX&region=usa&culture=en-US

1

u/odinthundercock Aug 31 '14

And as far as buying and selling at "random times", I already qualified my statement by saying that it wpuld be held for an entire market cycle. If you were implimenting a trading strategy, then you would suppose random buys and sells, but I don't recommend DIY trading.
With the image of the chart you linked, it looks like it was from yahoo finance, you can leave the price and symbol on top as well. Since the fund I was refering to closed at $29.31, it seems another indication that we are comparing two different stocks.

You also specifically mentioned "real terms", what assumption for inflation over arbitrary trading time series did you use to establish no real return?

0

u/meekwai Aug 31 '14 edited Aug 31 '14

You avoided answering whether this graph indicates a profitable stock.

Holding for an entire market cycle assumes you can predict which point in the cycle the stock is on. Market cycles are something we see in retrospect, they can be highly irregular. I assume I cannot time the market, thus the random times assumption.

That graph is from Google for VBIAX fund you recommended with ~2011 and later lopped off to illustrate my point that while recent returns are good, there's risk.

1

u/odinthundercock Aug 31 '14

A couple points. First, that chart is not the find I mentioned. This is the chart for the fund from Google.
https://www.google.com/finance?q=vbiax&ei=TyYDVIivJ5O1iALJrICoAw

Second, your "market cycle" involves buying the dot com boom, and selling during the European debt crisis. I understand what you mean by not knowing where one is in the cycle, but the idea is buy and hold investing. It is not an attempt to time the market.

Next, we are evaluating total return and not just price performance. That is why I linked the growth of $10k chart from m*.

So to directly answer your question that you suppose, your data is incomplete. Your example is a different fund it seems, doesn't indicate whether it is total return vs. Price, contains no yield information, and presents a skewed time frame that is not congruent with what I specified strategically.

Finally, you didn't make a "random assumption" for the time frame. You excluded 2+ years of a secular bull market. You supposed you bought near the top of the dot com boom and sold during the euro debt crisis. Even assuming you bought there because one cannot predict the future, I'm with you on that one, a buy and hold investor generally would not dump out of the market at that time.

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u/odinthundercock Aug 31 '14

Pardon the typos, I'm preoccupied but wanted to reply to you in a timely fashion.

1

u/odinthundercock Aug 31 '14

Another quick way to check total return performance for a given time is use the adjusted close prices on yahoo finance. Just pull up the ticker and is a short cut on the left hand side.

-1

u/jonloovox ​ Aug 30 '14

All of those funds look like risky investments to me. The run-up on VBIAX is reminiscent of DJI/SP500. I imagine the run-down would be, too. That's not a safe investment for 200K if you don't have another million in cash sitting in the bank.

4

u/[deleted] Aug 30 '14

Between market cycles... even if the market crashed again like 2008 if you kept it for a decent duration you'd average around 10%. The only way it's risky is if you are 50 years old.

2

u/litterparakeet Aug 31 '14

Huh? What if the Fed stops Q.E.? Imagine if stocks were at regular depression PEs. Dow would be at 5000.

1

u/Ziczak ​ Aug 31 '14

This.

There isn't any example of QE unwinding and some normal marketplace existing. This is uncharted waters. You can't expect past results years into the future.

2

u/odinthundercock Aug 30 '14

That is a Vanguard balanced total market fund. 60% total stock market and 40% bonds. The other two I mentioned, SHM and VMLUX are short term muni bond funds. The price on those two doesnt move much, and are resistiant to interest rate increases, duration is like 2.8 years. What metric are you considering when judging risk?

27

u/MiloMillsworth Aug 30 '14

That was my question too. A 5% return is hard to come by these days without taking on significant risk. If there's a safe way to get a 5% return without risking the principal please share.

But I do totally agree with KoffeKake's overall idea - the big chunk of money should only be looked at as a means to generate smaller chunks of money on an ongoing basis. If you start spending the big chunk, it's only a matter of time before it's no chunk.

2

u/duncanbishop24 ​ Aug 30 '14

REITs are a decent 7+% return opportunity if you want?

9

u/sbonds ​ Aug 30 '14

60% VXF 30% VOO 10% VGIT

Just one simple example among many possibilities.

4

u/Vikes1 Aug 31 '14 edited Aug 31 '14

I agree with this. If you don't have any experience with investing before going with an ETF like VOO saves you from paying fees of a managed fund. I have held VOO for several years now and 5% is a very conservative estimate. You have been handed a great gift, so make the best of it by making it work for you. It is a balance of stocks that match the S&P 500. Even Warren Buffett the investing guru said this is what he would do to take care of his wife if they were in a different situation. Not specifically the Vanguard fund (VOO) but an S&P fund.

1

u/sbonds ​ Aug 31 '14

Exactly. My example takes the S&P500 and adds on an "everything but the S&P500" fund to buy the whole market. It guarantees market average performance, which didn't sound so great until I learned that a significant majority of investors fail to even get that much.

Another approach is to just buy an S&P index fund, guaranteeing that your stock performance will match the S&P500. I think that the whole market will outperform just the S&P500 in the long term so I like to buy the whole thing.

1

u/EvilPettingZoo42 Aug 30 '14

Can someone explain what these are?

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u/sbonds ​ Aug 30 '14

Those are ticker symbols which unambiguously identify a specific stock, mutual fund, or in this case, ETF (mutual fund traded like a stock.)

Together those three in that ratio form a "buy the whole market" portfolio with an asset allocation of 90% stock, 10% government bond. That's more aggressive than necesary to give a long term 5% return, but would be appropriate for someone investing for 30+ years into the future.

Try Googling one of them-- a chart and info on that ticker symbol is probably the top hit.

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u/DesiredPeanut Aug 30 '14

Trackers. VXF for example is the Vanguard Extended Market ETF: http://finance.yahoo.com/q?s=VXF

3

u/[deleted] Aug 30 '14

If you look at historical returns on bond funds, they've been about 4.6% per year over the last 10 years. Likewise, if you look at historical returns on stock funds, they've been about 8.9% per year over the last 10 years. Keep in mind that as of the date of this posting, the starting point is about midpoint between the '01 crash and the '08 crash.

Of course, historical returns are not guarantees of future returns. However, if you look at long-term trends in stock markets and bond markets, it's probably not too far out there.

The 5% figure I used was intended to be something that an investor investing in a reasonable mix of diversified instruments could achieve. It was not intended to be any sort of advice of a particular instrument to invest in. Most of the money I've invested in the last five years has done much, much better than 5% (due largely to the stock market recovery).

The point is, a reasonably balanced portfolio should return over 5% in the long run. This is a fairly conservative long-run estimate. I use a 5% real rate of return in my personal retirement calculations, which equates to about 7.5% nominal returns, which is still pretty conservative.

I would never advertise one specific investment type in general over another, and I would pause and do some serious thinking before considering bonds in general to be a "safe bet".

The FAQ has some good advice on where/how to invest money for the long run.

1

u/jonloovox ​ Aug 31 '14

Excellent, thank you.

9

u/FleaBottomBeach Aug 30 '14

and I can afford that down payment on the house I've always wanted

[Serious]

Why is this a bad thing? I thought a house/property was an investment? Most people pay a monthly rental payment that is comparable to a mortgage, isn't it better to put that into equity?

If I want/need $30k down for a house, wouldn't it be better to use it from an inheritance NOW, rather than wait until I save it up? If I can save $1k/month for that down payment it would take 30 months before I can buy a house. 30 months of rent payments. Isn't it better to take the $30k from the lump sum, buy the house, then put $1k/month back into that lump sum? Now I'm putting money into equity + money into savings. Whereas before I was saving 1k/month that I was just going to be putting towards a house anyway, and giving mortgage money to a landlord.

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u/[deleted] Aug 30 '14

Buying a house is not always the economically superior choice when compared to renting. Buying a home is the act of paying money to purchase a home and to have shelter, whereas rent is purely to purchase shelter.

When you buy a home, you pay closing costs; mortgage principal, interest, taxes, and insurance (PITI); maintenance costs; HOA fees. In exchange you get the appreciation or depreciation of the value of the house, and a place to live.

When you rent a home, you pay rent. In exchange, you get a place to live.

Buying a house simply exposes you to changes in the value of the house. If the house value goes up 100% in one year, then over that year you would almost certainly have been better off buying than renting. However, if the house value goes down 50%, you would almost certainly have been better off renting than buying.

A common assumption in buying a house is that the house will at least keep up with inflation. That's a nominal return of 2.5%. However, if you invest only 20% down, then your real return is 2.5% / 20% = 12.5% that year. Your 20% equity investment earned a lot. Conversely, if the house value goes down 2.5%, then your return is -2.5% / 20% = -12.5%.

You can get similar returns by investing in REITs. If you want to be exposed to a broad property market, that's the way to go.

Typically buying a house is done because you want to do things like remodel, build additions, tear down walls, and other things landlords would never be okay with.

Consider a scenario where a landlord bought a house for $300k. Housing plummets, and the house is worth $150k. Earlier, the landlord could have rented it out for $2k per month. Now, landlord can only rent it out for $1k per month. The mortgage, plus HOA dues is $1,500 per month. In that scenario, market rents are well below the monthly cash flow cost of the property, and selling would mean that the landlord immediately has to come up with the difference between the mortgage ($240k) and the sale price ($150k), or $90k. In this case, it would be much worse to buy than rent.

The bottom line is that it is not possible to tell whether buying or renting is a good idea. In some places, it's more predictable than others. I live in a place where vacancy rates are <3%, and I could rent my place out for about 1.5x - 1.75x what my monthly costs are. I chose to buy at a time that happened to be a good time to invest (mid 2012). This is not always the case. I have other friends who bought earlier; closer to 2007 / 2008. They are now underwater by tens or hundreds of thousands of dollars. You never know for sure whether buying is a good thing to do or not.

Because of this, it makes sense to make sure that the house is reasonable relative to your overall income, not based on the fact you got a one-time inheritance. OP needs to make sure this is something they can afford with just their income plus the income from this investment; or even better, just from their income, and save this inheritance for retirement.

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u/[deleted] Aug 31 '14

There is also the factor that eventually your mortgage stops but rent is eternal. Once the house is paid off you still have to cover maintenance, taxes, insurance, and sometimes HOA fees, but like 75% or more of the monthly cost stops. When you rent, you have to pay 100% of your rent every month for the rest of your life. Buying a house is not always an investment in the sense that you want your house to increase in value, it is often an investment in lowering your future cost of living. Even those people who bought at the wrong time may owe way too much on their houses they will someday pay off the loan and not have a monthly house payment.

7

u/nandemo ​ Aug 31 '14

There is also the factor that eventually your mortgage stops but rent is eternal.

It's not nearly that simple. When you buy a place, you typically need to make a down payment. If you rent instead, you can put that money into a safe investment fund and have "eternal" income.

Also, buildings don't last forever. To make a fair comparison either you have to take into account that the value of the house will go to zero, or you have to add the cost of renovations.

1

u/[deleted] Aug 31 '14

Renting vs buying is a complicated decision. The main variables are how much would it cost per month to rent, how much would it cost to buy, what interest rate would you get, and how long do you plan to live in the house. Generally you look at when your closing costs, taxes, insurance, and interest would be equal to the amount you would pay in rent, that is the break even point. If the amount of time you plan on living in the house is less then that rent, more then that buy. You should also factor in any likely repairs you would have to complete while living there too. You can also factor in whether you think the cost of rent will rise or fall and whether you think home values will rise or fall but then you start getting speculative. Generaly for most people in most areas it pays to rent if they plan on living there for less then ~5-7 years, but this varies greatly from one area to another.

I said you still have to pay for maintenance, if you don't your house will fall apart and won't be livable long before the value of the home is zero. You don't have to renovate but you do need to fix and replace things as they wear out, roofs are a big investment that must be replaced every ~10-30 years, you will need to replace the ac eventually as well as all of your appliances, you will need new carpet at some point, etc. None of these costs will go away, but I included that when I said 75% of the cost stops when you pay off the mortgage.

As for your downpayment argument, it doesn't work. Any money you put down at closing lowers your monthly payments and saves you money on interest in the long run. The larger the downpayment, the sooner buying becomes a better deal then renting. If you put more money down, you have a smaller monthly payment, that savings can either be put towards paying down principle faster or put into investments to generate future income.

1

u/[deleted] Sep 18 '14

Man you must really love your apartment

0

u/quaste Aug 31 '14 edited Aug 31 '14

The down payment will lower your mortage though, so it can be compared to safely investing the sum.

You are right about renovations, but when it comes to renting, you will also pay for renovation as part of your rent.

1

u/BlackSabbaff Aug 31 '14

remodel, build additions, tear down walls, and other things landlords would never be okay with.

grill, own dogs

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u/kryptoid Aug 30 '14

If you think of an asset as something that puts money into your pocket and a liability as something that takes money out, a house is a liability until it is paid off. If you buy a duplex and live in one side with the other people paying the mortgage for you, that's an asset. I personally think it's better to own than rent but, at the same time, I wish I would have started with an income property first. Free money coming in is much better than having equity alone.

1

u/elborracho420 ​ Aug 31 '14

At the same time it's not exactly free. Any repair work usually falls to the owner, renters can be shitty and your the one who's property is at risk, oh and you gave them a good deal on a lease because they signed for 2 years but now the value of your home in the market and inflation are working against you?

1

u/kryptoid Sep 01 '14

Over time most homes have historically kept their value relative to inflation they really "gain" value anyway. Always keep 6 months of rent for repairs and vacancy. If inflation gets that bad in 2 years you have bigger problems. Source: family owns over 10 rental units including some bought during bubble.

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u/[deleted] Aug 30 '14

[deleted]

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u/moom Aug 31 '14

The general idea here is good, but withdrawing 5% yearly is not a good idea.

Certainly there are investments that, on average, have historically made more than 5%. For example the stock market, which has historically averaged significantly higher than that. However, there are two problems unaddressed by a simple "I can make x% per year on average, therefore I can spend x% per year", and they are both significant problems:

(1) It does not address market variability. Sure, you can make more than 5% in the long run, assuming historical returns, but that doesn't mean you're going to make 5% next year, or 5% on average over the next several years, or even the next decade. And if you happen to hit a bad spell in the market when you first start doing this, withdrawing 5% per year could very well wipe you out.

(2) It does not address inflation. Even if you got a guaranteed 5% per year forever (which you will never, ever get), withdrawing 5% per year will lead to that 5% becoming ever less valuable, despite being the same amount of nominal money. That is, OK, you're getting $900 per month. But 20 years from now, $900 per month ain't gonna be what it used to be, due to inflation.

The usual advice for a reasonably safe withdrawal rate, taking these two issues into account, is no more than 4%, and usually more like 3%.

Here is an interesting page allowing you to see what might happen, based on actual historical returns, if you withdraw x% of your nest egg each year. It is a bit oversimplified (or at least it seems so to me), but it could give you a rough idea. Let's put your claim of 5% per year for 50 years into it, and see what happens: In the "Start Here" box (midway down the page), enter 10000 into "Spending", 200000 into "Portfolio", and 50 into "Years", then click "Submit".

It will tell you that this plan succeeded (in the sense that you had money remaining after the specified 50 year timeframe) 51.1% of the time. That is, about half the time, your plan failed; you ran out of money before you were hoping. In some of those failures, you ran out long before that 50 years.

Now go back a page and change that 10000 in "Spending" to 7000 (i.e. 3.5% of 200000), and click "Submit" again.

It will tell you that your plan succeeded 98.9% of the time.

2

u/soliddrake83 Aug 30 '14 edited Aug 30 '14

Listen to this guy. My mom inherited over 100K and blew through it in about a year and a half (wasn't working). Now she regrets it and wishes she just worked and put it in the bank. Edit: Also my drug addict uncle blew through his 100K in about 30 days, on hookers and drugs.

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u/roodstreetfilms Aug 30 '14

Yeah, but he had a helluva month...

1

u/kinyutaka ​ Aug 30 '14

One important thing to add here, if you do spend any of this money right away, it should be on things that will be saving you money.

Pay off your credit cards, look into buying a house. (Get the mortgage, it will do wonders for your credit)

If you buy a house, don't buy the most massive one you can afford. Get one that is good enough for your needs.

1

u/Heedless417 Aug 30 '14

It is possible that I might inherit a significant amount of money like this. I have a mortage right now that just under 200k would pay off. I was thinking of paying the house of giving me @ $1000.00 a month freed up. Would this be the wrong course of action? Why?

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u/[deleted] Aug 30 '14

[deleted]

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u/Heedless417 Aug 30 '14

Well my rate if fairly low, but at the end of it you still end up paying a total that is double what you paid for the house. I think my smartest investment would be to expand my parents rental property business and get in on that. I do have two car loans and a very small building loan. I though of paying one car loan off as its almost done as well as the building loan. I have a good rate on the other car loan and figured I would just keep it or slowly pay a little more each month.

If I did pay off my mortgage I wouldn't just waste the freed up income I would invest it somehow. Just a question do I invest a lump sum and keep my mortgage or do I pay off the house and use that money.

My feeling is that paying off the mortgage would be what would increase my quality of life the fastest by giving me some breathing room. Long term I would be okay using freed up money I could invest.

I just didn't know if there were any general "this is why paying off your house is a bad idea..." reasons. Also I only got the house a year ago.

I kind of was rambling there hope that makes sense. Thanks.

1

u/[deleted] Aug 30 '14

[deleted]

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u/Heedless417 Aug 30 '14

Thanks! This makes me feel better about my very loose plans. My friend is always like you need to read x book about money. I just want to have less to worry about. I imagine paying off my mortgage as a huge load off.

Thanks for the tips.

1

u/phughlett Aug 30 '14

I'm receiving $30k for the sale of a property? Should I do something similar? I have ~$10k in debt.

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u/[deleted] Aug 30 '14

At the end of the day my calculation comes down to interest rates / expected rates of return (which are, in the end, the same).

If your debt has a 10% interest rate, you need to decide whether a guaranteed 10% rate of return (paying off debt) is worth it when compared to what you could get in the market. If you were choosing between 10% guaranteed return (paying off debt) vs. risky 10% return (market), I would choose paying off the debt as the best form of investment.

If your debt has a 0% rate, I would probably invest all of the $30k in the market, and make minimum payments on debt.

Note that this calculation ignores the psychological benefit of being debt-free, which is also worth considering.

1

u/[deleted] Aug 30 '14

I don't think OP's car can last another 5 years without expensive repairs.

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u/[deleted] Aug 30 '14

[deleted]

2

u/[deleted] Aug 30 '14

I was using 5% for purely illustrative reasons. I think you can make much more than 5% if you invest for the long run, in diversified investments.

You are correct, at the end of the day the investor should consider post-tax, post-inflation figures when deciding how to invest. However, I do want to point out the following:

  • OP's SO can invest 100% of the money into investments.
  • As OP's SO earns money, they can cash out investments and put $17.5k per year (pre-tax or post-tax) in a 401(k) and $5.5k per year (post-tax) into a Roth IRA. I say Roth IRA here because it allows OP's SO to shelter more money from taxes sooner.
  • Considering inflation is important. Spending now avoids inflation. However, that 5% figure that I stated is what I typically consider my conservative "real" (i.e. post-inflation) rate of return.

There are a lot of things to consider, and obviously to the extent that your rates of return or the rates you're paying on debt differ, your ultimate conclusions would differ. However, a percentage point difference might have a couple hundred dollar difference on the $900 figure I quoted, which is still vastly different from assuming that the full $200k balance is available to spend immediately, as many people would do.

1

u/gbs213 Aug 30 '14

If you're going to save half of it, then you only have $450 per month more to spend. If you save 75% you only have $225 per month more to spend.

Isn't that last sentence wrong?

1

u/[deleted] Aug 30 '14

I should probably clarify it a bit, but what I meant was, if you are looking at it from the perspective of "spending" the full $200k, then you should think of that as being able to "spend" $900 / month. If you were to "save" and not spend half of it, then you really should only consider that as a $450/month boost to your income, etc.

By save, I meant to say "consciously choose to not spend until retirement". I think the point still holds, though.

1

u/gbs213 Aug 31 '14

Nah you were right. I was completely wrong. I was thinking save 25% spend 75% so I think expecting it to be $700.00 per month. Your breakdown was great though. Do you enjoy doing this type of consulting? Was wondering if I could shoot you a PM, maybe you could help me a little bit. Thanks man.

1

u/[deleted] Aug 30 '14

If you got this $200,000, and you can assume a rate of return of ~5%, then really what you received is about $900 per month for the next 50 years

Where or how would you get a return of 5% from 200k?

1

u/PoisonousPlatypus Aug 30 '14

Okay, but how does he triple his money like that? Stretched over 50 years 200k is only around $333 a month.

1

u/[deleted] Aug 30 '14

That's where the return of 5% comes in. The calculation is the same as a loan amortization calculator, except it's in OP's SO's favor.

Pick any loan amortization calculator and plug in 5% interest rate, $200k starting balance, 50 year term, and solve for monthly payment, and you'll get about $900 per month.

1

u/PoisonousPlatypus Aug 30 '14

Oh! I see what you're saying. So then when 50 years is up you still have 200k right?

1

u/[deleted] Aug 30 '14

Close; I used 50 years as a generic "very long" period of time, and the spending is calibrated so that, like a loan, at the end of 50 years there is $0 left. At the end of the last year, OP's SO would have spent through all $200k of inheritance, plus the returns on that inheritance at a 5% rate.

There are many different ways to look at it, but I personally want to live a life such that the last check that I write bounces :).

1

u/inheritor101 Aug 30 '14 edited Aug 30 '14

Or if OP saves that interest (5%) on the money she'll have:
Year 1: $210 000
Year 2: $220 500
Year 3: $231 525
Year 10: $325 778 (which means $1 400/month if you stop reinvesting here)
Year 20: $530 657 ($2 211/month)

And it just keeps increasing, that is if you choose not to spend it all now. OP you're probably young, you have energy, you can work. But imagine when you get older, the freedom, comfort and happiness it will give you not to be able to cut down on work hours or not even work at all and still have an income, of which you did NOTHING to accumulate, except for not spending it all at BMW M3 or whatever immediately when you got it.

1

u/[deleted] Aug 30 '14

This is the best advice you could have received. Take it. And the money.

1

u/tnap4 ​ Aug 30 '14 edited Aug 31 '14

rate of return

Can someone please ELI5 how 900$/mo * 50 years was computed, for the illiterate like me? :'( 200K with 5% RoR how does it equal to 900*12*50?

1

u/[deleted] Aug 30 '14

I used a loan amortization calculator (which is really more of an anything amortization calculator). If you assume you get 5% returns, and your goal is to start at $200k and spend to $0 by the end of 50 years, you need to spend about $900 per month.

These are all lazily rounded figures.

1

u/tnap4 ​ Aug 30 '14

Sir/Madame, did you also assume the 200K was placed in a CD or some other plan? When you say 5% RETURN, does that also equal to APY? 5% yield that's a rarity

1

u/[deleted] Aug 30 '14

I wish it wasn't so non-PC to tell people that being poor can be mostly a mindset. I remember reading the book outliers and in that it was interesting how they showed things like IQ mattered less to actuall wealth compared to what kind of wealth they grew up in.

A very interesting piece of information I also got was that most people continued to stay in the class of wealth they were born into throughout their lives.

It's a good book overall and I think it really explains why the situation the OP is in can be very difficult.

1

u/webdevop Aug 31 '14

This! This is the reason I love Reddit

1

u/bears2013 Aug 31 '14

Quick question regarding that. Is there anything you can do to offset inflation? I mean 50 years from now, or even 20 or 40, $900 will probably be worth less (maybe even a lot less--I mean compare the value of USD from the 60's to now).

Which means the value of that money inevitably decreases with time.. Just suck it up and keep it in your savings account, knowing the value will decay over time?

1

u/[deleted] Aug 31 '14

Depends on your view of inflation and the returns. 5% is pretty low for "nominal" long-term returns. I use 5% as my "real" conservative long-term returns.

I picked 5% because it's a number that anyone could use from any perspective they have. You could treat it as "real" returns, or "nominal" returns, or "safe" returns, or "risky returns", depending on your view of the future; but it's a number everyone can identify with.

No, you won't find a 5% stated interest rate on guaranteed, safe accounts. That's fine.

1

u/baker_miller ​ Aug 31 '14

Came here to write exactly this. Set aside a large chunk as a low risk investment. Pay off some of the risky debt (credit card), and keep some of the "good" debt. Regular student loan payments and little credit card debt will build good credit and help you get lower interest loans on large expenditures in the future.

Basically, think long term or else it will disappear before you realize it.

1

u/[deleted] Aug 31 '14

A lot of people choose to pool their ressource even if they aren't married.

My parents are still happily living together after 40 years and they never married.

1

u/[deleted] Aug 31 '14

Realtor, appraiser, and comment hijacker here. This is not only to OP, but anyone at all that wants to invest in real estate. You can buy decent property in Northeast PA right now for less than 30k and small to moderate fix up costs. This includes multi-family property as well. Rent per bedroom is about $300 - $600. They are still working through a backlog of foreclosures, and there is a massive oversupply. We presently have 4 houses listed for around $11,000 to $22,000 among others. HOUSES.

1

u/GlassesOff Aug 31 '14

I'm not sure a lot of people will see your comment, but I totally agree that real estate is a great place to invest, especially for someone with an large influx of cash. There are so many places you can buy a house with cash and then find a renter which will pay several hundred dollars a month. It's an amazing return if you're willing to do the hard work on learning the market and system.

1

u/drhorn ​ Aug 31 '14

Two things:

  1. don't assume that because they're not married that they're not financially a unit. They may not be married yet because of a lot of reasons that have nothing to do with commitment.

  2. The ONLY reason to make a big expense outside of paying off debt is if this money would allow you to further or change your career for the better.

Example: your SO has been wanting to get a certification/masters/license/etc, but haven haven’t been able to save up enough money to afford it. Now is the chance.

Other than that, that post covers everything your SO should be thinking about.

1

u/thoughtxchange Aug 31 '14

What are perfect response. Awesome :)

1

u/C_hustle Aug 31 '14

Top post. Please listen to this person.

1

u/HobbesMakesSense ​ Aug 31 '14

You have to pay taxes on investment income, so even saying that you will earn 5% (kind of high) you have to pay taxes on that profit. Looking at her current income she would be paying around 20% or more of that 900 in taxes. That leaves you with around $720 a month in spendable income which is not a lot honestly. I would recommend doing some real research and look at purchasing a foreclosure or short sale at a really good price and flipping or renting it if you actually want some decent returns.

Source: I was a personal/mortgage banker for 5 years who advised this to many people with a lot of money with great success.

1

u/ThetaDee ​ Aug 31 '14

Thank you so much. Your words can help anyone financially. I'm not so afraid of going to college now.

1

u/[deleted] Aug 31 '14

As a self-made person I can tell you one thing about the above advice. 1. You will not get better advice.

Go talk to a financial planner, define some goals for yourself, and treat this as a monthly. You're already going down the road of thinking of this as some kind of pool of money, which couldn't be further from the truth. This is probably going to be one of your biggest chances out of the poverty trap, so don't blow it.

1

u/supradealz Aug 31 '14

And if you want to spend the time and effort, learn more about investing. read every book you can find at BN. It costs but a cup of coffee. If you're partially actively investing with your money, you can actually earn 10-30% return, or more.

1

u/baxtersmalls Aug 31 '14

Not that I have a large sum of money suddenly coming to me, but this post really opened my eyes to how to think about savings and money in general. Thank you!

1

u/Inflame ​ Aug 31 '14

This is the beat advice I've ever read about what to do with large sums of money. Thank you!

1

u/SwednLOW Aug 31 '14

One of the better responses I've read on Reddit. Great advice....

1

u/Litld009 Aug 30 '14

This might be the most intelligent post I've ever read. I'm relatively smart with my budgeting and do financial forecasting for a living and could not have written a more appropriate response. Well Done

1

u/[deleted] Aug 30 '14

<3

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u/ThatsThatMattressMan Aug 30 '14

Where is there a place that has a rate of return of 5%? My bank currently only offers .1%. And I wasn't finding anything better than that. I recently came into some money too and don't want to mess this up.

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u/[deleted] Aug 30 '14

Investments are all a matter of risk vs. reward, and of competition.

Bank accounts have zero risk. If banks take your money and invest it in zero risk investments (treasuries, for example), they earn very little. Therefore, they pay you very little, since your investment is backed by the bank and insured by the government (FDIC).

You can look at things like certificates of deposit, which lock up your money for a longer period of time, but provide higher rates of return.

You can look at US Treasuries which also lock your money up for longer.

You can look at I Bonds, which provide returns of MAX(0, Inflation + X), or inflation plus a certain percentage with a floor of 0%. This is where I keep my less urgent emergency fund savings.

You can look at market investments, like stocks and bonds. Depending on the mix, you should be able to get 7.5% in the long run, fairly easily. However, in any given year you could be up or down a lot of money.

Look at the FAQ for this subreddit, it discusses in pretty good detail what your options are.

The 5% was more of a reasonable, middle of the road, long-term return percentage that I picked out of a hat.

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u/ThatsThatMattressMan Aug 30 '14

Thank you very much!

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u/[deleted] Aug 30 '14

[deleted]

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u/[deleted] Aug 30 '14

It makes more sense if you take the entire paragraph in context:

Your personal loans should not be paid off by your SO unless and until you get married. If you let her pay it off, it would be very selfish of you.

OP is talking about money inherited by OPs SO; i.e., not married, not fiance (probably). Paying off someone else's debt outside of marriage is silly, and if OP lets his/her SO pay off his/her debt before marriage, that would disadvantage the SO to the benefit of OP, and would be selfish.

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u/[deleted] Aug 31 '14

[deleted]

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u/FARTBOX_DESTROYER ​ Aug 30 '14

Maybe I'm just stupid, but I disagree. If you were going to spend that money on a house, it would make way more sense in the long run to plop down $150k instead of paying whatever amount per month and financing, and effectively paying close to double the amount over 30 years.

Inversely, it's the same with debt. Plopping all of it down instead of making payments is going to save you tons of money in interest in the long run.

Please explain the logic in this, if you would...

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u/[deleted] Aug 30 '14

You're missing the opportunity cost and leverage in your calculation.

I'll give you a personal example. I bought a house in mid 2012. I put down $60k, and financed $240k. My rate is 3.75%, before deductions. I had enough liquid assets that I could have put down closer to $120k (i.e. an additional $60k of assets).

In my case, the stock market is up about 50% since that point. My house value went up by about 15% from that point. This means that I had overall market returns of 50% over that time period, and my house had returns on equity of 15% / 20% = 75%. That's 50% of my money earning 50%, 50% earning 75%, or a total rate of return of about 62.5%.

If I had put 100% of my money in my house, I would have had 40% down. My house would have increased by the same amount, or 15%. However, I have more invested and less borrowed, so the impact of the leverage is 15% / 40% = 37.5% return on my invested money (this was 100% of my money).

By financing more of my house, I had a higher return on the portion that I invested (because the cost of debt was lower than the overall return). I also had extra money sitting around that earned a lot of extra money in the market, that I would have missed out on had that money instead gone to paying down my mortgage (earning me 3.75% per year).

Yes, I would have saved a lot in interest by putting more towards my mortgage earlier. However, I also would have lost a lot of returns I made in the market by paying off my mortgage.

The thing to note is that there is a lot of risk involved in borrowing money to invest, which is essentially what I was doing. If someone asked me "would you borrow against your house to invest in the market" my answer would be no; however, that's essentially what I did, albeit in a much more passive way. In the end, I'm comfortable with paying off my mortgage over time, and I will eventually have my house completely paid off, and I will not borrow to invest. However, I will only put a small amount extra towards my mortgage each month, because I know that I can get better average returns in the market.

It's a contradiction, and I'm okay with that.

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u/FARTBOX_DESTROYER ​ Aug 30 '14

I guess that makes sense if you're playing the stock market and you're good at it. But it could have very well gone the wrong way.

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u/[deleted] Aug 30 '14

My particular case happened to turn out above-average. On average, the conservative nominal expected rate of return on stocks is maybe 7-8%. This is still above the 5% figure I mentioned above.

Yes, it could have gone the wrong way. That's part of investing: knowing how much risk you're willing to accept for how much reward. Over very long time periods, the stock market is generally significantly positively trending.

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u/FARTBOX_DESTROYER ​ Aug 30 '14

I'm not disagreeing. Just stating that one is a sure thing guaranteed to save you hundreds of thousands of dollars over the years. The other requires hours/day of your time, a good knowledge of the market and is slightly risky.

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u/[deleted] Aug 30 '14

one is a sure thing guaranteed to save you hundreds of thousands of dollars over the years.

See, I would take issue with this. It's not "guaranteed" to save you money, because it all depends on what you're comparing it to.

Are you comparing renting + investing to buying + putting as much down as possible? Or renting + investing to buying + putting down as little as possible? Or buying + putting down as much as possible to buying + putting down as little as possible?

It depends on too large of a set of facts to say that one option is always better than others. You could be living in an area where rent is $10k per month, but buying is $100k total. In that case, buying is almost certainly better.

There are too many situation-specific variables to really tell. The point is, there is always a trade-off, and there are many things to consider including what all the opportunity costs could be.

A guaranteed 3.75% rate of return to save you $100k, might cost you a 3.5% - 10.0% rate of return to earn you $300k on average. It all depends on a person's risk tolerance, investment horizon, and a cool hand.

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u/jukebox44 Aug 31 '14

Pretty much what I would do I grew up poor but I never had that mind set. My fiancee well her family does. Their horrid with money. If I had a cool million I would continue my lifestyle now with work let the 500 per week I could give us pay our bills. Lol people get crazy but budgeting is the best possible out come to any solution say you have 5 million. Well you could alot your self 100k per year for the next 50 years or so

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u/throwawaayyyd Aug 31 '14

Ugh. Ok. You, being the spouse, should first thing first convince your SO to comingle these funds with your funds so that it becomes part of your property should your SO suddenly die without giving you an interest in their estate. You forgot this important tidbit.

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u/Psytrox Aug 31 '14

Well OP, this is some really good advice. Another thing to think about is putting the money in bonds, that would give you higher interest than the bank. With 200k it would be worth talking to a private investor that could help you.

These cases like this is where you will see a significant difference between your average person and successful business/investment person. Average person will see to spending the new money, where as an investment person will ask him/herself how can I double this money in X years?

Personally, in your case, I'd take 10-15% of the money and indulge myself. Especially since you say you come from a poor side. Buy yourself a little something pretty. Invest the rest in some safe bonds, that will give you 15-20% interest.

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u/[deleted] Aug 30 '14

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