Investment advice?

True, a years worth of expenses may be excessive. I am drawing from my own experience there, where I was unable to work for 9 months following an accident, and unemployed not long after that for about 6 months. Paying our normal bills, paying for normal living expenses, and paying the medical bills all with no income (for me) coming in was, let's say very stressful.

Sure, if I had had a ROTH, or any available room on the equity line I could have used those funds, but those were not options I had at that time. The thing about an emergency fund that's not invested is that you have very little risk of losing it if the market tanks. Many people lost huge chunks of their retirement savings with the last stock market crash. Invested funds are not guaranteed to grow. An emergency fund is your buffer and should not be exposed to market volatility.

Having a little cash reserve helped me when I needed it, looking back I wish I had had more just to ease the strain during that time.

As in all cases, YMMV. 

Totally understandable.  My only point would be:  save that amount, but put it in a taxable investment.  That way its growing, instead of just sitting there losing value due to inflation.  You can still take it out/draw it down just as you would with taking money out of your mattress.

Pete Gossett said:

I’m sorry Duke, I still don’t completely understand. So an HSA is for healthcare, just without a “use-by” date? The idea of investing money into something that could only be used for healthcare sort of terrifies me. Sure, they’ll likely have healthcare expenses at some point in their lives, but there’s no family history of genetic medical problems that would likely be a large expense. 

An HSA is pretty much the only account where the money is never taxed. That's a big deal. In any other account, you're either taxed before depositing the funds, or taxed when the money is withdrawn. As long as the money is spent on medical/healthcare related things, the money in an HSA is never taxed. Also, the money deposited reduces taxable income, which reduces annual tax bills. Another advantage to an HSA, is that it stays with the account holder indefinitely so job changes, etc don't cause you to lose the funds. Finally, at age 59.5, the funds in an HSA are no longer subject to a tax penalty if used for non-medical things. The money would be taxed as income in that case, but there's no additional 10% penalty like there is before age 59.5. Some HSAs are just a savings account, while others offer different investment choices. What you/your sons choose just depends on what's available and what their risk tolerance is like. Research the options as thoroughly as you can stand to. Part of that investigation should center on fees.

Investing in the first place is probably the hardest part, but any investment, through any investment account (HSA, 401k, IRA, taxable, etc) is going to have some fees associated with operating the fund.  A 1% fee may sound small, but the difference between a 1% fee and a .1% fee can be 6 figures over a few decades. On top of those fund fees, you're likely to encounter fees from the brokerage that you have an account with. Again, keep these fees as low as possible to maximize your returns.

Hsa’s only work as an investment vehicle if you don’t use all the funds in a give. Year to cover your families expenses.  I max my contributions each year and spend them. Never been able to build it up. I miss my previous companies healthcare. 

In reply to Fueled by Caffeine :

That's true. That's why it's especially valuable to young, single people without families like the OP's sons. The money they contribute now can potentially grow before their needs change.

I'm glad to hear your son's are saving money.  I wish mine could. 

Warn them about all the Jezebels out there.  One of them can go through everything before you know what happened.   

I should start saving in a Roth again. I put all my emphasis into my 401k and am now at out of pocket max.  Finally. 

Keep overhead low. Avoid debt. Pay off a house. Own a rental property if you can handle the hassle of dealing with tenants. Stuff the mattress full of cash.

If their employers offer a 401k match they should put everything they can into the 401k up to the employer's match limit. After that, a Roth IRA is great because they can withdraw up to their total contributions (but not the gain) without penalty later. An emergency fund is a good idea but with the penalty-free Roth withdrawals it doesn't make sense to have it sitting in a checking account. That said, I tend to keep a few % of my liquid assets in a savings account out of habit / spousal comfort.

They should be learning this stuff, though. It's their money, they should know the why and not just the how and what. I've recommended this stock series before and always will when someone wants to learn. It's great: http://jlcollinsnh.com/stock-series/ . It's useful for newbies and pros alike.

Paying off a house is, in my opinion, a bad idea when a mortgage is 3.75% and stocks yield much, much more long term. I've made tens of thousands of dollars beyond what I've paid in mortgage interest over the years.

A cash advance against a credit card is NOT a source of emergency cash.  It's a headlong dive into a black hole of debt.  Cash means cash.  Six to eight months worth of expenses.  Savings and CD's aren't sexy and won't earn big returns, but they won't lose value either, and the cash will be there if and when you need it.

Establish the emergency fund, then get crazy with (some of) your investments, if that's what suits you.  The key to any successful savings/investment plan is REGULAR weekly or monthly contributions, as large as you can afford, ideally 20% of income.

Is saving up for a house an interest of theirs?  Buying a place and even potentially renting out part of it can be a great way to build stability and income.  If they plan on staying in the area for 5+ years, it will probably beat being tenants.  I have a friend who lives in a townhome, he lives upstairs and rents out the downstairs.  The rent covers his mortgage.  Another owns a single home and rents out 2 bedrooms, that also pays for his mortgage.  

The biggest benefit, of course, is long-term cost of living stability.  Rents usually go up at least with inflation, 2-3% per year.  That means doubling in 20 years.  Mortgage payment stays the same; taxes and insurance usually don't go up much.  

Another benefit to the ROTH IRA- it can be withdrawn, without penalty, to buy a house, pay for education or medical expenses.  Once they're getting the employer match on the 401k, work towards maxing out the ROTH IRA.  And keep 1 to 3 months living expenses in some sort of other account, depending on their risk aversion.  

In reply to volvoclearinghouse :

I’m honestly trying to steer them away from buying a house. Neither of them have the desire nor aptitude to deal with everything that comes with homeownership, and I’m afraid that once their mother & I are dead they’d be ripped off by contractor/charlatan/conman who stopped by. 

Neither of them really wanted to get their license or deal with car ownership either, so we basically forced them into it. No more than they drive, their cars should last them each another 5-10 years. Another ~10 years past that & I’ll probably try to get them each into a brand new car, instruct them to only have it serviced at the dealer, and hopefully it’ll last each of them a good 20+ years. 

volvoclearinghouse said:

Is saving up for a house an interest of theirs?  Buying a place and even potentially renting out part of it can be a great way to build stability and income.  If they plan on staying in the area for 5+ years, it will probably beat being tenants.  I have a friend who lives in a townhome, he lives upstairs and rents out the downstairs.  The rent covers his mortgage.  Another owns a single home and rents out 2 bedrooms, that also pays for his mortgage.  

The biggest benefit, of course, is long-term cost of living stability.  Rents usually go up at least with inflation, 2-3% per year.  That means doubling in 20 years.  Mortgage payment stays the same; taxes and insurance usually don't go up much.  

Another benefit to the ROTH IRA- it can be withdrawn, without penalty, to buy a house, pay for education or medical expenses.  Once they're getting the employer match on the 401k, work towards maxing out the ROTH IRA.  And keep 1 to 3 months living expenses in some sort of other account, depending on their risk aversion.  

 

QFT right there. My grizzled old hot rodder neighbor told me I needed to buy a duplex, live in one half, rent out the other. The renter would likely cover the mortgage easily, then I just need to pay utilities. Why the HELL didn't I listen to him?!?

Buying their own place is a pretty sound idea, although I'd tell them to wait til the market goes to hell to buy.

I dumped a chunk of change into bluechip stocks 14 years ago and set it all on dividend reinvestment. The CitiGroup stock imploded, but everything else did well. Sitting at roughly a 25% rate of return right now. A market index fund would have been safer though.

And congrats on raising kids who can save. My boys are split right now, one can't keep a penny, the other squirrels it away and goes on toy shopping sprees when he feels like it.

slefain said:

I dumped a chunk of change into bluechip stocks 14 years ago and set it all on dividend reinvestment. The CitiGroup stock imploded, but everything else did well. Sitting at roughly a 25% rate of return right now. A market index fund would have been safer though.

I don't think you're giving your CITI stock enough credit. Yeah, it sucks compared to the rest of your stock, but with dividends reinvested you're still close to 4% annual rate of return. You know what the average person got on their money over the last 14 years? Well, the average credit card interest rate is ~15%, so I would guess around -15%.

I keep kicking myself for not buying Huntington stock like I wanted to in March 2009. But the fact is I've done well so I have to get over it. Likewise, celebrate your 4%; it's a lot better than you seem to think. :-)

Pete Gossett said:

In reply to volvoclearinghouse :

I’m honestly trying to steer them away from buying a house. Neither of them have the desire nor aptitude to deal with everything that comes with homeownership, and I’m afraid that once their mother & I are dead they’d be ripped off by contractor/charlatan/conman who stopped by. 

Neither of them really wanted to get their license or deal with car ownership either, so we basically forced them into it. No more than they drive, their cars should last them each another 5-10 years. Another ~10 years past that & I’ll probably try to get them each into a brand new car, instruct them to only have it serviced at the dealer, and hopefully it’ll last each of them a good 20+ years. 

I can understand that, as a parent, the instinct is to try to protect them.  And I get that not everyone is handy like some of us are (2 nights ago I was laying a brick mantle for a fireplace, and last night I was installing window trim).  But even if you're not handy, most of the time houses really aren't that much work.  Even my rental house- a 1940's Sears kit home- doesn't require that much maintenance *knock on wood* and lately, I've even started contracting out more of that, since I just don't have the time to deal with it.  And I've found *most* contractors are reasonable to deal with and not trying to rip you off. 

I get that you're concerned.  That shows you are a good parent.  And you want to help them.  Potentially, owning a house and stepping up to all the attendant responsibilities therein will help them.  

Glancing at your profile, I see that you don't live in a particularly high cost of living area.  Houses are probably very reasonable, but I bet the rent on a 2 bedroom apartment is still 800 or 900 a month.  I still remember when I was in my early 20s, renting an apartment.  If there's one thing I wish I had done sooner in life, it's buy my first house.  

In reply to volvoclearinghouse :

Their rent is $600 for a 2-bedroom, plus internet/cable & electricity. Other than their cell phones(one is $60/mo on our AT&T, the other has a Tracphone & never uses his minutes before the year expires). 

It’s difficult for me to describe the boys & their situation without writing paragraphs and/or sounding condescending. Our older son basically lives in an emotional/social bubble - for example he’d likely never notice a roof leak unless he(or his belongings) were getting wet & he saw water dripping on them. He’s also ADHD/ODD, which gives home quite a bit of passive-aggressiveness  

His younger brother is on the lower end of the Autism spectrum, though honestly has become more of a functioning adult of the two. He’d at least be able to mow the grass & take out the trash, but wouldn’t likely do a very thorough job at it. Things like personal hygiene are still a struggle with him - he rarely will use deodorant, and when he brings his laundry over he just dumps his clean clothes back in his dirty basket & never puts them away when he gets home. 

For years we were pretty convinced their younger sister would end up caring for them someday, she even recognized that fact when she was 10(they’re 26, 24, and 21 now, with a another younger sister who’s 18). So we’ve been slowly working over the last 8-years to get the boys this far. 

I do like the idea of a duplex for them, though they’d need a management company to handle their tenants, and we’d need to make sure the tenants never found out they were the owners. 

I was looking around on their/our credit union’s website to see what they offer, and they show a 5-year IRA certificate at 1.99%. Is that worth investigating? It was a much higher rate than their other IRAs. 

2% is where I borrow money from other people to keep my money in the market. That is, if you offer me a car loan at 2% or below I'll take the loan and leave my money invested instead of paying cash. It looks like TIPS (Treasury Inflation Protected Securities) have a coupon of about 4.25 right now. I'd get a vanguard account and buy TIPS through them way way way before I'd ever buy any bank product yielding 1.99%

No.  Get an IRA account through Vanguard or Fidelity, etc.  Within that account you can choose mutual funds that those companies offer.  Pick your investment mix just like you would with a 401k, taxable, etc.  

This early in life they should be near 100% stock and growth rate will be volatile but yield way way way more than 1.99%.

90% stock 10% bonds is good.  Its what Buffett recommends.  But even a more conservative mix will crush the yield on that certificate.

Ok, thanks guys.