Author Topic: Index fund as a grad. present?  (Read 3894 times)

The Guru

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Index fund as a grad. present?
« on: August 05, 2014, 08:02:04 PM »
My stepdaughter just graduated from college and got her first "real" job. The night before her first day she moaned, in jest, "I don't want to work for the rest of my life!". I happened to be logged onto MMM so, sensing a teaching moment (how often does one get an opening like that!) I said "Come here". I showed her the website and explained the basic premise- w/ emphasis on the fact that MMM retired in his thirties (prompting a unison response of "WHAAAT?" from both her and her mom. I let it go at that; hopefully the seed has been sown. I'd love her to enjoy the freedom that financial independence brings but, I don't want to be "preachy".

Anyway. I promised her, as a graduation present, to set her up w/ an index fund and "seed" it in hopes she'll pick up the ball. And I confess I have no familiarity-apart from the concept- of index funds. ( My own investments are in socially responsible, traditional funds. Which I realize are controversial in their own right, but, that's a different discussion. Point is, I'm not changing my own strategy, nor trying to impose it on her.) I was also surprised to learn how many index funds are ETFs, which  I had to study up on.

So- can anyone make recommendations on how to proceed from here? Or did I maybe open my mouth to soon?

Thanks!

thecornercat

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Re: Index fund as a grad. present?
« Reply #1 on: August 05, 2014, 08:12:55 PM »
It's not clear to me if your SD wants "financial freedom" the way MMM describes it. That is, it's one thing not to work; it's another to work only on the things one cares about (which is what MMM promotes). In both cases, though, work is involved.

While wonderful in principle, giving your SD the opportunity for financial freedom rather than letting her earn it for herself might defeat the purpose. That is, she may not be as motivated to discover how she herself can earn money and save it (versus spend it). She wouldn't be as strong at "fending for herself" as she might be and, if she knows that she has these savings set aside, she may feel she doesn't need to have a high savings percentage -- not really freeing her from a culture of consumption.


So, doesn't really answer your question about index funds; just a thought about the idea of "seed" money in the first place. I may also just be too much in the mindset of THE MILLIONARE NEXT DOOR at the moment -- just finished reading it.

gotw3a1th

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Re: Index fund as a grad. present?
« Reply #2 on: August 06, 2014, 02:11:38 AM »
While wonderful in principle, giving your SD the opportunity for financial freedom rather than letting her earn it for herself might defeat the purpose. That is, she may not be as motivated to discover how she herself can earn money and save it (versus spend it). She wouldn't be as strong at "fending for herself" as she might be...

Agreed, but I'm not a father so I have little ethos in your perspective, other than relating from her perspective. In college my friends and I discussed how our parent's insistence on self-reliance probably created our financial independence & work habits (note: in college we all thought FI was not having your parents give you spending money, haha). These friends are all on track to achieve FI well before retirement. For what its worth, fear seemed to light a fire under all of our a**es & we're now better off than many of our peers.

Maybe at the most, try to create a matching deal (i.e. if you contribute $100/mo I'll contribute $50, for up to x year(s))? You may not be able to open a brokerage account immediately, but the message & the lesson of saving would still be conveyed (thats the seed I assume you'd like to plant). Matching could give her the incentive you're looking for without letting her benefit without sacrifice.  Also recommend TMND as mentioned above. Great read.

Best of luck, share your journey!
« Last Edit: August 06, 2014, 02:21:53 AM by gotw3a1th »

Bert The Turtle

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Re: Index fund as a grad. present?
« Reply #3 on: August 06, 2014, 06:47:31 AM »
While wonderful in principle, giving your SD the opportunity for financial freedom rather than letting her earn it for herself might defeat the purpose. That is, she may not be as motivated to discover how she herself can earn money and save it (versus spend it). She wouldn't be as strong at "fending for herself" as she might be...

...
Maybe at the most, try to create a matching deal (i.e. if you contribute $100/mo I'll contribute $50, for up to x year(s))? You may not be able to open a brokerage account immediately, but the message & the lesson of saving would still be conveyed (thats the seed I assume you'd like to plant). Matching could give her the incentive you're looking for without letting her benefit without sacrifice.  Also recommend TMND as mentioned above. Great read.

Best of luck, share your journey!

My mom essentially did this with me when I was starting out.  My first job had a 401k, but didn't offer a match.  So instead, Mom said that she was going to give me part of my "inheritance" early (on a monthly basis) on the condition that I put it all in the 401k.  It wasn't a ton of money, but it got the ball rolling for me.

I think the biggest thing for the OP is to get his SD started saving.  Whether it's a brokerage account or a Roth or a 401k, it's a lot easier to continue saving once that auto withdrawl is setup than it is to get over the hump of setting up a new Vanguard account.  So one possibility would be to say that you'll give her the first $1000-$3000 to have her meet the minimum for a mutual fund, on the condition that she also set up a $100/month auto withdrawl for the first year.  Beyond that though, I wouldn't nag her about saving aside from the occassional gentle inquiry.  If she gets excited about MMM or FIRE, she'll probably be more than happy to bring it up on her own to you.

The Guru

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Re: Index fund as a grad. present?
« Reply #4 on: August 06, 2014, 12:00:25 PM »
i should probably clarify: I wanted  to give her $250 as a graduation/b-day present. My hope was to give something that might steer her in the direction of financial independence, rather than a nod to consumerism in the form of cash or some "thing" else. Most everyone at that age is looking short-term (and rightly so, in terms of getting established) but we all know how important it is to start looking at the longer term ASAP, and the material world isn't going to teach that. I gave her a guesstimate on what that $250 could grow to by the time she hits my age (primarily to illustrate the power of compounding and, yes, starting early) but also emphasized that she needed to pick up the torch from there. My thought re: the index fund was to do the legwork and seed it just enough to get it going so in the short haul she could concentrate on shorter term goals. Hopefully her monthly statements would show enough growth to further her interest and to serve a regular reminder to fund the longer term. In short, it was, as Bert the Turtle suggested to get her started and not to fully fund her lifestyle.

All that said, I've already made the offer so my concern is less with the "why" that the "how".  I assumed that to invest in, say, a Vanguard fund one dealt directly w/ Vanguard. Is that not the case w/ an ETF?

Sorry to be such a dolt ;-) this is new territory.

Scandium

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Re: Index fund as a grad. present?
« Reply #5 on: August 06, 2014, 12:51:09 PM »
I would do mutual fund rather than ETF. Easier when you can just put in any dollar amount, rather than messing with share prices. That's why I set my wife up with that for example. Keep it simple.

Vanguard may have a minimum of $1k or $3k or something. So you might have to up your seed..

AH013

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Re: Index fund as a grad. present?
« Reply #6 on: August 06, 2014, 06:42:26 PM »
Open vanguard brokerage account. Fund with $250 (make sure to enroll in eDelivery to avoid annual charge).  Place market orders for the following
2 shares VT (Vanguard Total World Stock Index ETF)
1 share VNQ (Vanguard US REIT ETF)
1 share VNQI (Vanguard World ex-US REIT ETF)
Set all positions to reinvest distributions

A reasonably diversified (albeit RE heavy) portfolio.

Fees/commissions?  None. Total cost? <$250.  Your step daughter bragging to her friends that she owns pretty much every company in the world and is a global real estate mogul with properties in NYC, London, and Dubai?  Priceless.


mozar

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Re: Index fund as a grad. present?
« Reply #7 on: August 06, 2014, 06:50:36 PM »
My grandfather gave me $2k in american century mutual funds as a bat mitzvah present when I was 12. 20 years later I still have it and it's 7k. I think seed money is good to get her interested in investing. From a tax perspective though she would be better off maxing out her 401k rather than a matching scheme with you. And I doubt that growth from $250 is going to be exciting. And as a 21 year old it's hard to imagine being 58. I can't imagine it and I'm 31.

 I don't know your relationship with her obviously, but I don't think it's a bad thing to bring it up regularly, and even be a little pushy, then back off as she gets older. You don't want to miss the opportunity to talk to her, eventually she's going to get busy with her own life and not be around as much.
I think many people haven't responded to the how as much because there isn't much to say. Call whatever company you fancy and tell them what you want. I think you have to have her SS# to set it up.

swashbucklinstache

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Re: Index fund as a grad. present?
« Reply #8 on: August 06, 2014, 07:33:49 PM »
There are lots of low cost mutual/index funds that need minimums of < 250, just not many (or maybe any) at Vanguard. Check out Fidelity or Schwab on their website, and look at their fund screeners (maybe google for that term directly, e.g. [brokerage] fund screener) and see if the $ minimum is a screening option. From there you can easily sign up online, or call them up and have them walk you through the process - they're very friendly and helpful as they want your business. The one thing I'd note is that it is typically best in my opinion to buy a family's fund through their own house as sometimes there are other charges involved, though I think that is mostly for ETFs and such. By that I mean you could buy e.g. Vanguard ETFs/Mutual funds/Index funds commission free through Vanguard but may have to pay a fee if you go through another broker, same for Schwab funds at Schwab etc. These would be good things to ask on the phone or here if you have questions. Those screeners might help you find what index fund(s) you want to set her up in. Use these tools to pick what fund(s) you want to buy into, and from there you should be able to sign up online using an email address and can buy online if you link a bank account. Or you can call the place up and they'll create an account for you and walk you through the process.

Depending on her saving ability and goals, it may make sense to save up until she can get into the fund she really wants to be in if it has a minimum of 1,000 or 3,000 or something. Possibly easier to do that than get into one fund and then sell and move later, especially if she's wary of the process and you want to make it easy for her (I'm not at all wary so I'd just get started as soon as possible but everyone is different). If her income level will allow it, and the limits are easy to look up online but I think the maximum salary to be eligible for straight (not backdoor) Roth is something like 87,000, I'd suggest putting money into an IRA or more probably Roth IRA for a few reasons. That might help by giving her a goal to reach by the end of the year as a first start. That'll also allow her to move between funds if she changes her goals, or into funds with larger minimums without tax implications (if you are doing this, and especially x10 if you want to move brokers as part of this process, if you are at all unsure what you are doing I strongly recommend calling and having this done over the phone so you don't do something like take a distribution and get a penalty. A moderately easy thing to fix at tax time, but easier to make sure it is done right at the start. If you do decide you want to change houses, call up the place you are going and they will usually handle everything including contacting the other broker and forms etc. as again they want your business.

Here is the screener for schwab, for example:
http://www.schwab.com/public/schwab/investing/investment_help/investment_research/mutual_fund_research/mutual_funds.html?path=%2FProspect%2FResearch%2Fmutualfunds%2Foverview%2Fscreener.asp%3Fsymbol%3D

Fidelity:
https://www.fidelity.com/fund-screener/research.shtml

Vanguard:
https://personal.vanguard.com/us/FundsMFSBasicSearch?FROM=VAN

If those screeners aren't helping you out, you can always call them up and say "I want a total stock market index fund with a minimum of $250 or less. What do you have to offer me? what is the expense ratio? tell me every single fee involved," and go from there. Good luck.

One other small thing I've used in the past to encourage or explain what saving money means is to do some math to show people 2 things:
1. If you save x dollars you'll be able to get this every year/day/month forever, for free (using the 4% rule) - works great for small purchases like 1 pizza a week. E.g. to get 1 $5 pizza a week, every week, sustainable indefinitely "for free" (without using any of your principal) you'd need to save and invest $5*52*25=$6,500. Make sure they don't start actually withdrawing to do this once they've saved enough though, and use cashflow instead =).
2. If you delay this purchase by x years and invest instead you'll be able to get y.y of these / get 1 of these and have $zz left over - works great for big purchases. "What if someone paid you $8,000 to wait three years to buy that car/boat?"
« Last Edit: August 06, 2014, 07:51:40 PM by swashbucklinstache »

Nords

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Re: Index fund as a grad. present?
« Reply #9 on: August 06, 2014, 08:06:54 PM »
You have to know your kids, but you can try to teach them to fish.  The key is to get them comfortable with managing large sums of money at an early age so that they're better with even bigger sums of money when they start boosting their earnings.  When the money starts spewing from the Employment Horn of Plenty, they can direct the discharge at their retirement accounts instead of at their lifestyle.

We're taking a significant risk with our daughter, but it seems to have unleashed her inner frugalista.  (We may have created a monster.)  She understands that there's a significant possibility that she won't inherit our family wealth (if any) until she's at least 82 years old.  To challenge her money-management skills, we're gifting her some money this year to fully fund her 401(k) and her Roth IRA.  The trick is that she has to boost her payroll deductions to fund the 401(k) (her military Thrift Savings Plan), so she has to learn to live for the rest of the year off of her cash stash. 

This profit motive has inspired her to seek out a blogger buddy who's a CFP, and she's confirming all of the advice that she's heard me blah blah blah over the years.  She's maxed out  her Roth IRA and she'll also max out her 401(k) contribution this year.  Now she's saving even more in a taxable account.  Best of all, she's realizing that she can't just dump all of this cash in a checking account at 0.05% interest.  She actually has to develop an asset-allocation plan and a payroll-deduction plan to keep the money moving into her investments and her cash stash. 

Of course it's now her money, and she could cash out her retirement accounts at any time.  I've been showing her how to tap her Roth IRA contributions if necessary, and she's also built her emergency fund into a CD ladder.  Eventually (when she's out of the military) she'll start a house down-payment fund.  She seems comfortable with her finances, and the retirement accounts are hard enough to get at that she's not tempted to mess with them.  I've also pointed out that the money will grow tax-deferred (possibly tax-free) for her while we parents would have had to pay taxes on its growth for six decades before she could inherit it.

Pretty sneaky, but she's surrounded by plenty of examples of bad behavior.  She's also spent half her life envying the lifestyle of us parents while she was slaving away in school every day.

If your daughter is really motivated by the MMM concept, this is her chance to put it to the test.  If she buys a BMW next year, then you can always abort the project.  If she turns out to be good at ramping up her retirement plan then you could keep gifting her.

Scandium

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Re: Index fund as a grad. present?
« Reply #10 on: August 07, 2014, 07:16:41 AM »
swashbucklinstache: the minimum for Schab's total US fund  (SWTSX) is $1, but the minimum to open an account is $1,000. At least it was when I did.

I'd say save up 1K and set up a roth, dump all into SWTSX or a similar US total market fund somewhere else. Wouldn't mess with 3-4 ETFs and all that. Not necessary at this point.

Dezrah

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Re: Index fund as a grad. present?
« Reply #11 on: August 07, 2014, 01:53:00 PM »
Guru, this is exactly what I wanted to do when my youngest brother graduated college. 

I didn't know how it could be done, so I contacted Vanguard directly to ask.  They said I could write a check to Vanguard in my chosen amount and as long as my brother gave the rest to meet the fund minimum, it would be fine.  They didn't care if the checks came in the mail or from different sources. 

I like this because he can't simply cash the check and waste it himself (I doubt he would anyway).  This way it's a "you have to invest or you get nothing" motivation.  If he did want to abuse the gift, he at least would have to deposit it, allocate it, then try to withdraw while maneuvering tax implications.

It also helps that my brother also got into Mint per my suggestion.  My hope is seeing even a little investment growth will make him excited enough to continue on his own.

The Guru

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Re: Index fund as a grad. present?
« Reply #12 on: August 08, 2014, 10:51:49 AM »
Thanks to all who replied! The screener links will be especially useful. I am learning a lot I didn't know especially about EFTs. The one time I actually sought out info I could swear the article claimed they had higher minimums and fees than traditional funds ( written by a disgruntled fund manager perhaps? more likely i just read it wrong). Consequently I never gave them a second look. guess the moral is we all need to brush up on what we "think" we know periodically.

What astonished me in playing w/ the screener is the sheer number of index funds that exist. I always assumed they were based on an existing index eg. S&P 500, Russell 2000, etc. In fact it seems as if there is an "index" based on any set of criteria one can come up with. Interesting.