Darling Slegg Queries:
“Hey, let’s say that you got around $10,000 tomorrow. What would be the best way to make that grow in a year’s time?”
The Non-Answer:
The correct question is, what do I want to do with the money in a year’s time?
The Short Answer:
CDs.
The Long Answer:
That depends on a number of factors. Do I have any debt? Do I need the money to be liquid for the duration of that year for any reason? Am I expecting to make any big, unavoidable purchases in the next year (car repair, dental work)? How’s my job security? Do I have a lucrative college degree?* Ever the skeptic, why do I suddenly have $10,000 and do I owe anyone — aka, THE MAN — anything for it?
Steve Buscemi is the man.
*Not a non-sequitur.
I suspect what she’s asking me is where I would put the money so that it would create the most passive income, but there are a number of issues that arrive with an arbitrary, hypothetical situation.
If I had $10,000 and needed to access it in a year’s time, I would not invest in anything that is not FDIC insured. Very generally speaking, CDs tend to have the best interest rates for FDIC insured accounts (a quick Google search for CD savings rates brings me to bankrate.com, and right now GMAC bank is showing the best rate — 3.68% with 3.75% APY and a $500 minimum)**. See, the nice thing about CDs is that the rates won’t change — my high-yield savings account won’t promise that, which is why I just transferred my emergency savings account from FNBO Direct (~2.85%) to Dollar Direct (4% intro APY). I’d make a reliable couple hundred bucks. I’m basically being paid a pittance for patience.
**You’ll notice that my savings account has a better interest rate than CDs these days. That’s why research is key.
The Longer Answer:
$10,000 is a good chunk of money for anyone, but everyone values it differently. This is why it’s important to have goals, both financial and personal, and ideally, your financial goals are set in order to help you reach your personal goals. It’s called “maturity” — not just for Certificates of Deposit anymore!
See, maybe you’re going to be emotionally and financially ready to buy a house in a year — then that $10,000 needs to be worth at least $10,000 to help with the down payment, so you can’t risk it in anything that’s not insured.
Or maybe you’re more professionally focused. You could put $10,000 towards a degree or a certificate that will make you more qualified and thus worth more money and more valuable in the job market. There is nothing more worth your money than yourself, and educating yourself will increase your lifetime income exponentially. Unless you’re a liberal arts grad student, in which case you’ve already prepared yourself for poverty.
Maybe you have omnipresent student loans, or a car payment, or a few thousand in credit card debt you keep swearing you’re going to pay off.
Maybe you have a higher tolerance for risk, or a greater need for financial security.
The Responsible Anwer:
If I wanted to be really sexy and wise, I’d pretend like the money never existed in the first place and I’d put it all in an index fund and not think about it for fifty years, when it would be like receiving a gift all over again, except it would be something like $50,000 I would have to contemplate spending. Ah, compound interest. How you razzle-dazzle in the face of inflation.
The Actual Answer:
For me, personally, and this applies only to my lifestyle choices, with my current financial and personal goals in mind, here’s what I would do with a $10,000 gift (which, I believe, is the maximum amount before the taxman cometh):
- I would max out my Roth IRA ($5000 for the year, although I feel like you can contribute to a Roth IRA for the year prior’s tax filing up through April–that’s something to research further)
- I would pop $2500 in my emergency savings account
- And I’d spend $2500 on a fortnight in Thailand. You only live once, yeah?
- I should probably donate $1000 to something worthy as well, but my altruism varies widely depending on how many BBC headlines I read that day, and today’s were particularly bleak. Let your desire for karma dictate your tithing.
The “If This Isn’t A Hypothetical Question And You Are Coming Across $10,000 Tomorrow” Answer:
You should donate a portion of the proceeds to me, your friendly, neighborhood, non-professional, distinctly amateur, hobby personal finance advisor.
Hope this helps, slegg. Xoxo, m
Fancy Fiscal Finagling 
January 14, 2009 at 8:57 pm
Indeed you can contribute to a Roth IRA (or a traditional for that matter) for the previous tax year through April. Or at least through April 15th. I tend to contribute my entire year’s worth on April 14th or so.
You should make your next entry about IRAs. I have several, but I don’t think they’re as lucrative as they could be.
January 19, 2009 at 5:03 pm
If I put the money in a Roth IRA,
1) can I take it out for a down payment on a house
2) are Roth IRAs a guaranteed return (percentage wise)
and 3) would it be better to invest in a CD than a Roth for house saving purposes?
Thanks Morgan, my future ‘will be paid like a queen’ financial adviser.
January 20, 2009 at 11:36 pm
Slegg:
I’ll go into that in more detail later this week per Lindsey’s request, but in the meantime:
(1) Sort of: up to $10,000 after the account had been open for 5 years, then you can use that for (what will probably be part of) the down payment for a house without incurring penalties and fees.
(2) Nope.
(3) Ideally, I would say both. That’s a personal decision though, that has to do with why you want to buy a house. I believe investing in your retirement is a better value than investing in a house and at our age, that should be the priority.