Where should a 25-year-old keep excess cash?

[disneysteve]

Our daughter is 25. She still lives at home with us. She puts 15% of income into her retirement account. She has no debt.

At the moment, she has accumulated about 20K in her Ally savings account. She'd like to put it somewhere that it will earn more income, but she still wants it accessible. She has no immediate plans or need for the money but you never know what may come up (decide to move out, need a new car, etc.).

Where would you advise her to put 10K or so for sort of an intermediate term but where she'd still be able to get to it without penalty if something came up?

[sblatner]

I'd have her do the Dave Ramsey plan. She is already on step 4.

3. 3-6 months emergency fund - I'd put this in a bank account that is difficult to touch but easy to get to in a pinch; i.e., an online bank account. Won't earn
much income but it really is an insurance policy and shouldn't have to earn income.
4. 15% to retirement
skip to 7
7. After her emergency fund is set and 15% is going to retirement, I'd have her set up an account at Vanguard. Low fees and lots of choices. VTSAX is a good fund for the long term but
if she might need the money sooner, she could find a fund that is not as volatile.

Nothing else is really paying anything so it is not worth while to make her finances complicated and set up CDs, etc.

If she is not comfortable with a brokerage account, I'd have her put it in an online account where it is safe and can grow by her adding funds to it.

[disneysteve]

Total stock fund was exactly what I was thinking. Put in the minimum and then DCA going forward. Thanks sblatner.

I do need to ask her how much she is generally adding to her savings each month.

[ua_guy]

Everything I hear she does with money is excellent work and saving $20k is certainly commendable. I might recommend leaving the $20k as untouchable EF parked in her Ally savings, or setting a higher goal, maybe 25k. I remember when I left the nest and even 15 years ago, startup costs were formidable. First/last and security deposit. Fronting money for 6-month auto insurance premiums. Utility startup costs. A grand or two for a repair bill, etc. If I did it over again, I'd have stacked my EF even higher, and THEN opened a brokerage account. Maybe I was a little different, though, even though I had a great life at home, I wanted very much to be out on my own even given the expense.

[HundredK]

High yield savings.

[Jluke]

Not much to do with cash these days. Depending on the circumstances she may just have to let that sit at Ally.

if investing, Vanguard balanced index fund. Wellington. Those could be other conservative choices. Yes they have a ER and some tax inefficiency but that might not even apply depending on her tax bracket. (???)

she can also invest in ETFs, like VTI instead of VTSAX.

other thoughts
Did she max her Roth, if eligible?

15% is excellent but can she do more? Will she get the savers credit?

she could establish her baseline cash pile (say 25k as mentioned before) and then anything above that gets invested.

[LivingAlmostLarge]

VOO. Is she maxing out her Roth and 401k? Since living at home why not get ahead and just stash cash in retirement while she's getting ahead by living with you? I'd also make a plan about maybe buying a home. Maybe a 2 or 3 bedroom condo and renting out rooms with friends.

[corn18]

I helped my 22 yo daughter with the same thing. She is living with us while she is working. She has saved up $15k and it was sitting in her USAA savings account t earning nothing. She opened a Fidelity cash management account for checking. She put $5k in a brokerage account but just in the core MM account. This is her EF. The rest went into another brokerage account and is 100% FZROX Fidelity Zero total market mutual fund. That is her retirement savings. She likes having everything in one place just like her dad.

[disneysteve]

She doesn't have an employer-sponsored plan.

She is not currently maxing the Roth since she is only working part time so 15% of income isn't enough to max it out. She has yet to 'launch' post-college into a serious job. She has asked if she should put more into the Roth. I'm kind of torn on that. I know that you can never regain lost time in the market. I also realize that if really necessary, she could pull out money she contributed without penalty, but I don't really want her getting into that mindset.

I agree with those who pointed out the costs of starting life on your own and she's aware of that too. A good friend of hers from college who she talks to daily recently got her first apartment and has been telling her all about that.

Maybe what I'll suggest is that she just take a smaller portion of the money and start a taxable investment account, so maybe 5K of her savings and just leave the other 15K in Ally. We can also talk about how much she is adding to Ally monthly and going forward have her start regularly adding to the investment account with some portion of that.

[kork13]

Everything I hear she does with money is excellent work and saving $20k is certainly commendable. I might recommend leaving the $20k as untouchable EF parked in her Ally savings, or setting a higher goal, maybe 25k. I remember when I left the nest and even 15 years ago, startup costs were formidable. First/last and security deposit. Fronting money for 6-month auto insurance premiums. Utility startup costs. A grand or two for a repair bill, etc.

My thoughts exactly. $20k is a great EF for almost anyone, and would allow her to have plenty for whenever the time comes that she moves out on her own. I'd keep the $20k in cash savings, then beyond that (and maxing the Roth IRA), just invest in a taxable MF/ETF and throw anything extra into that account. S&P 500 (VFIAX/VOO) or total stock market (VTSAX/VTI) are great options. That investment money can just remain super flexible to eventually fund a home purchase, car replacements, future education, or whatever else she may need. It probably goes without saying, but she's doing a great job, and you/your wife have done just as great in teaching her to succeed.

[disneysteve]

My thoughts exactly. $20k is a great EF for almost anyone, and would allow her to have plenty for whenever the time comes that she moves out on her own. I'd keep the $20k in cash savings, then beyond that (and maxing the Roth IRA), just invest in a taxable MF/ETF and throw anything extra into that account. S&P 500 (VFIAX/VOO) or total stock market (VTSAX/VTI) are great options. That investment money can just remain super flexible to eventually fund a home purchase, car replacements, future education, or whatever else she may need. It probably goes without saying, but she's doing a great job, and you/your wife have done just as great in teaching her to succeed.

We were posting at the same time. Thanks for the input (and the compliment). I like your plan, but I think she's also itching to invest a bit (hearing me talk about it so much probably doesn't help). She can get into a VG fund with 3K or an ETF with less, so that might be a good starting point without depleting her savings that much.

[kork13]

She doesn't have an employer-sponsored plan.

She is not currently maxing the Roth since she is only working part time so 15% of income isn't enough to max it out. She has yet to 'launch' post-college into a serious job. She has asked if she should put more into the Roth. I'm kind of torn on that. I know that you can never regain lost time in the market. I also realize that if really necessary, she could pull out money she contributed without penalty, but I don't really want her getting into that mindset.

Not certain exactly how much she's earning, but I'll assume less than $40k/yr based on what you've said... But I'd still encourage her to max out the Roth IRA, in spite of it being more than the 15% often suggested. It's only $6k, and if she can get into the habit of ALWAYS maxing out the Roth IRA, it becomes second nature and you don't even think about it anymore. I started maxing mine as a college senior earning maybe $20k/yr... but totally worth it, and I've done it ever since. Habits are important, and a simple one like $6k into a Roth IRA? There's really no downside...especially if she has cash on hand that she doesn't know what to do with.

[LivingAlmostLarge]

VOO with the long time frame. I would also max out the Roth IRA now. She's lost already years since 18 to do that. You can pull it out. You also can take out $10k to buy a home. But how many emergencies are happening when she's living with you? Same with Corn's daughter. Why not be maxing out a Roth IRA? That's a great starting point for people with minimal living expenses and the opportunity to save a lot? It doesn't have to be 15%.

Plus I mean there is that 50%, 20% and 30% rule. Why not use 20% savings and 30% discretionary which can also go to savings if you are able to really live on 50%?

[Scallywag]

VTI for the win! She's young and she needs to max out the ROTH starting yesterday.

Frankly, if I remember right, she's living with you and not paying rent (no shame, just mentioning to say her minimal expenses when she's with you). I am also assuming that if she does end up with an emergency, that is not going to cost her more than 20K and if / when she moves out, that would be enough to pay first month's rent and security deposit on a decent and safe apartment. And, if she did need more, I'm sure you'd be more than willing to loan her that money?

So, if this is the case, since you likely have her back, I'd max that ROTH out. That's my opinion.

[disneysteve]

VTI for the win! She's young and she needs to max out the ROTH starting yesterday.

Frankly, if I remember right, she's living with you and not paying rent (no shame, just mentioning to say her minimal expenses when she's with you). I am also assuming that if she does end up with an emergency, that is not going to cost her more than 20K and if / when she moves out, that would be enough to pay first month's rent and security deposit on a decent and safe apartment. And, if she did need more, I'm sure you'd be more than willing to loan her that money?

So, if this is the case, since you likely have her back, I'd max that ROTH out. That's my opinion.

She does pay us a couple hundred dollars every month as well as covering a lot of her day to day expenses, but you're correct that overall her expenses are low. Even more so the past 9 months since she hasn't been able to go anywhere (although she was out of work for 4 months due to the shut down).