A big wad of cash and reasonable decisions can be mutually exclusive even for the most grounded individuals.
To a freshly minted adult, receiving thousands of dollars upon graduation is an intoxicating rush so powerful it's little wonder Nina, a single mother in her 50s, is concerned her daughter might spend an entire expected small fortune on unwise purchases.
"My 17-year-old daughter is in Grade 12 this year, and when she turns 18 in early 2013, a trustee will hand over $20,000 to her, a settlement from her father's death," she says.
Already, her daughter has received no shortage of advice from friends and family about what to do with the money.
"Some people are saying put it in the stock market," Nina says. "Others are saying buy a car because she'll never have all that cash at one time again."
Nina says she wants her daughter to take a balanced approach. She already has a $22,000 RESP to cover the cost of a college diploma program in computer science next year. As a result, Nina says she has suggested a portion of her daughter's trust money could be invested for the long-term future in an RRSP or TFSA.
Of course, some money could be used for short-term needs, such as buying a car. She could also take a once-in-a-lifetime vacation.
"She wants to go to Europe after graduation," Nina says. "I'm thinking she could use $2,000 and get a little help from Mom, too."
Although Nina says she understands it's her daughter's money and she trusts her to spend it wisely, a few ideas from experts wouldn't hurt.
"What makes sense?" Nina says. "What are some of the options for a young woman who is coming into a lot of money and she could just blow it all fairly quickly."
Two financial experts weighed in on Nina's daughter's options regarding her expected windfall.
Lyle Atkins is one of the few fee-only certified financial planners in Winnipeg, and Susan Misner is co-founder of Golden Girl Finance and co-author of It's Your Money, Honey: A girl's guide to savings, investing and building wealth at every age and life stage. She is also a former portfolio manager.
Both experts agree now is not the time for Nina's daughter to invest in an RRSP since she has no income and it's unlikely she'll be able to use the contributions to provide her with a tax refund in the next few years.
"The idea that you should contribute to an RRSP and delay using the deduction until there is taxable income is a total waste of time and money," says Atkins, with Independent Financial Counsellors.
Atkins and Misner say Nina's daughter should consider contributing $5,000 right off the hop when she turns 18 to a tax-free savings account (TFSA). Money inside the account grows tax-free and it's flexible. She also can use the money whenever she wants for whatever purpose.
The two advisers also say that, ideally, she should invest for the long term. That means investing in the stock market, which involves more risk than a savings account but also offers much more potential to grow her money over a decade or more. Stock market investing involves buying shares in companies. She would become an owner in those companies and, as such, she can be entitled to some of their profits -- dividend payments.
She also benefits from the growth in the companies' value.
The two experts differ on the type of stock market investment to best achieve long-term growth.
Atkins says the biggest bang for her buck would come from growth stocks, which have the best potential for long-term increases in value. A good example of a growth stock is Apple. In 1992, its stock was worth about $12. Today, it's worth more than $600 a share. That's a 5,000 per cent increase in value, so a $20,000 investment in Apple 20 years ago would be worth $1 million today.
Still, it's unlikely Nina's daughter would be lucky enough, even with the help of an adviser, to invest in the next big thing. Instead, she may want to invest in a mutual fund -- a managed portfolio of stocks -- with a good track record of annual increases in value. This would spread her money out, investing in many stocks, and it would reduce the risk of picking the wrong stock and losing a lot of money.
The basic take-home message is the tax-saving power of the TFSA combined with stock market investing shouldn't be overlooked.
Misner offers the following strategy to illustrate: Nina's daughter could invest $5,000 for three straight years in her TFSA -- $15,000 in total, then continue investing $250 a month until her late 30s.
"Earning a modest six per cent rate of return, her money will grow to over $165,000 in 20 years," she says. This strategy involves buying stock in a few blue-chip companies.
"These companies pay out profits in dividends and have a history of steady, long-term growth and a consistent track record of raising dividends," Misner says. "This will create growth, and she won't have to pay tax on any of the dividends or returns she accumulates within the TFSA."
It's also a fairly conservative strategy. Many blue-chip companies pay at least three per cent a year in dividends to shareholders, so the stock price only has to average a three per cent increase in value annually over a 20-year time frame.
Nina's daughter has several other options for her money, such as purchasing a car.
"Buying a car is not as foolish as one might think," Atkins says. "My marks at college went up significantly once I had a car."
However, she should think twice about using all the cash to buy a new car.
"A car is a depreciating asset that loses thousands of dollars in value the minute it's driven off the lot, whereas saving her money presents a great opportunity for growth," Misner says. "If she buys a new car, the money will simply be gone"
Instead, buying a used car is a better choice. She could set aside money for car repairs and insurance and she'd still have some money for a European trip and to invest for the future.
Nina's daughter also has time, so there's no need to rush into a decision, Atkins says.
She can invest the money in something safe and liquid, such as a high-interest savings account, until she's certain about her course of action. And she should approach her decision as an opportunity to learn about money and investing.
It's her money, so it's up to her to understand the options available, Misner adds.
"The key is to balance out the sweet things in life with a little self-control," she says.
Putting a little money toward short-term desires is fine, but Nina's daughter should try to see the big picture.
"In one scenario, $20,000 can be gone in no time and provide very little life value," she says. "In the other, it can be the foundation upon which she builds her own legacy of long-term financial success, one that may even extend to her own children some day."