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‘If I say the sky is blue, she’ll tell me it’s green’: My daughter, 19, will inherit $800,000. How can she invest in her future?

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Dear Quentin,

I have a 19-year-old college-sophomore daughter who is coming into a large sum of money — around $800,000. What is the best way for her to invest and set herself up for the future?  

Considering her age, I would love for some of that money to be inaccessible. If I say the sky is blue, she’ll tell me it’s green, so I am not the best person to advise her. 

I do know she wants to keep some money to live on for the next year or two, but other than that she has no concrete plans. 

Concerned Mom

Related: I asked my elderly father to quitclaim his home so I can refinance it — and take out a $200,000 annuity for my sister and me. Is this a good idea?

“Unchecked spending can deplete empathy as well as bank accounts.”

MarketWatch illustration

Dear Concerned,

This is a lot of money. It should — and should not — change her life. Let me explain.

If your daughter can buy a property for $300,000 when she gets her first job, and pay off a mortgage of $100,000 — or, even better, live mortgage-free with just property taxes and maintenance costs — that would be a great first step toward financial independence. 

She would be the envy of her peer group (more on that later). Most people work for years to free themselves from the rental trap and get their foot on the property ladder. Her home would likely appreciate in value, freeing her up financially to enjoy her life.

With the help of an adviser who is also a fiduciary, she can plan for her education and use this windfall as a way to not merely spend, but to see how even $800,000 comes with limitations. Budgeting and planning can be a lot of fun, and can also help her avoid getting into debt.

This is not the time to invest in cars, clothes and vacations: Such purchases would not only drain her account faster than she might imagine, they could lead to a lifetime of bad habits — especially if one month of lavish spending habits turns into 10 years.

It’s also not a good idea for her to use this money in ways that separate her from her peer group. Bragging about this inheritance will only help sow resentment and jealousy among her friends and acquaintances, and set in motion years of conversations that start with “It’s all right for you.”

Few people want to be friends with a person who flaunts their wealth, congratulates themself on how well they’ve done, and presumes that others lead the kind of lifestyle to which they have become accustomed. Unchecked spending can deplete empathy as well as bank accounts.

Yes, leisure is important; we are here to enjoy life, after all. She could, with professional advice, set aside an income for activities like travel, tennis or skiing lessons — pursuits that will add to her quality of life and allow her to have modest fun with her friends rather than living the five-star lifestyle.

She should feel empowered and, with professional advice, excited rather than daunted. Planning a future with so much money at her disposal should be more exciting than planning a college graduation or a birthday party. The reward? Financial independence and peace of mind.

Stocks, CDs and Roth IRAs

The return on CDs has increased in the last couple of years, and rates are currently in the 4%-plus range for jumbo CDs between three and seven years that require a minimum $100,000 deposit. That’s not a bad rate of return, if she’s not going to touch it.

A certificate of deposit is basically a time-limited savings account — and the interest you earn on your CD should be reported as taxable income to the Internal Revenue Service, unless the money is stored in a tax-advantaged account like an IRA CD. 

She could invest $50,000 in the stock market, preferably in shares of companies with a higher return on equity, lower leverage and more consistent earning profiles. This can help her learn about compounding — earning money on her initial investment and on the investment’s return.

Avoid individual stocks and opt for a mutual fund or exchange-traded fund. Research suggests young people become more risk averse and lack confidence as the years go on, but remember that investors tend to react more strongly to adverse events than positive ones. 

This is the perfect time to take advantage of her relatively low income, particularly when she starts working, and make contributions to a Roth IRA, which are usually made with post-tax dollars. The gift of saving for retirement could be worth a lot more than this $800,000.

The sad truth is there’s no magic $800,000 strategy that will make your daughter happy or free her from worries for the rest of her life. She will still have to study hard, work for the career that she wants, and fight for her place in the world like everyone else. This money, though, is a great head start.

And when she does begin her career in earnest, she will hopefully have given herself more choices to choose a job she loves — one that will reward her fairly and generously, allowing her to contribute to a 401(k) with an employer match.

Given that many young people grew up during the Great Recession, and saw what their parents went through, they are perhaps understandably more cautious and risk-averse to investing; but the earlier you start, the more time you will have to suffer all those slings and arrows.

A slow and steady approach is a win-win: $800,000 + time = a happy outcome.

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

Previous columns by Quentin Fottrell:

‘I don’t like the idea of dying alone’: I’m 54, twice divorced and have $2.3 million. My girlfriend wants to get married. How do I protect myself?

My partner is against marriage. I’m not on the deed to his home, but he set up a revocable trust in case he dies first. Is this risky?

I want my son to inherit my $1.2 million house. Should I leave it to my second husband in my will? He promised to pass it on.

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