LondonIce asks: “In about a month I’m going to receive £10,000 from my parents. I’m 17, and quite honestly, I have no clue what to do with it. Should I invest it? Keep it? What should I do?”
Question 18 – 17 Years Old, Receiving £10k – What To Do? – Shownotes
Today’s question comes from LondonIce:
In about a month I’m going to recieve about £10,000 from my parents (I’m 17). Quite honestly, I have no clue what to do with it.
Ideally, I want to put it towards a property but of course £10,000 probably isn’t enough, and I won’t be looking at a property for another 4 years or so. Should I invest it? Keep it? I have no clue. What should I do?
Straight away I have two thoughts. One: thank your parents. This kind of gift puts you massively ahead of most people your age and is going to set you up brilliantly for the years ahead.
Number two: at the age of 17, the fact that you are answering this question, and you haven’t already blown this money on a new car and related insurance, or a holiday, etc is great testament to your attitude. Very mature LondonIce, well done.
So, after this initial feedback, let’s get to your question.
Make Sure You Understand The Power Of This £10k And Time!
First quick check – although there is no tax due on gifts – you may be liable to inheritance tax should the absolute worst happen to your parents. This is very unlikely, and even if the worst does happen, it’s very unlikely that they’ll be any liability for this gift unless your parents are very wealthy.
However, like all things in personal finance, it’s best to educate yourself and be safe rather than sorry – so check out the Podcast Question 5 – Do I Pay Tax On Gifts.
Now, you need to know what to do with it. First thing is to understand its awesome power. Say you can invest it for the long term (not necessarily what we’ll do but it’s good to know) at 10% and inflation is 3%, then the amount this money could grow by is around 7% per annum.
It’s incredibly far away for you, but what happens is that £10,000 is the only money you ever save and you invest it from now until you are 65 years old, earning 7% above inflation. Well, your money would be worth £257,289 – over a quarter of a million pounds. And that is in “today’s money” because we’ve already considered inflation. You could then live off the profits from that each year (the 7%) and keep your capital growing in line with inflation to provide you with £18,000 income every year for the rest of your life after the age of 65.
I mention all this LondonIce not because it’s what you should do, but because understanding the sheer power of this £10,000 combined with the awesomeness of compounding interest over time, will help you be more responsible with the cash and make sure you use it on what is worthwhile to you.
What About Saving Toward Property?
You say in your question “Ideally, I want to put it towards a property, but of course £10,000 probably isn’t enough and you won’t be looking at a property for another 4 years”.
Both sensible. The biggest financial challenge and goal for most young people (anyone under 30) is pulling together the savings and building a secure enough financial position to buy a house. This £10,000 clearly won’t do this today, but it will help get you towards that goal.
LondonIce has said in a follow-up that he isn’t planning to go to University, but instead is looking to go full time with an IT technology firm after he finishes sixth form next June. Additionally, he adds that he has no “savings” outside of this amount. Completely expected for a 17 year old, but good to know for sure.
A Three Step Approach
So, your first goal is to build an emergency fund with some of the money, which will cover any unexpected events that you will be financially liable. There may not be many now, so you can probably keep this to £1k or less. However, this may increase once you go full time at work and/or move away from home.
This amount should be kept in a current account so it is immediately liquid, the best of which could earn you between 3 and 5% annually.
Then, you need to think about putting the rest of the money to better use, which could include:
- Supporting yourself through internships or training courses to further your IT skills and career
- Investing in longer term assets (the aforementioned market tracking ETFs) for a financially beneficial action in 5-8 years’ time (buying a house). In that time frame, you could consider investing in market tracking ETFs in S&S ISA. The returns will be better, and that time frame means that you’ll start to iron out the variance in your returns (meaning that you are highly likely to have more cash than when you started for your house purchase) – not guaranteed. Supplement with income in the future.
- Wait for it…having fun. It is always tough for me to remember because I’m so focussed on the maths of maximising wealth in the long-term, but it’s important to use a slice of this cash for having fun. But don’t waste it, put aside a small portion (maybe £200-£500) and create a fun fund. Use it wisely on things that you’ll get genuine enjoyment and lasting memories from.
Where you save or invest this money will depend largely on the timeline in which that will happen. Are you planning on going to University? If so, I would say that it may be 5-8 years before you buy a house because you won’t know where you will be settling long-term until after that and maybe a year or two in work first.
If that is the case, investing it in market tracking ETFs would not be a bad idea as you get a higher average return, and that time frame is usually enough to bring down the variance to an acceptable level.
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