djronnieb80
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Okay this may be a dumb question, but I'm new the whole investing thing. I will be receiving $80,000 from a relative who passed away. I was thinking of putting it into a money market that earns has a rate of 3.46% and APR of 3.56%. My question is.... the 3.46% interest rate comes out to $2768. Now would I receive $2768 every single month in my account? Or would I only receive $2768 once a year? In other words can I count on having an extra $2768 each month to spend? If I can't, then what you recomend that I do with this money so that I can earn $2,000-3,000 per month? Thanks and I look forward to your responses.
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Fri Feb 24, 2006 3:46 am |
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djronnieb80
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Thanks for your help. However It took me about 15 minutes to make out what you wrote, I can see that your spelling skills need some major work!
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Fri Feb 24, 2006 5:16 pm |
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rockhound
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Yeah, sometimes figuring interesting can be a little confusing. The difference between the nominal rate (or APR) and the effective rate depends on the method of compounding, and how often the interest is compounded. The more times it's compounded, the more you make, although this reaches a limit until the gains are very marginal no matter how many times you compound it until it is just compounded continually with a power function. But you are looking to "live off the interest" and not actually allow more interest to accrue on the interest, if I'm reading your plan correctly. So de facto, your investment wouldn't really be compounding the interest. You would forever only earn interest on $80,000 if your plan is to draw out the interest to live on every month. To figure your monthly interest in that simple way, you just divide the APR by 12, so each month your $80,000 would earn $80,000 x 3.46%/12 = $230.67. if you simply added those up, it comes out to $2,768 per year. That assumes no compounding because you would be drawing out the interest every month. But you get the idea, you won't be making $2,000/month on a money market. Let's see what kind of APR you would need: $2,000 = (APR/12) * $80,000, so your target APR would be 30%. To give you an idea, 30% is beyond the realm of regular investing. At that point, that is the Rate of Return demanded by gold mining companies in high risk ventures. I think the moral here is that a windfall of $80,000 does not mean that you will be retiring at age 21. I would suggest that you put about $10,000 in an emergency fund, perhaps a money market or CD. Use the rest to start a Roth IRA, and diversify those funds, where you will probably make 8-12% a year. But that will add up to a lot by the time you retire!
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Fri Feb 24, 2006 11:27 pm |
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rockhound
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quote:
Originally posted by coaster
But the last part of your post is the most important question because unless you anticipate needing the money within the next two or three years, it's a real waste of earning power to put the money in a money market fund at only 4% when stocks average over 10% over the long term.
I am guilty of this myself, because I have way too much money sitting in the bank as a psychological buffer against the "hard times" that are always "just around the corner", though I know it would make more financial sense to start a supplemental retirement fund or other form of investment. I grew up hearing my dad's stories about growing up during the Depression, and accept as fact that the rug can get pulled out at any moment, so I tend to look at cash as security.
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Sat Feb 25, 2006 1:26 am |
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Jaszbo
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djronnieb80 you don't want to put your money in a moneymarket or savings account if you want to make money. Inflation(buying power) has been around 3%, if you put 80,000 dollars and it's even earning 4% intrest, then it really only made 1% intrest and then these accounts generally charge your tax income as it's not considered long term invest, which is taxed at a lower rate. Therefore MMA are not really an investment, but a safe place for your money.
If you are looking at not just keeping money safe, but making real earnings, then I would look for other investments as the intrest you make in a MMA or even MMF isn't going to do anything except keep your money safe. Basically if it's 80k and it's making 4% a year, after taxes it breaks about even with inflatoin, so in the long run you'll end up with about the same amount of money.
I don't mean to confuse you, but you really need to take inflation and taxes into consideration. Like coaster said earlier everybody's confort level is differnt, so it depends on what kind of risks you want to take with what kind of returns you might be able to get. Maybe keep some in savings if you are worried and then just expose some of the money to risk while you learn and then rebalance the money moving the earnings to the savings.
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Sat Feb 25, 2006 5:39 am |
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djronnieb80
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quote:
Originally posted by Jaszbo
djronnieb80 you don't want to put your money in a moneymarket or savings account if you want to make money. Inflation(buying power) has been around 3%, if you put 80,000 dollars and it's even earning 4% intrest, then it really only made 1% intrest and then these accounts generally charge your tax income as it's not considered long term invest, which is taxed at a lower rate. Therefore MMA are not really an investment, but a safe place for your money.
If you are looking at not just keeping money safe, but making real earnings, then I would look for other investments as the intrest you make in a MMA or even MMF isn't going to do anything except keep your money safe. Basically if it's 80k and it's making 4% a year, after taxes it breaks about even with inflatoin, so in the long run you'll end up with about the same amount of money.
I don't mean to confuse you, but you really need to take inflation and taxes into consideration. Like coaster said earlier everybody's confort level is differnt, so it depends on what kind of risks you want to take with what kind of returns you might be able to get. Maybe keep some in savings if you are worried and then just expose some of the money to risk while you learn and then rebalance the money moving the earnings to the savings.
What would be some good investments, do you think?
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Sun Feb 26, 2006 2:51 am |
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