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I got my first good job this summer and when I go back to school in the fall I will have ~$10 000 saved up. Would I be able to invest this in a reasonable way that it would provide me with say $200 spending money per month over the school year? I still live at home so I wouldn't need to have the money available for emergencies or anything like that. I'm brand new to investing so excuse any naivete.

7

First thing to know about investing is that you make money by taking risks. That means the possibility of losing money as well as making it. There are low risk investments that pretty much always pay out but they don't earn much. Making $200 a month on $10,000 is about 26% per year. That's vastly more than you are going to earn on low risk assets.

If you want that kind of return, you can invest in a diversified portfolio of equities through an equity index fund. Some years you may make 26% or more. Other years you may make nothing or lose that much or more. On average you may earn maybe 7%-10% hopefully.

Overall, investing is a game of making money over long horizons. It's very useful for putting away your $10k now and having hopefully more than that when it comes time to buy a house or retire or something some years into the future. You have to accept that you might also end up with less than $10K in the end, but you are more likely to make money than to use it.

What you describe doesn't seem like a possible situation. In developed markets, you can't reliably expect anything close to the return you desire from assets that are unlikely to lose you money. It might be time to re-evaluate your financial goals. Do you want spending money now, or do you want to invest for use down the road?

  • Thanks for the response! Sounds like what I was looking for was a bit on the greedy side haha. I'll probably put most of this into something low risk like you suggested and just get a part time job if I'm low on cash. However I'm still interested in learning about higher risk assets even if I don't plan on buying them. What kind of assets carry higher risk? And what are some things that more experienced investors learn that lowers that risk? I know some of these questions are really broad so feel free to ask me to clarify. – Eric Jun 20 '16 at 19:59
  • Example assets that carry higher risk: equity index funds (including international equity), high-yield debt, real estate investment trusts, Things that lower risk: diversification--invest in broad indices through index funds, rather than buying individual equities or bonds. – farnsy Jun 27 '16 at 4:31
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Congrats on saving the money but unfortunately, you're looking for a 24% annual rate of return and that's not "reasonable" to expect. $200 per month, is $2,400 per year. $2,400/$10,000 is 24%.

In a 1% savings account with spending of $200 per month spending you'll have about $7,882 at the end of the year. You'll earn about $90 of interest over the course of the year.

Mo. Account  Spend  Interest
1    10,000  (200)   8.17 
2    9,808   (200)   8.01 
3    9,616   (200)   7.85 
4    9,424   (200)   7.69 
5    9,232   (200)   7.53 
6    9,039   (200)   7.37 
7    8,847   (200)   7.21 
8    8,654   (200)   7.04 
9    8,461   (200)   6.88 
10   8,268   (200)   6.72 
11   8,074   (200)   6.56 
12   7,881   (200)   6.40 

I'm sure other people will have more specific opinions about the best way to deploy that money. I'd open a brokerage account (not an IRA, just a regular plain vanilla brokerage account), break off $5,000 and put it in to a low fee no commission S&P index fund; which CAN lose value. Put the rest in a savings account/checking account and just spend wisely.

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The existing answers are good, I justed wanted to provide a simpler answer to your question:

Would I be able to invest this in a reasonable way that it would provide me with say $200 spending money per month over the school year?

No.

There is no way to invest $10,000 to reliably get $200 every month. Any way that you invest it that has even the possibility of getting that much will have a significant possibility of losing a lot of money. If you want to get "free" spending money out without risk of losing money, you're unlikely to be able to find an investment that will give you more than a couple dollars per month.

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Just to offer another alternative, consider Certificates of Deposit (CDs) at an FDIC insured bank or credit union for small or short-term investments.

If you don't need access to the money, as stated, and are not willing to take much risk, you could put money into a number of CDs instead of investing it in stocks, or just letting it sit in a regular savings/checking account. You are essentially lending money to the bank for a guaranteed length of time (anywhere from 3 to 60 months), and therefore they can give you a better rate of return than a savings account (which is basically lending it to them with the condition that you could ask for it all back at any time). Your rate of return in CDs is lower a typical stock investment, but carries no risk at all.

CD rates typically increase with the length of the CD. For example, my credit union currently offers a 2.3% APY on a 5-year CD, but only 0.75% for 12 month CDs, and a mere 0.1% APY on regular savings/checking accounts. Putting your full $10K deposit into one or more CDs would yield $230 a year instead of a mere $10 in their savings account.

If you go this route with some or all of your principal, note that withdrawing the money from a CD before the end of the deposit term will mean forfeiting the interest earned. Some banks may let you withdraw just a portion of a CD, but typically not. Work around this by splitting your funds into multiple CDs, and possibly different term lengths as well, to give you more flexibility in accessing the funds.


Personally, I have a rolling emergency fund (~6 months living expenses, separate from all investments and day-to-day income/expenses) split evenly among 5 CDs, each with a 5-year deposit term (for the highest rate) with evenly staggered maturity dates. In any given year, I could close one of these CDs to cover an emergency and lose only a few months of interest on just 20% of my emergency fund, instead of several years interest on all of it. If I needed more funds, I could withdraw more of the CDs as needed, in order of youngest deposit age to minimize the interest loss - although that loss would probably be the least of my worries by then, if I'm dipping deeply into these funds I'll be needing them pretty badly.

Initially I created the CDs with a very small amount and differing term lengths (1 year increments from 1-5 years) and then as each matured, I rolled it back into a 5 year CD. Now every year when one matures, I add a little more principal (to account for increased living expenses), and roll everything back in for another 5 years. Minimal thought and effort, no risk, much higher return than savings, fairly liquid (accessible) in an emergency, and great peace of mind. Plus it ensures I don't blow the money on something else, and that I have something to fall back on if all my other investments completely tanked, or I had massive medical bills, or lost my job, etc.

  • Also (not really a legit separate answer), consider using the funds to start or run a small business, or get into some other investment you have more control over, like real estate or a rental. I know several people who used a similar amount to co-sign with their parents on buying an apartment or small house when they went to college, then rented rooms to their friends to cover the payments. By the time they graduated the loan was paid off, they'd lived free for 4-5 years with hand-picked roommates, and they already owned their own place outright - or sold it to fund other investments. – brichins Jul 11 '16 at 18:25
  • How does this answer the question? He wants the funds for this coming school year. – JoeTaxpayer Jul 11 '16 at 18:29
  • @JoeTaxpayer Then he should get 3-6 month CDs initially, and longer-term ones after that (if desired), so they mature each month or two throughout the school. I would expect CDs to be a more reliable (though admittedly smaller) net return over a very short period than stocks, given purchase / brokerage fees and market volatility. – brichins Jul 11 '16 at 18:35

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