QUESTION: Denise in Albany says her son is getting a $50,000 settlement from a car accident. He’s 20 years old, and Denise wants to ensure he doesn’t blow it. How can she best guide him with this money?
ANSWER: I would suggest he take some of this money and give it. I would suggest he take some of this money and spend it. He should take the rest of it, put it away, and forget he owns it.
Let me give you an example here. Let’s say he gave $5,000 and blew $5,000. That would leave him $40,000. That’s a lot. Let’s say you took $40,000 and put it in a decent growth stock mutual fund at 20 years old, and you never touch it. At age 70, that’s going to be so much money that it’s going to be hard to believe. It would be $15 million. Just ask him if he’d like to have between $5 million and $10 million when he’s 70. That’s what leaving his hands off the $40,000 would be worth to him.
One definition of maturity is learning to delay pleasure. If he doesn’t do anything at all with this money except just set it aside for a few years—let’s say until he’s 30… Jump on a website and see what it would be worth at 12% in a few years if you invest into growth stock mutual funds.
The Standard & Poor 500 Index, which is the most accurate measure of the stock market throughout its life, has averaged over 11%. A good series of growth stock mutual funds—he should be able to average that. I average that on mine—over a long period of time, not necessarily in a given year. Last year was up about 14%. The year before that wasn’t. If you made that kind of money on your money, then you’d be able to retire. He’s going to have some serious money.
He will need to set some of it aside so that he has a future, or is he going to act like he’s 12 years old and blow it all this week on popcorn? If he will do this, this accident that he had can completely change his family tree. He’s going to be in a position to do that. In 10 years, the $40,000 would be $132,000. If he just set it aside until he’s 30, he could pay cash for a reasonable home in some markets. It would be $15 million if he waits until he’s 70. If he waits until he’s 60, it wouldn’t be $15 million; it would only be $5 million.
He can change his family tree with this money. He could change his entire life and all of the generations that follow him if he’s wise. Nine out of 10 people act like they hit the lottery, and they blow it. Then he’s going to wake up with this horrible headache called a financial hangover. Your butt is sore because you kick your own butt for a decade for being stupid. Tell him to avoid a headache and a sore butt to not blow this money. You won’t have to kick his butt. He’ll kick his own butt because he’ll wake up and say, “Man, I was 20 years old and stupid.” Then he’ll be calling me going, “I’ve got all this debt because I was stupid. I had a chance, and I blew it.” The nastiest taste in the back of your mouth is regret. If you can get him to understand all of that, you’ve moved him toward wisdom in this discussion. You’ve done him a huge favor as a mom. He does not need to go buy land. He needs to go get a job. If he’s not going to go work on his education, he needs to go get a job.