What's the money for?

Question: I have CDs for both my sons that will mature at the beginning of Dec. 2011. They are now 21 and 17. The CDs are making virtually nothing in interest compared to some years ago and am wondering what would be a better investment with their money? Each CD totals about $660. Thank you. Margaret, Cedarburg, WI

Answer: I usually don't do this, but I'd like to answer your question with a question: What are you trying to accomplish with the money? The reason is that once you know the goal the investment choice is often obvious.

For instance, let's say one son is in college and the other will be heading off to university shortly. You may want the money to be saved for when they graduate, perhaps to go for a security deposit on an apartment or for a new set of clothes at their first job following graduation. (These are just examples.) In that case, I would stick with short-term CDs or, perhaps even better, an online savings account. The money won't grow much, but it will be there when they need it in a few years.

Then again, you may want to use the money to teach your sons about investing. We live in a work world where knowing how to invest is a valuable skill, although most of us don't grow up picking stocks and choosing bonds. Yet at their first job they might get the opportunity to open up a 401(k) or they may stash some money away for their retirement years in an IRA. In this case, I would encourage them to research and pick a stock or stocks. They may make money. They may lose money. But by investing real money in stocks they'll learn a lot--the real goal of the exercise.

They could invest the money in a low-fee broad-based equity index mutual fund or a low-fee balanced mutual fund (60% stocks and 40% bonds). The idea here is to let the money grow (hopefully) and reinvest the dividend income. They would then have the option in their 30s and 40s or some other age of cashing it in and putting the money toward a down payment on a home, to pay for additional education, to help fund a wedding, and so on.

The goal comes first and the investment choice second.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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