I Inherited $3,000. What Should I Do With It?

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Photo: H. Armstrong Roberts/Getty Images

Dara, 27, is a teacher in Virginia who recently inherited $3,000 from an aunt. She knows it’s not a lot of money, comparatively, but she wants to make it work for her in the smartest way possible. Luckily, she’s paid off her student loans and isn’t in any debt, so this money is really hers to use however she wants. One source of concern is that she hasn’t started saving at all for her retirement. But she also could use a new car because her old one is a Hyundai from 2005. What’s the best way Dara could use this money and achieve her immediate and long-term goals?

It speaks highly of you that your “splurge” item is a new car — something you legitimately need. Many people — and definitely my 27-year-old self — would rip open this check, deposit it immediately, refresh their bank-account page until it showed up, and then blow at least part of it on something awesome like plane tickets, a really extravagant dinner, or a random shirt that they’d wear exactly twice. That you haven’t done this is probably the same reason why you’ve already paid off your student loans and don’t have any credit-card debt: You’re disciplined and smart and you manage your wallet like a tight ship. You’ve already aced the marshmallow test and, because you don’t owe anybody anything, this check is your oyster. Sure, it’s not a life-changing amount of money. But it’s do-something money, and that’s good enough.

We’ll get to the car thing in a minute. But first things first: You say that you haven’t started saving for retirement. If that also means you haven’t been saving in general, then that needs to change, like, yesterday. Don’t feel bad about it — it’s a waste of your time to feel guilty about most things, particularly money, and especially in your 20s. But DO take a minute to thank the beautiful, sparkling unicorn of good fortune who has showered you with magical dollar-sign sparkles and kept you out of disaster’s way. You are young and sharp and, as of right now, you’ll be just fine. You’re also in the vast majority of young women who keep their money as straightforward as possible: paycheck comes in, expenses are met, life goes on. This is understandable — and you could be doing a heck of a lot worse (by which I mean, have credit-card debt) — but it’s also a mistake. The great news is that you can very easily fix it.

Have you ever heard people bandying about the term “emergency fund”? Manisha Thakor, the director of wealth strategies for women at the BAM Alliance and all-around brilliant woman, aptly refers to it as “shit hits the fan money.” If you don’t have anything like this in place, then your aunt’s blessed $3,000 is arriving at the perfect time (right now). The point is, you always — ALWAYS — need a chunk of cash socked away to handle the inevitable calamities that are a given part of adult life. Quoting a report from the Consumer Federation of America, Thakor pointed out that it’s typical for an American woman to have around $2,000 of unexpected expenses a year. “This is stuff like weird medical bills, plane tickets to visit a sick relative, that kind of thing,” she says. I’ll take the liberty of adding to that list: car accidents, bed bugs, dental work, and finding out your boyfriend actually sucks and you must move out of your shared apartment immediately.

So: Take $2,000 from your aunt’s check and park it in a savings account, where those dollars must sit on their little cash butts, entirely liquid. You’re not allowed to even breathe on them unless an expense checks all of these boxes: (a) It’s a surprise, (b) It’s very, very important, AND most essentially (c) It’s so important that if you couldn’t afford it, you’d put it on a credit card and go into debt.

And if you do dip into it, replenish the $2,000 as fast as you possibly can. This is a financial ground rule.

Then, before you even think about the remaining $1,000, you need to take care of something that has nothing to do with it: Make sure that you’ve set up a 401(k). According to every single financial expert (and nonexpert) I’ve spoken to, this is a big, BIG deal, and the most idiot-proof way to start saving for retirement (Dara, you’re definitely not an idiot, but if you were, this would be even more important). What’s more, not contributing to it from the get-go is the No. 1 financial screw-up that women make. Christine Benz, the director of personal finance at Morningstar (a major global independent investment research firm) and author of no fewer than five books about investment strategy, explains that a 401(k) must be tended to from the get-go. “For young women, or for anyone, it’s a mistake to say, ‘I’m going to pay off my student loans first, and then get started on my 401(k) plan.’ Don’t do that,” she says. “Get started contributing to your 401(k) plan as early as possible.” In your case, that’s right now.

I’m not going to berate you, though, because all you have to do is get your ass to HR and sign up. You’ll want to contribute to the point where your employer starts matching your contributions. You’re a teacher, so chances are high that your employer offers a pretty solid 401(k) matching program. (If the work gods are kind, there’s a chance you might have been opted into your company’s 401(k) program at some point without realizing it. Some companies do this automatically, as a sort of Nudge Theory move.) Once you sign up, a little bit of your money will be taken out of your paycheck each pay cycle and put into an investment account in the money universe that you don’t need to think about for now. That money will be exempt from income taxes, and if you put in a certain minimum (usually around 6 percent of your paycheck), your company will “match” it (that they call it matching is stupid, because they don’t contribute dollar for dollar, but the point is they do add something). This is commonly referred to as “free money,” and you really want to hit that minimum so that you’re eligible to get it. The whole rigmarole is annoying for the 30 minutes it takes to set up, but it’s ultimately not that hard, and after dealing with the nice people in HR (who should be able to walk you through the process and answer any further questions, because that’s their job), it’ll require literally no effort on your part, besides coping with a slightly lower number on your paycheck every month. Just suck it up. Your old-lady self will be incredibly grateful.

Hypothetical side note: Even if you did have some outstanding debt, both Benz and Thakor — and every other money genius I’ve talked to — would have strongly urged you to do the previous two things anyway. In the hierarchy of smart money moves, starting an IRA and setting up an emergency fund are always at the very top. And while we’re on the topic, one more word on the latter: Every single expert I’ve consulted has emphasized that the $2,000 chunk of cash is the rock-bottom minimum. Your real goal should be to have three to six months’ worth of living expenses tucked away somewhere, liquid, just in case. Elizabeth Warren calls this “walking-away money”; my financially savvy friend Katrina calls it “fantasize-about-quitting-my-job money”; in Ali Wong’s words, this would be the gold that you’d stuff up your butt before running away from the Communists, etc.

Realistically, that amount of savings will take years to squirrel away, and that’s okay. “Unless you’re making a bajillion dollars, it’s going to take you a really long time to save up that three to six months’ of expenses. The starter $2,000 should be the initial goal, and then continue adding from there,” says Thakor. “You need to get used to multitasking — doing a little bit of everything. Every month, put some money in your 401(k), pay off some of your student loans, and stoke your emergency fund, but do it all gradually.” The aforementioned Katrina set up her company’s transportation reimbursement to go directly into said emergency fund, so that it would increase bit by bit every month. Another woman I know started her career as a management consultant, and set aside her first two year-end bonuses. One of my best friends saved $43,000 in two years when she was an IT consultant, only for it to be wiped out by the exact reason people need it in the first place: She developed an extremely rare brain condition that required multiple ridiculously expensive brain surgeries. There are plenty more horror stories where that one came from, but you get the idea.

Which leads us, finally, to the fun part: After you set up your emergency fund and your 401(k), you’ll have $1,000 left for your new car. Considering you’ve paid off all your student loans in a timely fashion, you probably have a decent credit score, so you should be able to negotiate an excellent payment plan. Be aggressive. Take those car salespeople to the cleaners! Shop around and fight hard. Ultimately, they want to sell you a car, so be tough. (And apparently car sales are leveling out exactly now, so now is a good time to bargain.)

Beyond that, I don’t know anything about buying cars, but there’s plenty of literature out there about how to trade in your old Hyundai and get a good deal on something else. I would encourage you to get a hybrid, which will save you money in gas over the long run. (My mom’s ancient Prius, despite smelling like a wet dog, is still humming along beautifully after nine years.)

Oh, and take $100 and keep it for something fantastic for when you turn 28. To celebrate your new financial security, and also because spending money is way more fun than saving it.