You’re a trust fund baby; your parents set up your trust fund with a specific goal in mind — your happiness. But if you approach this chunk of cash the wrong way (let’s say, through treating your friends to bottle service), then you might find yourself broke and very unhappy.
So, when you’re just starting out in the world and you have big-old brokerage account a couple clicks away, how do you handle it responsibly?
1. Sit On Your Trust Fund Money
A common mistake Bera sees is brand new trust-fund holders running out to make a huge purchase. “Whether it’s a car or a home, I usually recommend that people sit on that money for six months before any major decision. Maybe right now you think you really want to buy a car, and six months you later you realize you really want to take the year off and travel with your friend. But you just bought a car, and you don’t need a car for your round-the-world trip!” Bera says.
2. Figure Out Your Financial Goals and Values
If you don’t know what you want to do with your trust fund, then it’s easy to fritter it away on the forgettable things, like cocktails and fancy throw pillows. But when you crystallize what you want to do, it brings everything else into focus.
“It starts by figuring out your goals and your values,” Bera says. “Do you want this money to last until retirement? Do you want to use this money for a down payment on a home? Or do you want to pretend like it’s not there, and that eventually you’ll tap into it for those big things when you need them? Or do you want to use it to supplement your lifestyle because you decide to take a lesser paying job or an internship to build your resume?”
3. Do the Math
So when you don’t necessarily have a fixed salary, but a big chunk, how do you decide what to spend every month? That’s a challenge for trust-fund babies.
“One of the things that I see is that people don’t know where their money is going, because it changes each month, and they’re haphazardly tracking their spending,” Bera notes. “They’re taking money out whenever they need it. They spend a lot month, and they withdraw $5,000. The next month it’s $2,000 and the next month it’s $10,000. If they think they are taking out $20,000 a year from their trust and it’s actually taking $50,000, and they only have $200,000 in their trust, that money is only going to last four or five years.”
You don’t want to wake up four years from now and realize your money is gone. Strangely, it helps to think of your trust fund almost as a retirement account. Like your grandparents, you need to figure out how long you want your money to last, and from that, how much you can spend each month or year.
“In retirement we talk about safe withdrawal rates, and that’s important to look at for your trust as well,” Bera says. A safe withdrawal rate is how much you can withdraw each year to make your trust last. One rule of thumb is that if you have $1 million you can withdraw 4 percent — or $40,000 a year — to make your trust last 30 years.
Of course your figure will depend on the size of your trust and how long you want it to last.
“When you see that those large amounts are coming out of your trust, it’s time to add those up and figure out, and see that, ‘Whoa, I took out 10 percent of my trust this year. If I continue at this rate, it’s not going to last,’” Bera continues. That’s the financial planner’s version of a reality check.
4. Figure Out Your Monthly Costs.
So far, we’ve just been speculating about how much you should spend. But let’s couch that in reality. Next, you want to figure out what it will cost to live your life. And we’re talking about the basics: rent, utilities, cell phone bill, groceries.
If you’re already out in the world, you should dive into your bank accounts (or a budget tracking service like Mint.com) to get an idea of where your money is going. Given the earlier math you did, you might find your rent is too high, or that you could afford more. Or that you need to stop buying rounds for your friends.
If you have a job, is your monthly paycheck minus taxes enough to cover these expenses? Is it enough to cover reasonable discretionary spending, too, like eating out or shopping or a long weekend away?
5. Give Yourself a Paycheck
If your regular salary is not enough (or you don’t have a salary yet), Bera suggests setting up an automatic monthly transfer from your trust to your checking account.
“It’s as if you’re getting a monthly paycheck, and you’re living off this fixed monthly income,” Bera says. This is better than transferring money over willy-nilly when you overdraw your account. And it gives you a framework for deciding what you can “afford” and what you can’t.
“And once you get a job, you can either stop that monthly transfer or reduce the amount you’re taking from the trust fund. Instead of depleting those funds really quickly, you’re managing that money in a way that will allow it to last over time.”
6. Have Some Cash in Hand and Invest the Rest
If you have a transfer set up, calculate the amount of six to 12 months of that transfer, and keep that in cash in your brokerage account. You’ll earn money on your money, without having to sell at random intervals. “We don’t want a large portion sitting in cash, but we don’t want to have to make trades when the market isn’t doing as well,” Bera says.
7. Plan for Unexpected or Special Expenses
OK, so you’ve got yourself a budget and a transfer. But you know there is money just sitting over there, burning a hole in your bank account. So how do you keep from saying “yes” to every vacation, dinner invitation and J. Crew sale? “The tough thing is what usually ends up happening is money is pulled out of the trust to be able to do it all,” Bera told us.
She suggests doing what non trust-funders do: Set up savings accounts. “If you do have some money coming in each month, set aside part of that to your different savings goals outside of the trust in different accounts. If you know you like to spend $5,000 a year for travel, make sure you’re setting aside money for that. Maybe that means if you take this trip with your girlfriend, you can’t take a trip later on in the year or that you might want to cut back in other areas.”
And keep your safe withdrawal rate in mind when setting up the savings accounts.
8. Get a Financial Planner or Financial Advisor
“This is a huge responsibility that not a lot of young people have to deal with,” Bera says. “While their friends are worrying about credit card debt and student loans, they don’t have anybody to talk to about, ‘Hey, I got half a million dollars, and what should I do with this?’”
“Trust funds come in all different shapes and sizes,” Bera adds. “I’ve talked to some people who have a small inheritance that is still the most amount of money that they’ve ever dealt with. Other people are getting checks on a monthly basis, whether that is from an annuity or an insurance product or company stock. Other people were gifted inherited shares of publicly traded companies. These are very complex financial planning situations.”
Bera thinks it’s important to work with someone close to your age, who understands your concerns and your values. But what if your trust came with your parents’ financial advisor?
“There are benefits to both, staying with your parents’ advisor or switching,”
Bera says. “If you have a great relationship with your parents’ advisor, maybe you do want to stay. But you should at least explore your options.”
The risk of staying with you parents’ advisor is that a) they’ll retire or b) they’ll manage your money as if you’re a retiree and not a young person who dreams of buying a home someday.
“The most important thing is that you’re working with a planner that you feel comfortable talking with, that is knowledgeable, who has CFP credential behind their name,” Bera advises.
Look, it’s natural to be nervous about this trust fund (it’s the ones who aren’t nervous who really should be worried). But with the right advice and some thought, you can use the trust fund exactly like your parents intended over the course of your life: in your pursuit of happiness.
Additional Resources if You’re a Trust Fund Baby: