Perhaps you heard this charming human-interest story in the news the other day: It seems that in Hutchinson, Kansas, a bartender at the local Applebee's (Nasdaq: APPB ) received a $10,000 tip on a $26 tab from a regular customer.
As you can imagine, she was shocked and thrilled. Like most of us would probably do, she quickly started thinking of all the things she could do with the money. According to an AP article, she said, "'I'd like to take care of my parents, since they always took care of me ... But I feel like he wanted me to buy something for myself, and there's a Jeep that I've had my eye on for a while.'"
Hmm. I won't condemn the decision, assuming she does go for a Jeep, since I don't know her and her particular situation. But in general, that seems like a less prudent option compared to some other possibilities. Here are some thoughts that ran through my mind when I read about the Jeep:
First off, if her parents need help, this would be a great way to help them without feeling much pain in her pockets.
Next, cars are assets that depreciate. On average, after five years, a car is worth about 35% of its price when new. According to About.com, "Some models such as Jeep Grand Cherokee, Ford Explorer, Ford Taurus, Lincoln Continental, Infiniti Q45, lose their value quicker than others like Honda Accord, Lexus, Mercedes-Benz." Now, if she really needs a new car, then getting one can make sense, but otherwise..
She should consider buying assets that appreciate, such as stocks or mutual fund shares. If she'd received the windfall 20 years ago and had invested in Wal-Mart (NYSE: WMT ) , it would be worth nearly $200,000 today. (I'm ignoring any taxes she might have had to pay on the tip.) In Johnson & Johnson (NYSE: JNJ ) stock, it would have topped $230,000, and in Altria Group (NYSE: MO ) , it would have grown to more than $360,000. Invested in Lowe's (NYSE: LOW ) , it would have exceeded $400,000!
Heck, invested in Applebee's stock 17 years ago, it would have grown to be almost $150,000.
Not every stock will perform spectacularly, of course. Invested in Eastman Kodak (NYSE: EK ) 20 years ago, that $10,000 would be worth a little less than $15,000 today. Still, that can beat a rusty 20-year-old jalopy.
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If you're lucky enough to receive a windfall gift, think carefully about how to spend it. You needn't deprive yourself of any enjoyment from it -- you might opt to spend some of it and invest the rest. Or maybe, all things considered, you just want a Jeep.
Wal-Mart is an Inside Value pick, while Johnson & Johnson is an Income Investor pick.