| Keep money in savings account or...? |
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GordonG
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| Keep money in savings account or...? |
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So, I have a decent amount (approaching $200K) in a "high yield" savings account which earns about 1% interest. I've been building it up in order to buy a house, but it's taken a lot longer than I thought to find the right one. Sometimes I wonder if it's a waste to have it just sitting in a savings account. On the other hand, I don't want to risk losing anything. At some point, some of this money will be used for a down payment on a house, or I suppose if I save long enough, I could just buy a house outright.
Anyway, what would you do in this situation? Keep it in savings, invest, etc? I have a respectable retirement account going through work, and I also have a personal brokerage account with about $25K in an S&P 500 ETF.
Thanks 
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Mon Mar 23, 2015 8:01 pm |
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oldguy
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quote:
I have a respectable retirement account going through work, and I also have a personal brokerage account with about $25K in an S&P 500 ETF.
I can tell you what I do. We normally keep our EF capped at about $5000 in savings. That's about as much "dead money" as I can tolerate, I like to keep our funds working for us. Like you, I use the SP500 Index for our taxable fund. It grows tax deferred, it averages 11%/yr, and it is immediately available as a back-up EF.
I keep as much of our 'non-retirement' money in that SP500 as I can. When we buy rental houses, I make the minimum DP that I can (and leave our money growing). And when we need a new car, I finance the entire amount (including tax/license) so that I have no money in the car - that way the entire price of the car remains in the SP500. Plus, I sell the old car privately, and add that $3k or $4k to the SP500. Using the Rule of 72, I expect that money to double within 7 yrs.
When I'm saving for a shortterm purchase (your situation) instead of following conventional wisdom and keeping the money 'safe' in a 1% savings account, I put it into SP500. And when the time comes to buy, I buy a minimum DP. That is my way of getting a longterm return (11%) on our shortterm needs.
Keeping money "safe" comes at a price, you give up higher returns. In your case, I would move $195,000 from savings to SP500. And then try to leave it there (you may need to pull a small amount to buy a house).
As for paying cash for a house - US mortgage money is some of the cheapest capital in the world, the other 190 nations require frequent resets (usually at 10 yrs), the US lets you get a Fixed Rate mortgage for 30 years - and for only about 4%/yr. I keep them for the full term, and invest that cheap capital elsewhere.
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Mon Mar 23, 2015 10:16 pm |
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GordonG
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quote:
Originally posted by oldguy
quote:
I have a respectable retirement account going through work, and I also have a personal brokerage account with about $25K in an S&P 500 ETF.
I can tell you what I do. We normally keep our EF capped at about $5000 in savings. That's about as much "dead money" as I can tolerate, I like to keep our funds working for us. Like you, I use the SP500 Index for our taxable fund. It grows tax deferred, it averages 11%/yr, and it is immediately available as a back-up EF.
I keep as much of our 'non-retirement' money in that SP500 as I can. When we buy rental houses, I make the minimum DP that I can (and leave our money growing). And when we need a new car, I finance the entire amount (including tax/license) so that I have no money in the car - that way the entire price of the car remains in the SP500. Plus, I sell the old car privately, and add that $3k or $4k to the SP500. Using the Rule of 72, I expect that money to double within 7 yrs.
When I'm saving for a shortterm purchase (your situation) instead of following conventional wisdom and keeping the money 'safe' in a 1% savings account, I put it into SP500. And when the time comes to buy, I buy a minimum DP. That is my way of getting a longterm return (11%) on our shortterm needs.
Keeping money "safe" comes at a price, you give up higher returns. In your case, I would move $195,000 from savings to SP500. And then try to leave it there (you may need to pull a small amount to buy a house).
As for paying cash for a house - US mortgage money is some of the cheapest capital in the world, the other 190 nations require frequent resets (usually at 10 yrs), the US lets you get a Fixed Rate mortgage for 30 years - and for only about 4%/yr. I keep them for the full term, and invest that cheap capital elsewhere.
Thanks for the advice! That'll definitely give me some stuff to think about. It nice knowing my money is safe in a savings account, but like you said, the thought of all that "dead money" makes me feel kind of bad. Not sure I'd be comfortable putting 95% of it in the market, but I could probably add a bit more to my SP500 account and see how it goes.
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Tue Mar 24, 2015 12:31 am |
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oldguy
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quote:
Not sure I'd be comfortable putting 95% of it in the market, but I could probably add a bit more to my SP500 account and see how it goes.
Here's a site that may be helpful for you - I use it to check 30-yr-blocks, they usually average 11%/yr. The most recent 30 years ending last month returned 11.2%/yr.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VRGEhuHmeUl
A couple useful guidelines -
1. The Law of investing - risk and return are directly proportional. Ie, you need risk to become wealthy, a savings account merely tracks inflation.
2. Rule of 72. (aka the power of compound interest). At 11%, your money doubles about every 7 years. So - $200k > $400k in 7y > $800k in 14y > $1600k in 21y. And before you know it you'll be a Multi-Millionaire. 
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Tue Mar 24, 2015 3:45 pm |
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littleroc02us
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You've already answered your question. If you cannot handle the market dropping 50% like it did in 2008 to 2009, then no way would I put it at risk. Your 200k could drop to 100k, but it could rise to 300k. No one knows. So I wouldn't play the market with money you plan on using as a DP, it could really set your plan back years. I mean think about it, if today you put 200k in an S&P500 and yes the market has average 11% for as far back as I've been alive, and your plan is to use the money for a DP 6 months from now. Tomorrow you wake up and the market has dropped 5%. And then a month goes by and it drops 10%. You start to get worried and think about pulling it out now so that you don't lose anymore for your dp.
But you decide to wait it out because it might recover. Then another 2 months go by and the market drops another 10%. Suddenly you find the house of your dreams. Now your initial investment is only worth 150k. So you really want the home you pull out the money and now what could have been 200k towards a home now is only 150k.
How was that a good idea. The number one thing most people don't calculate for is risk.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Tue Mar 24, 2015 9:00 pm |
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cyyber
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Well if you are looking for higher return then you have to make yourself ready to risk a little higher.
The rule is simple no pain no gain. So no risk then no profit.
I suggest you to invest in Forex or Stock market where you can actually make decent money if you know how to trade.
Or if you don't know how to trade then you ask someone else who know how to trade he/she can trade for you at certain percentage of commission
Now the matter is how much money you should risk in forex or stock market.
Well I believe choose an amount say $10,000. I think its good to start in forex with $10,000. If you trade properly then you can easily get a return of more than 20% in a year in the forex.
I have been trading in the forex for a long time and therefore I invest some of my savings into forex. But I never invest all of my money into forex.
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Wed Mar 25, 2015 6:03 pm |
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littleroc02us
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quote:
Originally posted by cyyber
Well if you are looking for higher return then you have to make yourself ready to risk a little higher.
The rule is simple no pain no gain. So no risk then no profit.
Yes, but the poster stated that she doesn't want to lose any of the money, because it's primary purpose is to purchase a home. If the market does badly, she could end up losing a bunch of her principle.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Wed Mar 25, 2015 7:08 pm |
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Wino
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quote:
Originally posted by cyyber
I suggest you to invest in Forex or Stock market where you can actually make decent money if you know how to trade.
About 95% of the people who "trade" end up losing money. The most reliable way to make money in equities is to "buy and hold." You find undervalued stocks and purchase them for the long-term, including dividend payouts, or you invest in broad index funds.
Playing with Forex is a fool's errand. Unless you're keyed in to many different variables, you're basically gambling. Sure, those who hit "red" on the roulette wheel 10 times in a row come out way ahead, but those who miss it 9 out of 10 times are bankrupt. I wouldn't recommend anyone try to play Forex on his own, unless he wants to lose most of his money.
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Thu Mar 26, 2015 5:18 am |
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