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Author: MrCromulent Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46837  
Subject: Shorter-term Savings Date: 5/4/2005 10:59 AM
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Hi FC,

I'm currently saving money for (among other things) shorter-term goals such as buying a house or condo. I hope to make this purchase in the 1-3 year range.

Right now, the $ I'm saving for this purpose is going into an ING acct that is earning me 3%. It's been suggested to me that I could also look into buying bonds or bond funds (Vanguard), but none of these look like they return a significantly higher %age than my ING acct within my time range. Am I missing something?

Also, where would you put the money if you were in my situation? Thanks for any help.

-MC
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Author: missash Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38203 of 46837
Subject: Re: Shorter-term Savings Date: 5/4/2005 11:03 AM
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<<<<where would you put the money if you were in my situation>>>> Same place

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Author: gebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: Shorter-term Savings Date: 5/4/2005 11:10 AM
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where would you put the money if you were in my situation?

Hi MC,

Exactly where you have it.

The timeline for the money's use is the key to the answer to your question. If you need the money in less than 5 years or so, then the best place to put it is in some safe place such as an ING account or a money market account or in some CDs. Something safe and boring.

Yes, I know. You could probably get a slightly better return in bonds, though maybe not. You might even get a better return from the stock market, though maybe not. But notice the emphasized words, "probably" and "might". Those entail risk. The one thing you do not want to do is to lose any capital on short-term savings. Safe and boring is the way to go for that money.

Money to be invested in the stock or bond markets is long term savings, not needed for 5, 10, 20 years or more. In time periods shorter than that, the risk is too great that you will lose money instead of gaining it. What if this were six years ago and you had put that money into the stock market? Well, you wouldn't have bought a condo in 2002, most likely. Same thing going forward from here.

Don't worry about this money. You are doing exactly right.

gebin


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Author: PaulEngr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38229 of 46837
Subject: Re: Shorter-term Savings Date: 5/5/2005 7:18 PM
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Bonds and bond funds offer a "spectrum" of investing vs. risk. By that I mean that you can invest in "short term", "medium term", etc., etc.

Essentially banks invest in the "money market". These are highly liquid assets like treasury notes and short term bonds. They skim some off the top and pass the rest on to you.

You can get nearly the same equivalent thing from several mutual funds or from a money market account with a brokerage. Often, those mutual funds are intended to be the connection between your long term savings and spending it. So those accounts are set up for people in retirement. They frequently have check writing privileges or debit card privileges attached to the accounts to make it easier to transfer money out of those accounts.

I know that Fidelity has one or two of these. Strong (www.estrong.com) used to be the most popular mutual fund company for it, except that they've fallen out of favor after a recent scandal came to light. Most of the brokerages (even some discount ones) offer some sort of "banking" like functions.

The fundamental difference in this case is that there is no gaurantee on your investment. You can theoretically "lose it all" just as with a regular stock fund. There's no FDIC (not that FDIC "insurance" gaurantees anything even close to 100% coverage contrary to popular opinion).

So it becomes one of the following:
1. How "safe" is safe. Does contractual safety (in other words, a CD) carry a performance benefit (lower interest rates)? Last I checked, the answer is "not enough to matter". In the pre-9/11 days, it mattered a lot. You could get another 0.5-1% by forgoing a little safety.
2. How efficient is the bank/brokerage/fund in terms of overhead? For instance, my local bank pays a whopping 0.75% on passbook savings accounts! ING has been running about 3%. There are some with marginally better rates but the convenience of ING just can't be beat.
3. Some short term bond funds that I just checked also ran about 3% if you look at their 1-3 year returns. So right now it appears that the risk/reward spectrum is not going in your favor.
4. Checking www.bankrate.com shows CD's going in the upper 3's (3.5-4%) range so you can do better than ING if you have a particular minimum time window in mind.

Keep in mind how much all this really gets you. For instance, if you have $10,000 socked away, an extra 1% gets you $100. On the one hand, every little bit helps. On the other hand, a few dollars here or there is insignificant over the short term compared to the cost of the down payment itself. My wife and I agonied over maximizing our interest rates but found that it was a waste of time in the end to even worry about getting the absolute best return on our short term investments.


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Author: ikedim Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38247 of 46837
Subject: Re: Shorter-term Savings Date: 5/6/2005 6:43 PM
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Hi Mr. Cromulent,

I like your handle so much I just had to reply.
I'm currently saving money for (among other things) shorter-term goals such as buying a house or condo. I hope to make this purchase in the 1-3 year range.
Right now, the $ I'm saving for this purpose is going into an ING acct that is earning me 3%. It's been suggested to me that I could also look into buying bonds or bond funds

If you know you won't need the money for a year, a better alternative would probably be i-bonds. They currently pay 4.8% (rate is adjusted based on inflation every 6 months), the interest is state/local tax free, and you can defer the income tax on interest until redemption - see http://www.treasurydirect.gov/indiv/products/ibonds_glance.htm
You may redeem the bonds any time after 1 year, paying a 90 day penalty until 5 years.

Isaac, AKA Mr. Crepulent


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