Starting to invest
Happily about to hit a nice threshold in our savings account, $20k. Now that I've made it this far, it is time to put that money to work.
Risk wise, this is our emergency fund so what ever we invest in needs to be fairly stable, low risk and accessible. I have a well funded 401k so I don't need to think super long term with this cash.
Problem is am fairly ignorant about investing in the near term. Money market account? IRA? I don't really know what makes sense, as I intend to put longer term YNAB savings categories in there like saving for a car down payment.
Ideas for options? What works well for you?
I have done a lot of thinking about this topic, and I would suggest that you do not consider your emergency fund as an investment. It is a way to protect your investments. In many ways all of your funds are emergency funds, but there is a specific reason to keep a portion of that as cash. There is a limit for the amount of money that can be put into tax deferred accounts in a given year, and you do not want to damage the long term growth of those dollars by pulling the money out for a short term expense. If your 401k is well funded, does that mean you are putting the maximum contribution into that account? Also, Roth IRA contributions should be maximized. Those will be our only investment vehicle for many of us. Tax advantaged accounts need to be maximized before you even think of investing elsewhere.
Put your $20k into a "high-yield" savings account and then add another 20. You will not get much better returns for those dollars without what I would consider an inappropriate amount of risk.
It is tempting to try to maximize those returns because it is a significant amount of money, but the faster you get your true emergency fund established, then the faster you can start investing for real. The amount of money you need to retire comfortably is so vast, that it really needs to be heavily weighed into all of the spending decisions you make. We have taken a more balanced approach because we both feel our jobs are very stable, so we have 4 months of expenses in cash, and we will continue adding another month to that every year.
So the point of that rambling post is don't invest it at all, and going forward invest in your 401k or Roth IRA as eligible and appropriate for your risk profile.
Spring Green Lobster said:
Risk wise, this is our emergency fund so what ever we invest in needs to be fairly stable, low risk and accessible.
Investments generally are not fairly stable and low risk.
Right now a savings account is probably the best you can do. Maybe CDs if you want to deal with that, but on $20k an extra half percentage point isn't going to result in much and you'll lose more than you earn if you have to break the CD early.
Agree with the others. Wait until you have at least 6 months of income in an EF or Income Replacement fund and have all other Rule 2 true expenses covered before you start investing funds in excess of that amount. Until then, put the excess in an online high-yield savings account. I keep a $2000 buffer in my checking account and then the rest of my budget funds go to the HYSA.
Can I suggest short term Peer-to-Peer Lending? Not sure if it's available in your country but worth a look and fast becoming a staple option for many investors. I'm achieving rates 4x what the best HYSA is paying and it's where the equivalent of my 3 month buffer sits. There are risks (of course) but if you have a look you might find something suitable. My money is only ever lent 1 month at a time and the platform I'm with has a Provision Fund (in the event of a borrower defaulting, which has never happened) so I'm confident I won't lose money and I can access it quickly if I need to.
As you embark into the world of investing, you will encounter lots of ideas, bragging about all kinds of success stories, tons of books, youtube videos, etc. because the advisors (a) measure their self-worth based the returns they get on their investing (like batting averages ;)) (b) need to do this because their net worth depends on you giving a tiny slice of your money to them as commission for their ideas (c) want to outright cheat you.
Before you begin investing on your own, make sure you have enough liquid cash saved up in a money market account , have little to no debt, and are contributing to a retirement plan. Then, educate yourself. I would highly recommend http://paulmerriman.com/wp-content/uploads/2013/04/first-time-investor-grow-and-protect-your-money1.pdf to get started.
Spring Green Lobster said:
It is the short term investment/savings that I need to get more strategic on.
Short term doesn't need a real strategy other than finding the best interest rates possible, because you don't hold short term money long enough for inflation to be a long term issue. Short term money needs security. Just find a bank with a better yield. They exist and are easy to find. Ally, Capital One, Barclay, etc.
You are saving specific amounts of money for specific things in your budget. So you are already accounting for inflation in what you save. Finding better interest is a bonus.
I account for inflation in my income replacement fund by continuing to increase it by 5% every year even after it's been fully funded for over 5 years, but otherwise every category has a real dollar target amount, and I don't rely on bank interest for the needs of my budget.
Unless it's a huge amount of money, the difference between inflation and interest earned isn't worth putting the money at risk.
For example, inflation is about 2%. If you are in a 1.25% HYSA, the interest on $20k is $250. Is it worth putting the money at risk for an additional $125 when the potential downside of putting the money at risk in a "safe" bond fund could be a real loss of $1000?