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?

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  • 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.

    Like 5
  • 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.

    Like 2
    • nolesrule Half the money is in CD that has so low an interest rate it dosen't keep up with inflation.  CDs are relics of an era with higher interest rates. The other half the money is earning a cent or two a month. 

      Am an engineer so I have knowledge of the time value of money and how inflation works over time.  Without a rate of return that matches inflation you are losing money year over year. 

      I don't want to invest this money to earn a big return,  I want to match inflation and maintain access.  The issue is that I am not as knowledgeable about shorter term methods as the longer haul. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 mth ago
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      Spring Green Lobster you can't match or beat inflation without putting the money at risk.  There is nowhere you can put the money to meet all of your requirements. You are better off losing a small percentage to inflation than putting your principal at risk for this money. 

       

      Once you have enough saved then you can consider putting additional money into riskier investments. At your current amount of cash the downside outweighs the upside. 

      Like 4
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 1 mth ago
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      Spring Green Lobster You asked and we're giving you the truth. The very minimum for investing is 5 years as a general rule. But, hey, if you have a very aggressive nature and aren't afraid to lose it all, then go for it.

      Like 1
    • Superbone Just explaining my current perspective, doesn't mean I'm right. I may well be expecting too much, until I figure out a realistic way forward. I do enough engineering financial analysis to know what I'm loosing. 2-3% compounded over time adds up.   I am just more sensitive than most to inflation. The math doesn't scare me. 

       I've had the CD for years, and have always been slightly frustrated as to its poor return. 0.04%. No typo. Earned less than $5 last year.  Might as well be a mattress.

      I've got to know what to start look for other than my bog standard big bank checking account. Because it's not working for me. Invest is a relative term. 

      Ha! I just looked at my credit union through work  (who I've been thinking of switching over to for years) and their CD rates for the equivalent value/time is  0.5%, over 12x as high. They also have money market funds, though I'll have to think harder on that. 

      Baby steps I think. 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 1 mth ago
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      Spring Green Lobster 0.04%?! Break it immediately. You can get 1.3% at Barclays online savings account.

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 1 mth ago
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      Spring Green Lobster Are you in the US? You need to branch out from your local banks. Just went and looked and Barclays is now down to 1.15%. However,  Ally is still at 1.25%. These are what are known as online high yield savings accounts. I have accounts at both of these. Still way better than what you're seeing.

      I'm an engineer also and I understand exactly what you're saying. At least these come closer to not losing money to inflation. There really aren't many choices between HYSAs and investing in stocks and bonds. All we're saying is wait until you have more funds before you start investing them. Ally and Barclays returns are guaranteed while investing in stocks and bond is not. You need to be willing to handle the volatility.

      Like 1
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 mth ago
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      Spring Green Lobster If you are in the U.S., I Bonds are inflation protected and principal, but illiquid for the first year with a 3 month interest penalty for 5 years. They can be held for up to 30 years and no taxes are due on the interest.

      Otherwise as Superbone points out there are a bunch of online banks paying better rates on savings accounts and CDs than you are getting.

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  • 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.

    Like 1
  • 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.

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    • QC , "In the event of a borrower defaulting, which has never happened" is simply not true and you perhaps simply got lucky or are getting poor returns that are not worth the risk you are taking.

      Like 3
      • QC
      • HaplessFinanceProfessional
      • Queenofcoin
      • 1 mth ago
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      Festive Healer  Stunned that you would make such an assumption on my experience based on what....your experience? 

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    • QC , I didn't mean to insult you and sorry if you read it that way. It is simply not true that there is no default in peer-to-peer lending or maybe I read your post wrong. If you want returns that exceed returns of risk-free investments, you take the risk and it is the risk of default in peer-to-peer lending even though the platforms do a great job trying to manage that risk by diversifying the loans made.

      I do use peer-to-peer lending for a small portion of my portfolio,  but I buy notes off investors selling them since the risk is more discoverable there since there is a default/payment history and many investors get in attracted to higher returns but can't stomach defaults or the illiquidity of the instruments.

      Google scholar has some great literature on various aspects of the risks involved here if you are interested.

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  • 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.

    Like 3
    • Festive Healer In nutshell, Ithat is why i am posting here.  Real world advice, not someone trying to upsell me.

      I have a nice little nest egg in my 401k.  Every now and then they send me "warning" letters that I am not investing enough. Per their calculations, I will be earning more than I currently make by the time I retire in 20 years. Not including social security. Not including my pension. Their "warning" is entirely based on the fact I have picked low fee investments so they aren't earning enough of me. 

      Debt wise, am in ok shape. Credit card will be fully paid off next week, small home equity loan will take 8 months once I start throwing the credit card payments at it. Mortgage other than that, which I am debating on getting aggressive about.

      The end of debt is in sight, so time to get smart about saving.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 mth ago
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      Spring Green Lobster 

      Spring Green Lobster said:
      I have a nice little nest egg in my 401k.  Every now and then they send me "warning" letters that I am not investing enough. Per their calculations, I will be earning more than I currently make by the time I retire in 20 years. Not including social security. Not including my pension. Their "warning" is entirely based on the fact I have picked low fee investments so they aren't earning enough of me. 

       These calculations usually don't account for inflation and are in nominal dollars and not real dollars, so yeah, it's more than you are earning but with less buying power.

      The important thing is having a well thought-out investment plan and sticking to it. But you can't have your plan for each account in a vacuum. You need to look at everything as part of a whole, united portfolio. In addition to 401k you can also be using a Roth IRA for extra tax-free investments over what you put in the 401k.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 mth ago
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      Spring Green Lobster Personally I'm in favor of maxing all available tax-advantaged accounts before investing taxable money.

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    • nolesrule the "warning" was in inflation adjusted dollars.

      I made my own retirement calculator that takes into account inflation, and it assumes I will live on the nest egg and not tap into it. My numbers are widely divergent from theirs because my approach is different: no spending down. I am getting fairly close to hitting a number that I have heard some FIRE folks living off. It is the short term investment/savings that I need to get more strategic on.

      Until YNAB I had trouble managing month to month. Once I got comfortable income wise (and cash-only ceased to be a way to keep on budget) I stopped being quite as careful, and wasn't able to get out of paycheck to paycheck. Had a point in my life where I was saving half my paycheck. Want to get back there or reasonably close to it.

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  • 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?

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