Where to put semi-accessible savings?
Friends, the Almighty Church of Budgeting has brought me to this place I do not understand, and I need your help. I actually have *gasp* (whispers) savings (/whispers) */gasp*, and I want to be good to it.
- I have $13,000 to put in savings.
- I found an online savings account with a 1.55% interest rate.
- I found an online five-year CD with 2.5% yield.
- I do not need regular access to this money, but it *is* my holy-sh*t-the-world-has-gone-sideways money, so I need some access in case the world, well, goes sideways (job loss, apt loss, etc).
- I add $250 to it every month
- put it all in 1.55% savings where I can get to it if I need it
- put half of it in 1.55% savings and half in 2.5% CD, risking not having access to half of it for five years
- choose a shorter term CD with a lower yield, but still higher than 1.55%
- dump some of it in my 401k (will it really make a significant difference over the long term?)
- some other answer that I don't currently see
Whatever portion you put into CDs, I wouldn't put it all into a single CD - instead I would start a CD ladder. Put 1/5 into a 1-year CD, 1/5 into a 2-year CD, etc up to 5 years. That way every year you will have something that matures. When it does you can either put that matured money into a new 5-year CD (to continue the cycle of having a CD mature each year) or assess if you need it somewhere more liquid.
Also, generally you can't add funds to a CD once you open it. For you future $250/month contributions, look at I-bonds.
Thank you for that jenmas . I learned something about starting the CD ladder.
Slugger Had to laugh when I saw this entry. I am also trying to decide where to put $300 per month. Will be watching this thread and hopefully learning lots.
For my thoughts, I'm thinking about going with: $100 saved for a yearly CD purchase, $100 to stocks, $100 to TreasuryDirect (undecided at this time). Thinking about, and researching jenmas' recommendations. Had almost settled on TIPS. Just opened my account today.
Thats my thoughts.
First off, I'm impressed that you found a savings account with rates that high, that's a full .3% higher than what I've found.
Personally, I'd say leave at least half of the money in the savings account. A CD ladder sounds like a good plan for the other half. As for Lending Tree and the like, I would stay away from that until you had enough that you're comfortable with the possibility of losing 40% (why 40%? I dunno, it seems like a reasonable number to me) of your invested amount when you need it. If there's a huge recession like 10 years ago, the people who have borrowed the money are as likely to be in those straits as anyone else in the country, and paying on their unsecured loans that you're funding may be their way of getting by. If there's the accompanying stock market crash, it could crash by that much too if you invest it in the market.
For what it's worth, I did some back-of-the-napkin calculating. I used the 1.55% savings interest rate from CIT Bank, plus the CD calculator at Barclay's that has the highest or close to the highest CD rates.
Option 1: All in 1.55% savings, add $250/mo
5 year Yield: $29,632.97
Option 2: Two thirds savings; one third CD
$8,400 in 1.55% savings, add $250/mo: $24,662.54
$4,600 in one 2.4% five-year CD: $5,191.80
5 year Yield: $29,854.34
Option 3: 50/50 with CD ladder
$6,500 in 1.55% savings, add $250/mo: $22,609.54
$6,500 in five-year CD ladder: $7,228.20
5 year Yield: $29,837.74
Option 4: Two thirds savings; one third CD ladder
$8,400 in 1.55% savings, add $250/mo: $24,662.54
$4,600 in five-year CD ladder: $5,115.34
5 year Yield: $29,777.88
What jumps out at me is how there really isn't much of a difference. If I went for the highest tolerable yield (option 2), I only get $221 more over five years than the lowest yield ($44/yr), and I don't have access to a chunk of change for five years. I decided the 50/50 option doesn't leave me with enough liquid cash, so I scrapped option 3. Balancing yield with access in option 4, I only get $144 more than just dumping it all in savings ($28/yr) and I have to monitor it over the years and make sure to stay on target (something I am historically bad at).
So I think I'm going to dump it all in the savings account. That gives me flexibility to invest as it grows, and the adaptability to roll with whatever life tosses at me. I might still consider throwing $1,000 in to Lending Club, just to see what happens, as a 6-8% return is marked enough to make a difference.
Oh, Congratulations! Well done! It's so wonderful, getting to that place where you have bank account balances with commas and extra zeros in them. I have just arrived at that same place myself, and I find it very satisfying. Pinch me!
But what is enough? and what is too much? That is frequently the subject of interest and meditation for me. Isn't it interesting how you never actually get to the end of this journey, you just get to the next way station on a journey of ever-changing financial goals.
After much reading on the two YNAB forums and elsewhere, I am now convinced of the wisdom in keeping a healthy emergency fund in a state of total liquidity. It earns next to nothing, yes, but more importantly it also keeps me from experiencing the stress of crisis and from having to prematurely cash out an investment at the wrong time. I'm still feeling my way through this subject and trying to figure out the enough/too much question for myself, so I'm very interested in seeing what prevailing opinions and experiences on the subject are.
For now, I'm keeping my e-fund of 3 months of take-home income in a bank account earning 1%. This represents almost 6 months of bare-bones expenses for me because my true expenses categories are also healthy and full. Like you, I plan to continually drip more money into the e-funds, adding one month's income per calendar year. I'm also investing monthly in more aggressive investments in my retirement accounts.
One more option to consider for the semi-liquid part of your semi-emergency fund (the 3 to 6 months of living expenses, not the my-car-broke-down-on-a-holiday-weekend): A Roth IRA.
You can put $5500 a year ($6500 if you're over 50) into a Roth IRA fund. This is post-tax money and you can do this even if you have a 401k or similar fund through work. You can open an account somewhere like Vanguard or Schwab and invest in whatever you like (something very safe and solid, given the purpose of this money). You can withdraw any earnings after five years without penalty. But, and this is the most important part for this kind of savings, you can withdraw your contributions (the $5500/year) at any time, without penalty. So, if you need your money, you can get it in within a few days.
Why this is a good option for some people:
- interest or earnings rates are higher than your bank account even with very safe investment options
- it's a good place to park some long-term savings that you might need, but you hope you don't and aren't planning on spending
- the interest or earnings grow tax-free and you don't have to pay taxes on them if you withdraw them during retirement (plus you've already paid taxes on the principal deposits)
- potentially, depending on your investment choices, you could lose some money (though keep in mind, if your money is parked in CDs right now, they're probably not earning enough interest to keep up with inflation and cost of living increases, so they're losing, too)
- if you take out earnings before the five-year mark you will pay taxes and there's a penalty
If you make over $120k (single, more if married) you might need to look into a "Backdoor Roth" instead.
Personally, I have money in the bank, cash in the sock drawer, a credit card I never use, and some money in a Roth IRA. All useful in different ways.
Put half in Ally Savings, no minimums, no hassles, no fees, 1.45%: https://www.ally.com/bank/online-savings-account/
Put the other half in Short or even Intermediate Term municipal tax-exempt mutual fund with Vanguard:
Both accounts will be liquid almost immediately.
Besides my checking account, I spread mine across 2 savings accounts, 1 money market account and a couple of 12 month CD's. I use multiples of savings and money market because of federal limits to the number of withdrawals and transfers per month for online savings/money market accounts. In certain situations, you never know how often you might need/want to use parts of your money.