What are my alternatives?

Girl Ninja and I have a significant amount of our net worth sitting as cash in a “high yield” savings account. It’s exciting that we are just a few weeks away from hitting our $100,000 savings goal, but it’s also terribly depressing to know this money has earned a paltry 0.8% over the last couple years. Especially when it could have been earning 20%+ in the stock market. I mean, I would literally have an extra $20,000 to my name if I saved via the stock market, instead of saving via a bank account.

As you know, we are keeping such an excessive amount of cash on hand for a down payment on our first place. We’ve been hunting for about six months now, and the reality is, we are no closer to buying a home today than we were when we first started.

If we decided tomorrow that we never wanted to own a home, I would immediately take $90,000 out of our savings account and start putting it in the market. This would leave us about $10,000 in cash for emergencies. I think having more than $10k in the bank is pretty silly. Especially when we have a healthy discretionary income, stable jobs, no kids, and a Roth IRE.

My question for you today is simple:

Is there anywhere else I should consider putting this $90,000? 

Half of our net worth is failing to keep up with inflation. This concerns me and I feel like something needs to be done about it. Only problem is, I don’t know what reasonable alternatives there are to savings accounts when it comes to having quick access to cash in the event Girl Ninja and I finally find a house worth buying. HELP!!!

27 thoughts on “What are my alternatives?”

  1. The market is volatile and your $90K could be worth $75K next week.

    You could go into long-term CDs, say 5-7 years. An Ally 5-year CD pays 1.5% held to maturity, which isn’t fantastic, but better than what you’re doing now and you still have FDIC protection. But instead of buying a single CD, buy 9 CDs of $10K each, so if you have to break a single CD early, the withdrawal penalty applies only to that CD. Of course if you decided to go for the house and you had to break all your CDs early, you’d have to see if this strategy is any better than what you have now.

    You can also ladder CDs with varying maturities. That way if interest rates do finally rise, you’re not locked into lower rates with all your cash.

    • If the penalty for early withdrawal of savings is a concern, consider also that this amount can be used to reduce your federal AGI. The bank will send you a 1099-INT at year end.

  2. If I had any spare cash right now, I’d look into lending club. The lowest risk loans pay off completely 99% of the time, the return is about 6-7%, it’s only a three-year loan, and if your state allows it, you can sell the shares in a secondary market if you need the cash. Plus, you can do it for only $25 per loan, so you can spread out your risk.

    Maybe not 90K, but if you’re getting 0.8% right now, that’s about $720. If you put $15K in at 6%, you’re instantly doubling your return (75K @ 0.8% = $600, 15K @ 6% = $900 for a total of $1500/year).

  3. I’d look into something with a solid company like Vanguard and go with a LifeStrategy Fund. In your case VASIX may be a good option since you are looking for the short term. Another approach would be to put divide up your pot of gold and put 50% in VASIX, 35% in VSCGX, and 15% in VSMGX or VASGX.

    However, markets are at all time highs so we are all quite cautious. Looks like a repeat of 2008 almost…maybe things will all crash down in 4 months.

  4. The challenge here is the amount of risk you are willing to take. The money is safe right now, meaning you won’t lose anything, but you likely won’t gain anything either. CDs are a bust because they pay almost nothing…. 10 years ago, CDs and Treasury notes were the way to go, but now the banks and the government pay almost nothing.

    If I were in your situation, I would take a small percentage of the money and put it in individual stocks (for products that you love). I am a huge fan of Starbucks coffee, video games, and some pharma conpanies (I’m in the industry…). I would dabble with those and se e if they hit and then continue to add on or invest in other individual products.

    However, if you want sure safety, your best bet is to leave the money where it is right now. It may not make you anything, but it won’t lose you anything either.

  5. Have you looked into corporate bonds? They can be sold anytime….so you’re not locked in like a GIC (I assume it’s the equivalent to the american CD). We have most of our savings in GICs (yes, I know, low interest rate — but the principle is guaranteed) since we have a low risk tolerance. However, my husband started dabbling in the corporate bond market — his face interest values vary between 4 to 7%, payable twice a year and he bought most just under par…one is now 120% par, the rest stayed the same.

    I admit we don’t play the mutual fund or etf games…and we don’t own stocks, so we’re really, really boring.

  6. I-Bonds are an alternative, but have 0 liquidity for 1 year. They are also a guaranteed, real, after-tax loss at the current rates, but probably a better return than you are getting in your savings account. http://www.bogleheads.org/wiki/I_Savings_Bonds

    A fun project would be to invest in Microsoft, because the prices of homes you are looking at might be linked to the stock price of such a large corporation in your own backyard.

  7. You could modify your Roth contributions to go toward your 401k, and fund the rest of your roth out of savings. Also increasing your an GN’s 401k contributions to max out. Basically put yourself in a negative cash flow situation because of heavy investment contributions and pay out of your savings to whittle it down.

  8. I would look into some low-fee ETFs and Mutual Funds that fit a strategy you’re comfortable with. This could be target date funds in the near future (ie- heavily bond invested), high income stock funds (ie- dividend payers), or similar. This does open you up to market volatility, yes, but it’s astounded me for some time now that you save for your down payment purely in cash. Stocks and ETFs are just as liquid as cash, and mutual funds are almost as liquid. You risk losing some of that principal amount, yes, but as you said also have potential for growth. I was in a similar position 2 months ago (well, had an extra $10k in cash I was looking to keep liquid but expose to potential growth) so I dumped it into 3 Vanguard ETFs that have consistently beat the market (over every time frame in their existence) that I could trade commission free on TD. They’ve already each earned over 6%, so I’m considering cashing out at this time to maintain my capital. I’m more than happy with a 6.5% gain in 2 months. But, I’ll probably leave it in as this market shows little sign of slowing and I can afford the risk.

  9. I’d put it all in the stock market in a broad, diversified set of index funds.

    Look, there’s risk. Of course there’s risk. At some point in time, that $90k could be down half to $45k.

    But ask yourself this — if that $90k is down to $45k, would you be buying a house? OF COURSE NOT! You’d be saving every penny, and hopefully plowing every free penny into buying MORE stocks because they were so cheap!

    Keep enough in the emergency fund to cover 3-6 months of complete joblessness for both Ninjas (which itself is a HIGHLY unlikely scenario, both of you being fired simultaneously), plow every other penny into the stock market (where it can grow, albeit with some risk), and then in the long run it’ll give you a good return until either (a) you decide you want to buy a house and you take out the money because it’s gone up, or (b) if it goes down, you don’t buy a house (which is where you are now, right?)

  10. I agree with Chaddogg regarding acquiring a diversified set of index funds. I personally love Vanguard and have a lot of $ in a total of 4 of their funds (VFIAX, VFWAX, VWITX, VTCLX), as well as doing a monthly auto deposit to help dollar cost average. Yes, you should invest this money (and future monies) in the stock market for the LONG term, especially considering your age.

  11. Given your high savings rate, I would consider investing at least part of the money. You have liquidity if you need it – you can borrow against your 401k to raise cash for a down payment if that situation should arrise. It seems like in the event that you find something you really want to buy and you need to borrow against your 401k, you would have the ability to make a pretty substantial monthly payment against anything your borrowed from your 401k. So worst case scenario is you end up loaning yourself some money (admittedly in a leveraged position you may not prefer), or best case you invest the money, see gains, then liquidate to raise cash for a down payment.

    Through the Seattle Foundation, they will organize everything, invest your money as you wish, and help you decide on your goals/mission and the grant giving process. You can be as involved or hands-off as you wish. You can be a known or anoymous donor. Your local bank will also offer a Trust department that can do the same thing.
    This is your chance to go beyond your traditional volunteerism, public service jobs (Girl Ninja – thanks for educating our future 🙂 ), and your blog.
    True that the tax advantages are tremendous. But the knowledge you will gain, the positive karma you are putting out there, and the help you are giving to those less fortunate will reap you even more positive gains that you can ever hope to yield from an investment fund.
    And I am not just saying this – I am saying from experience as a person who quit being a lawyer so I could be a nonprofit fundraiser – and I haven’t been happier.

  13. Hey, Ninja, I wouldn’t change a thing until you guys decide to become long-term renters.

    “Chasing yield” might get you more returns, but you’d also risk loss of principal or have to lock up your money for a longer time. One option might be a three-year CD, but if you find a house tomorrow then you’ll face a redemption hassle and a penalty.

    You could think of this frustrating time as the price that you and Warren Buffett both pay for being value investors. If you stumble across a great home next week, you’ll be able to swoop in with cash for a significant discount on your mortgage interest rate and your purchase price. The savings that you get from one value purchase will more than make up for years of crappy “high-yield” savings returns…

  14. Personally I’ve used a corporate hi-grade bond fund with money like this, but I like the suggestion of VASIX above, that’s a fully diversified portfolio with fairly low risk. You need a good income fund. Because this is short term, don’t look at growth vehicles, they are too volatile. You need dividends.

    I don’t remember your expenses, but it doesn’t sound to me like $10K is an adequate emergency fund! It’s an oopsie fund, maybe! Please keep at least 6 months expenses in a true emergency fund. If you have the money, shoot for 9 months. Any left over, go ahead, invest away. The test I apply is: am I willing to lose it all? If that thought makes me squeamish, then I don’t invest.

    Really there aren’t a lot of good places to go with money you might need in the short term. The Lending Club is a great idea. But again, you have to be willing to lose the money.

    I understand that feeling of not having my money working for me. It sucks. But the reality is that you may need access to your money. You want that to be without risk, penalty or delay. So enough money has to be in savings to help you out if you suddenly become disabled, lose your job, or find the perfect house! Those scenarios are what the emergency fund is for. Money to cover you in those situations don’t belong in the stock market, imho.

  15. I would just leave it in cash until you decide you’re never going to buy a house. Or set a specific dollar amount that is the most you would put down on a place (say $100,000 or $150,000 or $200,000) and then start investing after that point.

    I put an offer in on my place within a week of it going on the market and closed about a month later. Having cash on hand was key.

  16. Sounds like a difficult choice. The higher yield you have, your money is often less liquid. Are there any local investment opportunities within your community that could give a decent ROI?

  17. Honestly, I’d just put it all in a total stock index fund. Mortgage rates are super cheap right now so you shouldn’t worry much about owing a bit more money.

    If the market tanks and you lose half your investment, you should celebrate being young and having the opportunity to buy stock at a discount. Also, the money you’ve already lost by not doing anything with your money would have more than paid PMI if that’s what you’re worried about.

  18. How about a short term bond fund or ETF? It will get you more return and also limit your downside to interest rate shock.

  19. What if you start putting small chunks in a brokerage account? Just a few thousand at a time. Since you have a decent amount of disposable income every month, it wouldn’t take much to re-save.

    You can also always take out Roth contributions if you end up buying a house soon than you think.

  20. Since you painted the scenario of not needing the money for a down payment (and therefore not needing it in the near future), I would definitely put it in a set of mutual funds. I would find an asset allocation that makes sense for you, and then buy a set of index funds accordingly (total stock market, international stock market, bonds). I recommend Vanguard funds for their low expense ratios and great customer experience.

    Ideally you would want to put everything in at once, but I am an irrational human and like to dollar cost average into the funds to make myself feel better. :o)

  21. Given the high prices of some mutual funds, ETF’s, etc, I would look into safe utility dividend paying companies that on average pay 4% plus in yield. Utilities are not as volitile as other sectors in my opinion, and you can sell whenever you want. PLus you can set up a stock filter that notifies you if and when the price begins to drop, if it falls below 15% what you orignally paid sell. The losses would not make a huge difference. But if it were me I would only do half now and keep the other half ready in case I did find something. 50K downpayment is very respectable, plus 50K invested earning 4% will earn you some extra dollars every quarter.

  22. It really depends on what you have planned. From your past posts, it doesn’t sound like you guys have anything planned and this chunk of change is starting to “burn a hole in your pocket.” Purchasing a house, investing in a rental, funding more of your startup… It may be beneficial to revise your 5/10 year plans before considering where this goes.

    Regardless, have you considered keeping the money in the Family and lending it out for relatives car loans, home improvement projects, etc? Charge a reasonable interest rate that is mutually beneficial. I really like this idea because it cuts out the super-banks making ridiculous money on us.

    For a more structured investment vehicle, you could look into Lending Club, as another mentioned, or a simple post-tax investment strategy like Betterment, a “lazy portfolio” with Vangaurd, or CD ladders.

  23. Think of that 90k as an opportunity warchest. If not a new house, use it when the market crashes. Everytime the markets drop, put in 10k at a time. Dollar cost averaging only when the markets drop would be my stategy 🙂

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