Where to save cash over 5 years.

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get_g0ing
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Where to save cash over 5 years.

Post by get_g0ing » Tue Dec 12, 2017 10:15 pm

Hi,

What's the best way to save some money every month for about 4-5 years. Maybe like $500 every month. So that you have some saved up money after 4-5 years that could all be used towards a large purchase.

One simple way is to just save it in a checking or savings account. Is there a better way (like some safe mutual fund)?

I'd appreciate your advice.
Last edited by get_g0ing on Tue Dec 12, 2017 10:28 pm, edited 1 time in total.

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Jerry55
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Re: Where to save cash over 5 years.

Post by Jerry55 » Tue Dec 12, 2017 10:19 pm

I transfer $$$ from my checking account to an online savings account, currently Capitol One 360.
Their normal savings acct yields about 0.75%, but I recently transferred about 90% of that to their Money Market Account @ 1.2%

There are others, as many will mention soon, like Ally bank, and more. I used to use Discover bank as well, before I combined accts into one.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

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Sandtrap
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Re: Where to save cash over 5 years.

Post by Sandtrap » Tue Dec 12, 2017 10:34 pm

CD's. High yield accounts.
For such a short term protection of principal is the priority.
"Investment" is for long term. IE: funds.
Do research here:
BankRate.com
http://www.bankrate.com/partners/sem/cd ... 033236%3as
j :D

whiteprius
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Re: Where to save cash over 5 years.

Post by whiteprius » Tue Dec 12, 2017 10:38 pm

Here are the 12-month returns of the mutual fund FBIDX over the last 30 years. As you can see it's pretty safe and, IMHO, a no brainer choice over a savings account or CDs.

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D

dh
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Re: Where to save cash over 5 years.

Post by dh » Tue Dec 12, 2017 10:39 pm

My vote for "cash" savings for five years would be to put $6,000 ($500 per month) in I-Bonds each year. :sharebeer

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bligh
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Re: Where to save cash over 5 years.

Post by bligh » Tue Dec 12, 2017 11:12 pm

What is your Tax Rate?

If you are in a high marginal tax bracket you could get some short duration municipal bond funds. Here are some short duration and quite safe mutual funds you could use to get better returns than a savings account while taking on a very small amount of risk to principal.

Vanguard Short Term Tax Exempt (VWSUX)
Vanguard Limited-Term Tax-Exempt Fund Admiral Shares (VMLUX)
iShares Short-Term National Muni Bond ETF (SUB)

Depending on your state there might be state specific versions of these you could use too.

I-Bonds and CDs are also excellent options.

mega317
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Re: Where to save cash over 5 years.

Post by mega317 » Wed Dec 13, 2017 12:37 am

Another option if you don't have a specific purchase in mind is to just incorporate the money with the rest of your investments. To do that tax-efficiently you will most likely be buying stocks in a taxable account. That will give you better tax-efficiency and greater expected returns, with the very large trade off of volatility. You could of course adjust the risk level when a spending goal comes in to focus.

That's probably not the answer you're looking for but you did ask for "a better way" and that would be better in my own situation.

My vote for you is I bonds.

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Wed Dec 13, 2017 5:24 am

dh wrote: โ†‘
Tue Dec 12, 2017 10:39 pm
My vote for "cash" savings for five years would be to put $6,000 ($500 per month) in I-Bonds each year. :sharebeer
I already buy i-bonds, so this would be separate from that because i-bonds have a max limit. On that note, is it better to buy i-bonds or invest that money is funds like VTIAX, VTSAX. I never gave thought to this question.

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Wed Dec 13, 2017 5:32 am

whiteprius wrote: โ†‘
Tue Dec 12, 2017 10:38 pm
Here are the 12-month returns of the mutual fund FBIDX over the last 30 years. As you can see it's pretty safe and, IMHO, a no brainer choice over a savings account or CDs.

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D
bligh wrote: โ†‘
Tue Dec 12, 2017 11:12 pm
What is your Tax Rate?

If you are in a high marginal tax bracket you could get some short duration municipal bond funds. Here are some short duration and quite safe mutual funds you could use to get better returns than a savings account while taking on a very small amount of risk to principal.

Vanguard Short Term Tax Exempt (VWSUX)
Vanguard Limited-Term Tax-Exempt Fund Admiral Shares (VMLUX)
iShares Short-Term National Muni Bond ETF (SUB)

Depending on your state there might be state specific versions of these you could use too.

I-Bonds and CDs are also excellent options.
Is FBIDX the same type or category of fund as VWSUX, VMLUX? Is there a way to choose between these?

I am sorry but I don't know my tax rate. Can I find that information from my tax return? How would the tax rate affect my choice of where/how to save this money?

If you can educate me a little, that would be so helpful.

chipperd
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Re: Where to save cash over 5 years.

Post by chipperd » Wed Dec 13, 2017 5:53 am

get_g0ing wrote: โ†‘
Wed Dec 13, 2017 5:32 am
whiteprius wrote: โ†‘
Tue Dec 12, 2017 10:38 pm
Here are the 12-month returns of the mutual fund FBIDX over the last 30 years. As you can see it's pretty safe and, IMHO, a no brainer choice over a savings account or CDs.

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D
bligh wrote: โ†‘
Tue Dec 12, 2017 11:12 pm
What is your Tax Rate?

If you are in a high marginal tax bracket you could get some short duration municipal bond funds. Here are some short duration and quite safe mutual funds you could use to get better returns than a savings account while taking on a very small amount of risk to principal.

Vanguard Short Term Tax Exempt (VWSUX)
Vanguard Limited-Term Tax-Exempt Fund Admiral Shares (VMLUX)
iShares Short-Term National Muni Bond ETF (SUB)

Depending on your state there might be state specific versions of these you could use too.

I-Bonds and CDs are also excellent options.
Is FBIDX the same type or category of fund as VWSUX, VMLUX? Is there a way to choose between these?

I am sorry but I don't know my tax rate. Can I find that information from my tax return? How would the tax rate affect my choice of where/how to save this money?

If you can educate me a little, that would be so helpful.
GIven the 5 year return rate of 1.77% of FBIDX, the higher risk over cash (a quick google search can get you 1.5% money market; no minimum) doesn't seem worth it to me IMHO.

mega317
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Re: Where to save cash over 5 years.

Post by mega317 » Wed Dec 13, 2017 10:53 am

get_g0ing wrote: โ†‘
Wed Dec 13, 2017 5:24 am
On that note, is it better to buy i-bonds or invest that money is funds like VTIAX, VTSAX. I never gave thought to this question.
I think you would benefit from a more comprehensive review of your situation. I'd recommend you start a new thread and post in this format
viewtopic.php?t=6212

Yes you can find your tax rate on your returns.

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 9:54 am

Can someone explain the difference between VBMFX and the other two funds mentioned above, VMLUX and VWSUX.
When would you use each of these?

(In searching online, I see that the other fund mentioned FBIDX, is same as VBMFX).

VBMFX = Vanguard Total Bond Market Index Fund
VMLUX = Vanguard Limited-Term Tax-Exempt Fund
VWSUX = Vanguard Short-Term Tax-Exempt Fund
Last edited by get_g0ing on Thu Dec 14, 2017 10:10 am, edited 1 time in total.

dbr
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Re: Where to save cash over 5 years.

Post by dbr » Thu Dec 14, 2017 9:57 am

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 9:54 am
Can someone explain the difference between VBMFX and the other two funds mentioned above, VMLUX and VWSUX.
When would you use each of these?

(In searching online, I see that the other fund mentioned FBIDX, is same as VBMFX).
Tell me what those funds are and I could try.

get_g0ing
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Joined: Sat Dec 09, 2017 11:09 am

Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 10:10 am

dbr wrote: โ†‘
Thu Dec 14, 2017 9:57 am
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 9:54 am
Can someone explain the difference between VBMFX and the other two funds mentioned above, VMLUX and VWSUX.
When would you use each of these?

(In searching online, I see that the other fund mentioned FBIDX, is same as VBMFX).
Tell me what those funds are and I could try.
VBMFX = Vanguard Total Bond Market Index Fund
VMLUX = Vanguard Limited-Term Tax-Exempt Fund
VWSUX = Vanguard Short-Term Tax-Exempt Fund

dbr
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Re: Where to save cash over 5 years.

Post by dbr » Thu Dec 14, 2017 10:20 am

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:10 am
dbr wrote: โ†‘
Thu Dec 14, 2017 9:57 am
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 9:54 am
Can someone explain the difference between VBMFX and the other two funds mentioned above, VMLUX and VWSUX.
When would you use each of these?

(In searching online, I see that the other fund mentioned FBIDX, is same as VBMFX).
Tell me what those funds are and I could try.
VBMFX = Vanguard Total Bond Market Index Fund
VMLUX = Vanguard Limited-Term Tax-Exempt Fund
VWSUX = Vanguard Short-Term Tax-Exempt Fund
The difference between tax exempt and taxable funds is that tax exempt funds held in a taxable account are not taxed on the interest received and the others are. The calculation is that people in high tax brackets would be at an advantage holding tax exempt funds. High probably means 25% bracket at least. Total Bond holds a very diversified collection of bonds while tax exempt bond funds hold only munis, hence those funds are less diversified by definition. National tax exempt funds like those are diversified enough within munis to be fine. If your tax situation justifies tax exempt bonds, you also have to check you state tax cost to see if state specific funds qualify. Most investors would avoid the whole issue and hold VBMFX in a tax protected account so that tax exemption is moot.

The other difference among these funds is duration, which measures the sensitivity of funds to changes in interest rates. Total bond has a longer duration than those muni funds and is therefore more volatile from day to day, month to month, year to year, etc. Why you should care is a different discussion. The longer the duration the higher the return. I suggest that intermediate duration is a good compromise between volatility and return.

It seems a little odd that you would be choosing among those alternatives.

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 10:30 am

dbr wrote: โ†‘
Thu Dec 14, 2017 10:20 am
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:10 am
dbr wrote: โ†‘
Thu Dec 14, 2017 9:57 am
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 9:54 am
Can someone explain the difference between VBMFX and the other two funds mentioned above, VMLUX and VWSUX.
When would you use each of these?

(In searching online, I see that the other fund mentioned FBIDX, is same as VBMFX).
Tell me what those funds are and I could try.
VBMFX = Vanguard Total Bond Market Index Fund
VMLUX = Vanguard Limited-Term Tax-Exempt Fund
VWSUX = Vanguard Short-Term Tax-Exempt Fund
The difference between tax exempt and taxable funds is that tax exempt funds held in a taxable account are not taxed on the interest received and the others are. The calculation is that people in high tax brackets would be at an advantage holding tax exempt funds. High probably means 25% bracket at least. Total Bond holds a very diversified collection of bonds while tax exempt bond funds hold only munis, hence those funds are less diversified by definition. National tax exempt funds like those are diversified enough within munis to be fine. If your tax situation justifies tax exempt bonds, you also have to check you state tax cost to see if state specific funds qualify. Most investors would avoid the whole issue and hold VBMFX in a tax protected account so that tax exemption is moot.

The other difference among these funds is duration, which measures the sensitivity of funds to changes in interest rates. Total bond has a longer duration than those muni funds and is therefore more volatile from day to day, month to month, year to year, etc. Why you should care is a different discussion. The longer the duration the higher the return. I suggest that intermediate duration is a good compromise between volatility and return.

It seems a little odd that you would be choosing among those alternatives.
That's a good explanation, thank you.

I'm not selecting between these. VMLUX, VWSUX, along with FBIDX (Fidelity U.S. Bond Index Fund) were recommended in response to my original post (post #1). When I researched FBIDX, it looked similar to VBMFX. So I wanted to know what was the difference between these.

Can you review my original post and comment on what could be done?

Thanks for your help.

dbr
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Re: Where to save cash over 5 years.

Post by dbr » Thu Dec 14, 2017 10:43 am

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:30 am

That's a good explanation, thank you.

I'm not selecting between these. VMLUX, VWSUX, along with FBIDX (Fidelity U.S. Bond Index Fund) were recommended in response to my original post (post #1). When I researched FBIDX, it looked similar to VBMFX. So I wanted to know what was the difference between these.

Can you review my original post and comment on what could be done?

Thanks for your help.
For a five year time line you would put money in short term munis in order to have maximum predictability of the value of the investment while minimizing taxes if you are in a high tax situation. If taxes are not an issue you could use some other short term bond fund that is taxable. For a little more return with a little more uncertainty the total bond fund would be fine. You would use a longer term tax exempt fund if you will accept the volatility and are in a high tax situation. The standard deviation of annual returns for a total bond fund might be 5% or so meaning the annual return would highly often range between -3% and +8%. For a short term fund the annual return might most often fall in the range -1% to +3%. I guess a savings account or CDs probably are in a range of 1% to 3% over the time proposed. All numbers are rough approximations not worth refining in the face of unpredictability of interest rates.

The actual truth is that virtually all the reasonable alternatives for bonds, savings, and CDs in this thread come to about the same thing. I would probably just put everything in a savings account with some decent interest rate for simplicity and convenience.

Most questions about what bonds to buy are self inflicted dilemmas over non-choices.

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 11:12 am

dbr wrote: โ†‘
Thu Dec 14, 2017 10:43 am
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:30 am

That's a good explanation, thank you.

I'm not selecting between these. VMLUX, VWSUX, along with FBIDX (Fidelity U.S. Bond Index Fund) were recommended in response to my original post (post #1). When I researched FBIDX, it looked similar to VBMFX. So I wanted to know what was the difference between these.

Can you review my original post and comment on what could be done?

Thanks for your help.
For a five year time line you would put money in short term munis in order to have maximum predictability of the value of the investment while minimizing taxes if you are in a high tax situation. If taxes are not an issue you could use some other short term bond fund that is taxable. For a little more return with a little more uncertainty the total bond fund would be fine. You would use a longer term tax exempt fund if you will accept the volatility and are in a high tax situation. The standard deviation of annual returns for a total bond fund might be 5% or so meaning the annual return would highly often range between -3% and +8%. For a short term fund the annual return might most often fall in the range -1% to +3%. I guess a savings account or CDs probably are in a range of 1% to 3% over the time proposed. All numbers are rough approximations not worth refining in the face of unpredictability of interest rates.

The actual truth is that virtually all the reasonable alternatives for bonds, savings, and CDs in this thread come to about the same thing. I would probably just put everything in a savings account with some decent interest rate for simplicity and convenience.

Most questions about what bonds to buy are self inflicted dilemmas over non-choices.
I find myself agreeing with you.

Just for curiosity, when you said:
"You would use a longer term tax exempt fund if you will accept the volatility and are in a high tax situation"
What Vanguard fund would that be?

overthought
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Re: Where to save cash over 5 years.

Post by overthought » Thu Dec 14, 2017 12:24 pm

whiteprius wrote: โ†‘
Tue Dec 12, 2017 10:38 pm
Here are the 12-month returns of the mutual fund FBIDX over the last 30 years. As you can see it's pretty safe and, IMHO, a no brainer choice over a savings account or CDs.

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D
Looking at quarterly rolling returns that regularly dip down a few %, I wouldn't want to put short-term savings in that fund. It would be annoying to have to wait out a drawdown before making the planned purchase.
Jerry55 wrote: โ†‘
Tue Dec 12, 2017 10:19 pm
I transfer $$$ from my checking account to an online savings account, currently Capitol One 360.
Their normal savings acct yields about 0.75%, but I recently transferred about 90% of that to their Money Market Account @ 1.2%
+1 for Capitol One 360. I keep the liquid part of my EF there, which pushes me well over the $10k threshold to get the good rate (currently 1.3%) for whatever extra savings I stash there. I keep looking at CDs but they're so much more hassle to deal with for usually minimal extra earnings (especially if you have to pay 6-9 months interest to break), plus there's the risk that a bank wouldn't let me break the CD when I need the money (since you invariably have to choose 5-year terms to get above 1.3%).

Update: A quick google search taught me that money market and savings no longer differ meaningfully since 2008, and savings accounts actually tend to have higher interest rates with lower/no minimum deposit. See here for one list of current offerings.
Last edited by overthought on Thu Dec 14, 2017 12:39 pm, edited 1 time in total.

whiteprius
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Re: Where to save cash over 5 years.

Post by whiteprius » Thu Dec 14, 2017 12:35 pm

overthought wrote: โ†‘
Thu Dec 14, 2017 12:24 pm

Looking at quarterly rolling returns that regularly dip down a few %, I wouldn't want to put short-term savings in that fund. It would be annoying to have to wait out a drawdown before making the planned purchase.
OP said he was in 4-5 years, unless I misread.

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 12:42 pm

overthought wrote: โ†‘
Thu Dec 14, 2017 12:24 pm
whiteprius wrote: โ†‘
Tue Dec 12, 2017 10:38 pm
Here are the 12-month returns of the mutual fund FBIDX over the last 30 years. As you can see it's pretty safe and, IMHO, a no brainer choice over a savings account or CDs.

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D
Looking at quarterly rolling returns that regularly dip down a few %, I wouldn't want to put short-term savings in that fund. It would be annoying to have to wait out a drawdown before making the planned purchase.
Jerry55 wrote: โ†‘
Tue Dec 12, 2017 10:19 pm
I transfer $$$ from my checking account to an online savings account, currently Capitol One 360.
Their normal savings acct yields about 0.75%, but I recently transferred about 90% of that to their Money Market Account @ 1.2%
+1 for Capitol One 360. I keep the liquid part of my EF there, which pushes me well over the $10k threshold to get the good rate (currently 1.3%) for whatever extra savings I stash there. I keep looking at CDs but they're so much more hassle to deal with for usually minimal extra earnings, plus there's the risk that a bank wouldn't let me break the CD when I need the money (since you invariably have to choose 5-year terms to get above 1.3%).
If we consider CDs, isn't the 5 year rate more like 2.25. I just checked, I'm even seeing 2.4% for 5 year CD.

Does that make CDs better than everything else?
i-bonds, Vanguard total bond fund, tax exempt funds (both short-term and intermediate term)?

overthought
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Re: Where to save cash over 5 years.

Post by overthought » Thu Dec 14, 2017 12:49 pm

whiteprius wrote: โ†‘
Thu Dec 14, 2017 12:35 pm
overthought wrote: โ†‘
Thu Dec 14, 2017 12:24 pm

Looking at quarterly rolling returns that regularly dip down a few %, I wouldn't want to put short-term savings in that fund. It would be annoying to have to wait out a drawdown before making the planned purchase.
OP said he was in 4-5 years, unless I misread.
Right. If you look at 5-year rolling returns for the bond fund, they've been steadily decreasing and are currently around 1.8%. Compare that to ~1.5% guaranteed gain for a high-interest savings account and the gap won't be wide enough in 4-5 years to justify the volatility.

If you suffer one of those 3% drops just before you planned to use the money, you'd have to either eat the loss or wait for the fund to recover. If this was for something like EF money, which I don't plan to spend, that would be just fine. But OP knows the money will be spent in a few years.

For example, $10k @ 1.5% for 5 years yields $773 interest. Investing that same $10k @ 2% (being generous) and taking a 3% drop at the end is $709 gain. If the bond fund returns only 1.8% in the next five years, like it did in the previous five years, then the gain drops to just $605.
Last edited by overthought on Thu Dec 14, 2017 1:06 pm, edited 1 time in total.

overthought
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Re: Where to save cash over 5 years.

Post by overthought » Thu Dec 14, 2017 12:55 pm

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 12:42 pm
If we consider CDs, isn't the 5 year rate more like 2.25. I just checked, I'm even seeing 2.4% for 5 year CD.

Does that make CDs better than everything else?
i-bonds, Vanguard total bond fund, tax exempt funds (both short-term and intermediate term)?
OP plans to trickle in the funds, $500/mo. That would be a pretty hairy CD ladder, and any he broke at the end would claw back 6-9 months interest. I haven't run numbers but I'm guessing the gain, if any, vs. a good savings account would be minimal even before considering time spent.

Update: It seems GS/Marcus has a $500 minimum deposit, and 30 days to fully fund the account. So if OP has a 5 year horizon, they could open CDs every other month. 12x 3-year CDs in 2018 and 2019 (current rate 2%, better than 4-year, better than breaking 5-year), 6x 2-year CDs in 2020 (current rate 1.75%), 6x 1-year CDs in 2021 (current rate 1.65%). Move matured CDs, plus the last year's money, into savings account (currently 1.3%). Rough estimate is $30k in, ~$31.4k out, for an overall IRR of ~1.5%. At 1.3%, they get ~$31.2k out instead, so if the time to set up the ladder is worth the $200 difference, go for it.

mega317
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Re: Where to save cash over 5 years.

Post by mega317 » Thu Dec 14, 2017 3:45 pm

I chopped down your full paragraph here just to make a point.
overthought wrote: โ†‘
Thu Dec 14, 2017 12:49 pm
...$10k @ 1.5% for 5 years yields $773 interest.
...taking a 3% drop at the end is $709 gain.
...then the gain drops to just $605.
I don't think someone investing 5 figures over 5 years for an undetermined purchase should care about possible differences of less than 200 bucks (before taxes). He could get that from a credit card bonus in less time than it takes to read this thread.

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 12:42 pm
Does that make CDs better than everything else?
i-bonds, Vanguard total bond fund, tax exempt funds (both short-term and intermediate term)?
Of course the answer is it depends. Those CD rates are currently less than I bonds, so I bonds are better, unless inflation decreases then they're worse. Due to the early withdrawal penalty CDs might end up ahead of bond funds if held to maturity but worse if the money is needed sooner or if bonds increase.

overthought
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Re: Where to save cash over 5 years.

Post by overthought » Thu Dec 14, 2017 4:02 pm

mega317 wrote: โ†‘
Thu Dec 14, 2017 3:45 pm
I chopped down your full paragraph here just to make a point.
overthought wrote: โ†‘
Thu Dec 14, 2017 12:49 pm
...$10k @ 1.5% for 5 years yields $773 interest.
...taking a 3% drop at the end is $709 gain.
...then the gain drops to just $605.
I don't think someone investing 5 figures over 5 years for an undetermined purchase should care about possible differences of less than 200 bucks (before taxes). He could get that from a credit card bonus in less time than it takes to read this thread.
Exactly! That's why my advice is to stuff it in a decent savings account and get on with life.

mega317
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Re: Where to save cash over 5 years.

Post by mega317 » Thu Dec 14, 2017 4:28 pm

I must have lost track of the thread and missed that was your position.

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dm200
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Re: Where to save cash over 5 years.

Post by dm200 » Thu Dec 14, 2017 6:13 pm

Some credit unions offer certificates (CDs) where you can add on to the CD some number of times over the life of the CD.

dbr
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Re: Where to save cash over 5 years.

Post by dbr » Thu Dec 14, 2017 6:21 pm

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 11:12 am


I find myself agreeing with you.

Just for curiosity, when you said:
"You would use a longer term tax exempt fund if you will accept the volatility and are in a high tax situation"
What Vanguard fund would that be?
Maybe intermediate term tax exempt VWIUX.

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Toons
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Re: Where to save cash over 5 years.

Post by Toons » Thu Dec 14, 2017 7:04 pm

Something like
Capital One Money Market. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" โ€“Bruce Lee

get_g0ing
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Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 10:39 pm

mega317 wrote: โ†‘
Thu Dec 14, 2017 3:45 pm
I chopped down your full paragraph here just to make a point.
overthought wrote: โ†‘
Thu Dec 14, 2017 12:49 pm
...$10k @ 1.5% for 5 years yields $773 interest.
...taking a 3% drop at the end is $709 gain.
...then the gain drops to just $605.
I don't think someone investing 5 figures over 5 years for an undetermined purchase should care about possible differences of less than 200 bucks (before taxes). He could get that from a credit card bonus in less time than it takes to read this thread.

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 12:42 pm
Does that make CDs better than everything else?
i-bonds, Vanguard total bond fund, tax exempt funds (both short-term and intermediate term)?
Of course the answer is it depends. Those CD rates are currently less than I bonds, so I bonds are better, unless inflation decreases then they're worse. Due to the early withdrawal penalty CDs might end up ahead of bond funds if held to maturity but worse if the money is needed sooner or if bonds increase.
I just looked, and the i bond rate shows as 2.58%
Want to make sure I'm reading/understanding correctly. If someone buys i bonds today, do they get a 2.58% return? As compared to let's say 2.40% on a 5-year CD, or 1.5% on a savings account?

On that note, I hear that i-bonds and Roth IRA are good places for emergency funds and downpayment savings. Is that accurate?

get_g0ing
Posts: 29
Joined: Sat Dec 09, 2017 11:09 am

Re: Where to save cash over 5 years.

Post by get_g0ing » Thu Dec 14, 2017 10:43 pm

overthought wrote: โ†‘
Thu Dec 14, 2017 12:55 pm
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 12:42 pm
If we consider CDs, isn't the 5 year rate more like 2.25. I just checked, I'm even seeing 2.4% for 5 year CD.

Does that make CDs better than everything else?
i-bonds, Vanguard total bond fund, tax exempt funds (both short-term and intermediate term)?
OP plans to trickle in the funds, $500/mo. That would be a pretty hairy CD ladder, and any he broke at the end would claw back 6-9 months interest. I haven't run numbers but I'm guessing the gain, if any, vs. a good savings account would be minimal even before considering time spent.

Update: It seems GS/Marcus has a $500 minimum deposit, and 30 days to fully fund the account. So if OP has a 5 year horizon, they could open CDs every other month. 12x 3-year CDs in 2018 and 2019 (current rate 2%, better than 4-year, better than breaking 5-year), 6x 2-year CDs in 2020 (current rate 1.75%), 6x 1-year CDs in 2021 (current rate 1.65%). Move matured CDs, plus the last year's money, into savings account (currently 1.3%). Rough estimate is $30k in, ~$31.4k out, for an overall IRR of ~1.5%. At 1.3%, they get ~$31.2k out instead, so if the time to set up the ladder is worth the $200 difference, go for it.
You are very good with numbers. Thanks for such a detailed and thoughtful response.

BogleMelon
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Re: Where to save cash over 5 years.

Post by BogleMelon » Thu Dec 14, 2017 11:05 pm

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:39 pm
I just looked, and the i bond rate shows as 2.58%
Want to make sure I'm reading/understanding correctly. If someone buys i bonds today, do they get a 2.58% return? As compared to let's say 2.40% on a 5-year CD, or 1.5% on a savings account?

On that note, I hear that i-bonds and Roth IRA are good places for emergency funds and downpayment savings. Is that accurate?
My understanding is yes, he will get 2.58% (plus another fixed rate that I think it is 0.1% if I remember correctly). However the rates are getting updated every 6 months. So he will get 2.58% valid for a year, then every six months he will get a variable rate according to the inflation which could be more or less (I don't mind if another one here can fact check my info)
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

mega317
Posts: 2245
Joined: Tue Apr 19, 2016 10:55 am

Re: Where to save cash over 5 years.

Post by mega317 » Fri Dec 15, 2017 1:19 am

get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:39 pm
I just looked, and the i bond rate shows as 2.58%
Want to make sure I'm reading/understanding correctly. If someone buys i bonds today, do they get a 2.58% return? As compared to let's say 2.40% on a 5-year CD, or 1.5% on a savings account?

On that note, I hear that i-bonds and Roth IRA are good places for emergency funds and downpayment savings. Is that accurate?
I bonds bought now will pay 2.58% for 6 months. The rate adjusts twice a year based on inflation. If inflation stays the same or goes up, I bonds will be better than 2.4% 5 year CDs. If it goes down and stays down they will be worse.

I think I bonds are great for emergency funds as long as you understand them. I would recommend reading in detail on the treasury direct website lest you get into something you don't understand. Quiz: I bought some I bonds this past May, if I needed them for an emergency tomorrow I'd be in trouble. Know why?

A Roth is OK for an emergency fund because contributions can be withdrawn without penalty. It is better as a retirement account, but if you have to choose between contributing to a Roth or maintaining an emergency fund, might as well get the money into the Roth for the year.

get_g0ing
Posts: 29
Joined: Sat Dec 09, 2017 11:09 am

Re: Where to save cash over 5 years.

Post by get_g0ing » Fri Dec 15, 2017 1:49 am

mega317 wrote: โ†‘
Fri Dec 15, 2017 1:19 am
get_g0ing wrote: โ†‘
Thu Dec 14, 2017 10:39 pm
I just looked, and the i bond rate shows as 2.58%
Want to make sure I'm reading/understanding correctly. If someone buys i bonds today, do they get a 2.58% return? As compared to let's say 2.40% on a 5-year CD, or 1.5% on a savings account?

On that note, I hear that i-bonds and Roth IRA are good places for emergency funds and downpayment savings. Is that accurate?
I bonds bought now will pay 2.58% for 6 months. The rate adjusts twice a year based on inflation. If inflation stays the same or goes up, I bonds will be better than 2.4% 5 year CDs. If it goes down and stays down they will be worse.

I think I bonds are great for emergency funds as long as you understand them. I would recommend reading in detail on the treasury direct website lest you get into something you don't understand. Quiz: I bought some I bonds this past May, if I needed them for an emergency tomorrow I'd be in trouble. Know why?

A Roth is OK for an emergency fund because contributions can be withdrawn without penalty. It is better as a retirement account, but if you have to choose between contributing to a Roth or maintaining an emergency fund, might as well get the money into the Roth for the year.
In that case, it sounds like i-bonds are better than VMLUX (Limited-Term Tax-Exempt) and VWSUX (Short-Term Tax-Exempt).
I can put new money into i-bonds and withdraw the previously bought i-bonds when I need the money.

On related note, is it a bad idea to buy the Vanguard total bond fun in a taxable account?

get_g0ing
Posts: 29
Joined: Sat Dec 09, 2017 11:09 am

Re: Where to save cash over 5 years.

Post by get_g0ing » Fri Dec 15, 2017 1:52 am

mega317 wrote: โ†‘
Fri Dec 15, 2017 1:19 am
I think I bonds are great for emergency funds as long as you understand them. I would recommend reading in detail on the treasury direct website lest you get into something you don't understand. Quiz: I bought some I bonds this past May, if I needed them for an emergency tomorrow I'd be in trouble. Know why?
I believe that's because you need to hold them for at least a year.
Since I already have i-bonds over a year old, I'm thinking I can put new money into i-bonds, and then withdraw the old ones when needed.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Where to save cash over 5 years.

Post by dbr » Fri Dec 15, 2017 9:12 am

get_g0ing wrote: โ†‘
Fri Dec 15, 2017 1:52 am
mega317 wrote: โ†‘
Fri Dec 15, 2017 1:19 am
I think I bonds are great for emergency funds as long as you understand them. I would recommend reading in detail on the treasury direct website lest you get into something you don't understand. Quiz: I bought some I bonds this past May, if I needed them for an emergency tomorrow I'd be in trouble. Know why?
I believe that's because you need to hold them for at least a year.
Since I already have i-bonds over a year old, I'm thinking I can put new money into i-bonds, and then withdraw the old ones when needed.
Yes, they need to be a year old and there is an interest penalty up to five years. For some situations the annual purchase limitation means I bonds aren't helpful, but in other cases they can be a good idea. I bonds are tax deferred for thirty years. That is actually a strike against them as an emergency fund as to redeem them you pay the tax and you give up that tax deferred space which can't be instantly recovered due to purchase limits.

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