Short/intermediate term bond to help fund car savings?

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SloanKeterson
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Short/intermediate term bond to help fund car savings?

Post by SloanKeterson »

As the title states, could it be beneficial to invest $500/month (or more) into a short/intermediate bond or bond fund to make the end goal of $20,000 happen a little bit quicker over a 2-4 year period? My simple thinking would say yes, but could someone help advise me if I’m overlooking something? I’m still new, but reading “Boglehead’s Guide to Investing” and this just came to mind.

If yes, would it be the same plan for saving 20% down payment for a house ($50,000)?

Our plan is to have $20,000 saved up for a car in no more than 4 years, but working for sooner. As well as having $50,000 saved for a down payment on a house in 6 years but working for sooner as well.
annu
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Re: Short/intermediate term bond to help fund car savings?

Post by annu »

2-4years, CD is probably your best bet.
Other option, not your question, but buy a good used car.
investing engineer
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Re: Short/intermediate term bond to help fund car savings?

Post by investing engineer »

I would go for I-bond in your case, if you still have room for more. This helps keep up with inflation (after-tax) and avoid the risk of unanticipated inflation.
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SloanKeterson
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Re: Short/intermediate term bond to help fund car savings?

Post by SloanKeterson »

annu wrote: Sun Aug 16, 2020 1:46 am 2-4years, CD is probably your best bet.
Other option, not your question, but buy a good used car.
Why would CD be the best bet? Not challenging, just trying to understand.
Also, this will be about a 3 year old used car. My wife has a dream car she has wanted for years. We are going to get it used, but still fulfill that little dream. I’ll be driving the somewhat beater for a while to make up for it. Happy wife happy life 😂
Topic Author
SloanKeterson
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Re: Short/intermediate term bond to help fund car savings?

Post by SloanKeterson »

investing engineer wrote: Sun Aug 16, 2020 1:48 am I would go for I-bond in your case, if you still have room for more. This helps keep up with inflation (after-tax) and avoid the risk of unanticipated inflation.
Why is that? What are typical returns for I-Bonds? My thought is along these lines, since I would originally save in a bank account where it wouldn’t grow hardly at all. Is this the right thinking?
investing engineer
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Re: Short/intermediate term bond to help fund car savings?

Post by investing engineer »

SloanKeterson wrote: Sun Aug 16, 2020 1:51 am
investing engineer wrote: Sun Aug 16, 2020 1:48 am I would go for I-bond in your case, if you still have room for more. This helps keep up with inflation (after-tax) and avoid the risk of unanticipated inflation.
Why is that?
The answer is in my original reply:
This helps keep up with inflation (after-tax) and avoid the risk of unanticipated inflation.
SloanKeterson wrote: Sun Aug 16, 2020 1:51 am What are typical returns for I-Bonds?
The change in CPI + a tiny bit of interest. The inflation protection part (change in CPI) isn't subject to taxation. The interest part is only taxed by the federal government. You pay taxes when you redeem. Once you purchased I-bond, you can't redeem until one year later (which is probably fine for you before the last year). If sold within 5 years, you forgo the last 3 months of interest (which would happen in your case). You can purchase up to $15k per year. See https://www.bogleheads.org/wiki/I_savings_bonds
SloanKeterson wrote: Sun Aug 16, 2020 1:51 am My thought is along these lines, since I would originally save in a bank account where it wouldn’t grow hardly at all. Is this the right thinking?
It depends on what you want. If you anticipate significant interest increase in the next year, a high-yield savings account might bring a better outcome. If I were you, I would put preserving the purchasing power of the money in the first place and I-bond is IMO the most reliable way to achieve that.
Last edited by investing engineer on Sun Aug 16, 2020 3:03 pm, edited 1 time in total.
UpperNwGuy
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Re: Short/intermediate term bond to help fund car savings?

Post by UpperNwGuy »

Use a certificate of deposit, not a bond fund, for this type of savings.
tashnewbie
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Re: Short/intermediate term bond to help fund car savings?

Post by tashnewbie »

For the money you’ll need in possibly as little as 2 years, you might get a better return chasing bank bonuses, after you’ve accrued at least $10k (most bonuses generally require at least that much). The gist of it is that you open a new bank account, park some cash there for a certain time period, then you get a sign up bonus. Doctor of Credit website has a thorough list of current bonus opportunities.

It also may be worth checking your local credit unions to see if any of them have rewards checking accounts. One of mine offers 5% APY on a balance up to $10k if you meet certain direct deposit requirements. You and your spouse could open separate accounts and get a higher yield on the amounts deposited.

For the car money that you’ll need in 2-4 years, if you save $500/month, you’ll have $20k in a little over 3 years, which meets your desired purchase time. If your purchase time is flexible, I don’t see any need to take on principal risk with this money. Other reasonable people would disagree.
mega317
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Re: Short/intermediate term bond to help fund car savings?

Post by mega317 »

What fund did you have in mind? Vanguard short bond fund with a duration close to 3 years has an sec yield of 0.35%.

You are wasting your time here. There is no way to make 500 a month over 2-4 years grow meaningfully more than in a high yield savings account without taking substantial risk. The bank bonus game will do it I guess.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
nix4me
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Re: Short/intermediate term bond to help fund car savings?

Post by nix4me »

My answer is yes, short term bonds are appropriate for this.

Also, the SEC yields people are quoting are misleading. Make sure you understand bond funds before believing that you are going to make SEC yield - because that is simply not true. The actual distribution yield is what you should be looking at. For VBIRX which is what I think a previous posted used, the actual distributed yield for the month of August equates to 1.74%.

Use this link to see what it actually has paid each month.
https://investor.vanguard.com/mutual-f ... ions/vbirx
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whodidntante
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Re: Short/intermediate term bond to help fund car savings?

Post by whodidntante »

No, I wouldn't use a short or intermediate-term bond fund for car savings. Rates are really low right now in the QE era, which has so far been over a decade. Here's what I would do instead, and it is what I do.

1. Max the best tax-advantaged accounts each year. Like 401k, HSA, and Roth IRA.
2. Invest remaining money in a taxable brokerage account and use it to buy equity index ETFs.
3. Put fixed-income in a pre-tax account. Manage risk across your portfolio, not with buckets.
4. Tax-loss harvest when the opportunity arises, like the gigantic drop that occurred earlier this year.
5. When you buy a car, see where rates are at and if you'd rather sell equities, borrow against the equities (can be done for 1.6% at IB right now), or borrow against the car.

Four years ago, I took a 5-year car loan at 1.89% at a credit union. I can still borrow at similar rates. It has worked out fantastically.

Probably the main way this approach can backfire is if you get extremely unlucky, like you decide you need an expensive car right away, and equities are down bigly, and borrowing money is suddenly extremely expensive due to a spike in rates. But then you can still take the loan and prioritize paying it down. I don't think that confluence is terribly likely, and I guess I just don't see the point in being ready for everything to go wrong for me.
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anon_investor
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Re: Short/intermediate term bond to help fund car savings?

Post by anon_investor »

Two suggestions:

1. Super safe: online high yield savings account (Ally and Marcus currently offer 0.8%)

2. A little risk but more return: Vanguard LifeStrategy Income Fund (VASIX), which has an 20% stock/80% bond mix.
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Re: Short/intermediate term bond to help fund car savings?

Post by grabiner »

investing engineer wrote: Sun Aug 16, 2020 2:03 am
SloanKeterson wrote: Sun Aug 16, 2020 1:51 am What are typical returns for I-Bonds?
The change in CPI + a tiny bit of interest. The inflation protection part (change in CPI) isn't subject to taxation. The interest part is only taxed by the federal government. Once you purchased I-bond, you can't redeem until one year later (which is probably fine for you before the last year). If sold within 5 years, you forgo the last 3 months of interest (which would happen in your case). You can purchase up to $15k per year. See https://www.bogleheads.org/wiki/I_savings_bonds
The entire return, including the inflation adjustment, is subject to federal tax. However, the tax is deferred until you cash in the bond, which significantly reduces the effect because the tax loss does not compound.

In contrast, for TIPS, both the dividend and the inflation adjustment are taxed as income every year. With TIPS yields currently negative, there is no reason to buy TIPS in a taxable account until you have maxed out I-Bonds.
Wiki David Grabiner
hudson
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Re: Short/intermediate term bond to help fund car savings?

Post by hudson »

anon_investor wrote: Sun Aug 16, 2020 10:13 am 1. Super safe: online high yield savings account (Ally and Marcus currently offer 0.8%)
I agree with the above. Short term needs = safe short term investments.
Once you build up enough cash, look at converting to some CDs of appropriate length.
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SloanKeterson
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Re: Short/intermediate term bond to help fund car savings?

Post by SloanKeterson »

Thanks everyone for the advice. Taking the suggestions, I researched a few high-yield savings accounts and found these 3:

1) Citibank- 1.05%
2)CIBC- 1.05%
3)VIO- 1.01%

I think I’m going to put our emergency fund, as well as future savings for car/house here since we wouldn’t be touching it anyway. I like the idea of safety but some growth vs none, which is where it’s at right now.

What are the main things I should consider? I’m not worried about a minimum since we are transferring EF. Are these reputable banks to open up a savings account?
Last edited by SloanKeterson on Sun Aug 16, 2020 1:54 pm, edited 1 time in total.
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anon_investor
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Re: Short/intermediate term bond to help fund car savings?

Post by anon_investor »

SloanKeterson wrote: Sun Aug 16, 2020 1:52 pm Thanks everyone for the advice. Taking the suggestions, I researched a few high-yield savings accounts and found these 3:

1) Citibank- 1.05%
2)CIBC- 1.05%
3)VIO- 1.01%

I think I’m going to put our emergency fund, as well as future savings for car/house here since we would be touching it anyway. I like the idea of safety but some growth vs none which is where it’s at right now.

What are the main things I should consider? I’m not worried about a minimum since we are transferring EF. Are these reputable banks to open up a savings account?
Check to see if those banks have daily or monthly withdrawal limits.
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