How to optimize savings for major purchases

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kamikazekid
Posts: 40
Joined: Sun Apr 05, 2015 5:15 pm

How to optimize savings for major purchases

Postby kamikazekid » Fri Apr 21, 2017 9:20 am

Hi Bogleheads,
is there a general rule of thumb to follow on how to invest money when getting ready for major purchases (2 cars, house) that are on the horizon in the 3 to 5 year timeframe. I have followed all the basics thus far
1) 8 months emergency fund in place in bank
2) 401k maxed out, His and Her roth IRA maxed
3) Contribute to HSA and another
4) Have a Taxable brokerage with Vanguard where I contribute monthly
5) Recently I opened another 2 year CD with Ally (1.40%) to increase my liquidity.
6) Have some $ in Employee Stock Purchase Plan.

I still have another 10k or so to invest which I will need in the coming years. In general items 1, 2 and 3 are untouchable. However, I should be able to use items 4, 5 and 6 to fund my purchases. Am I thinking this right? Should I be looking into some other investment vehicle for parking my money.
Thanks,

NiceUnparticularMan
Posts: 767
Joined: Sat Mar 11, 2017 7:51 am

Re: How to optimize savings for major purchases

Postby NiceUnparticularMan » Fri Apr 21, 2017 9:41 am

So personally, I think there are two reasonable approaches.

One is just choose safe vehicles for your timeframe, and put the desired amount of savings into those vehicles. At 3-5 years, CDs seem like a reasonable option to me.

Another approach is to "overfund" a mixed portfolio that could meet your spending needs even if it experienced some loss. I don't think it makes sense to go crazy with this concept, but you could look at a short-to-medium bond fund, or perhaps a bond-heavy balanced fund: something like LifeStrategy Income (80% bonds), or Target Retirement Income (70% bonds). Note the more risky, the more you have to "overfund" it.
Last edited by NiceUnparticularMan on Fri Apr 21, 2017 9:41 am, edited 1 time in total.

ACM4297
Posts: 24
Joined: Mon Mar 27, 2017 8:37 pm

Re: How to optimize savings for major purchases

Postby ACM4297 » Fri Apr 21, 2017 9:41 am

You have to approach this from a risk/reward standpoint. Look at different investments, their maximum drawdown, and their return to decide. If it were me, 3-5 years would mean short/intermediate term bonds (BND, VGIT, BIV, VCIT, VCSH), CDs, or an I Bond.

Fox
Posts: 15
Joined: Tue Dec 13, 2016 2:00 pm

Re: How to optimize savings for major purchases

Postby Fox » Fri Apr 21, 2017 11:04 am

Would you be able to utilize a high interest checking account through a credit union?

We have two checking accounts that have 3% interest on balances up to $15,000 if you meet the typical usage minimums, which vary per bank/credit union.
We use these accounts for small purchases and credit card for everything else...works well for us.

KlangFool
Posts: 5293
Joined: Sat Oct 11, 2008 12:35 pm

Re: How to optimize savings for major purchases

Postby KlangFool » Fri Apr 21, 2017 11:21 am

OP,

There is another approach which may or may not work for you.

Do not save for those purchases.

If your annual savings and your portfolio are big enough, there is no need to
save for those purchases. You can just use your cash flow to pay for it.

For example, if you save 5K per month and you plan to buy a 20K car, why do you need to save/plan for this purchase? You just stop savings for 4 months and buy the car with cash.

KlangFool

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willthrill81
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Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: How to optimize savings for major purchases

Postby willthrill81 » Fri Apr 21, 2017 11:29 am

ACM4297 wrote:You have to approach this from a risk/reward standpoint. Look at different investments, their maximum drawdown, and their return to decide. If it were me, 3-5 years would mean short/intermediate term bonds (BND, VGIT, BIV, VCIT, VCSH), CDs, or an I Bond.


I think this is good advice, though I would be willing to be more aggressive. For a three year or greater investment horizon, I would have no problem going all in with something like Vanguard's Wellesley Income. The future could certainly look different from the past, but in the 47 year history of the fund, it's always been in the black in any three year period.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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whodidntante
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Joined: Thu Jan 21, 2016 11:11 pm

Re: How to optimize savings for major purchases

Postby whodidntante » Fri Apr 21, 2017 11:40 am

To be honest, I've been unwilling to either carry or spend cash in this current low rate environment. If I need to buy a car, I go get an auto loan for as much as they'll give me. I invest my money according to a desired asset allocation. If the interest rate environment changes, then so will I.


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