Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

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Topic Author
crossbow
Posts: 195
Joined: Mon Nov 12, 2018 6:47 pm

Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by crossbow » Wed Jul 29, 2020 7:22 pm

Quick combined net worth breakdown:

Taxable Equity: $165k
Roth IRA Equity: $35K
401k Equity: $55K
401k Bond: $105K
Cash (Ally savings): $115K ($15K above target e-fund)

Our target emergency fund is $100K for a family of 4 (1 toddler & 1 infant) in a HCOL city (SF Bay). We currently rent but might want to purchase a house some time in the future. We are comfortable renters and the math would have to very obviously lean in favor of a home purchase (maintenance, prop tax etc.) for us to consider it. As it currently stands, renting is an obvious financial choice. However we are cognizant of the fact that it could turn into a lifestyle choice at some point i.e. kids and school districts. Where we are, a typical 20% downpayment for houses we would consider are in the ballpark of $200K.

We just began maxing out tax-advantaged accounts each year. The excess cash above our target $100K e-fund increase approx 3K/month. I see 3 options:

Option 1 - Earmark anything above $100K in savings account for a house downpayment. My concern - what if we choose not to buy after a few years? We'd have excess cash sitting in a HYSA that would have been better off in VTSAX. Which leads me to consider options 2 and 3 -

Option 2 - Re-direct anything above $100K to VTSAX and cash out when we decide to buy. My concern - we would likely buy only if house prices fall, otherwise rent+invest works out better financially where we are. However, if an event occurred to trigger a drop in house prices such that it was cheaper to own vs rent, the stock market would probably have taken a hit, so we might be worse off than if we had gone with Option 1.

Option 3 - Earmark anything above $100K in HYSA for either a lumpsum investment into VTSAX if/when the stock market crashes, or toward a house if housing market dips. This is actually our current path of action while we try to decide what our next steps are.

Any alternatives we could consider? Thanks in advance.

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vineviz
Posts: 7103
Joined: Tue May 15, 2018 1:55 pm

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by vineviz » Wed Jul 29, 2020 7:40 pm

crossbow wrote:
Wed Jul 29, 2020 7:22 pm
Quick combined net worth breakdown:

Taxable Equity: $165k
Roth IRA Equity: $35K
401k Equity: $55K
401k Bond: $105K
Cash (Ally savings): $115K ($15K above target e-fund)

...


Any alternatives we could consider? Thanks in advance.
Keep $25k in the Ally savings accounts, and put everything else in a taxable account invested in Vanguard Target Retirement Income Fund (VTINX).

Mentally earmark $75k of the VTINX balance as "emergency fund" and anything above that as the "maybe, someday buy a house fund". VTINX is a one-fund wonder whose name shouldn't distract you : the 30% stock and 70% bond allocation is pretty much a minimum variance portfolio of globally diversified stocks and bonds. The heavy bond allocation means volatility is dampened, but the market exposure is enough that you can reasonably expect the money to grow faster than inflation can erode its value. The all-in-one nature means no one to rebalance it.

If you ever decide to buy the house, or decide for sure you won't, you can likely find a way to split the account up more creatively but for now my advice is to keep it simple.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Topic Author
crossbow
Posts: 195
Joined: Mon Nov 12, 2018 6:47 pm

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by crossbow » Wed Jul 29, 2020 11:38 pm

vineviz wrote:
Wed Jul 29, 2020 7:40 pm
crossbow wrote:
Wed Jul 29, 2020 7:22 pm
Quick combined net worth breakdown:

Taxable Equity: $165k
Roth IRA Equity: $35K
401k Equity: $55K
401k Bond: $105K
Cash (Ally savings): $115K ($15K above target e-fund)

...


Any alternatives we could consider? Thanks in advance.
Keep $25k in the Ally savings accounts, and put everything else in a taxable account invested in Vanguard Target Retirement Income Fund (VTINX).

Mentally earmark $75k of the VTINX balance as "emergency fund" and anything above that as the "maybe, someday buy a house fund". VTINX is a one-fund wonder whose name shouldn't distract you : the 30% stock and 70% bond allocation is pretty much a minimum variance portfolio of globally diversified stocks and bonds. The heavy bond allocation means volatility is dampened, but the market exposure is enough that you can reasonably expect the money to grow faster than inflation can erode its value. The all-in-one nature means no one to rebalance it.

If you ever decide to buy the house, or decide for sure you won't, you can likely find a way to split the account up more creatively but for now my advice is to keep it simple.
Thanks, I'll check out VTINX. Thanks!

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dratkinson
Posts: 4962
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by dratkinson » Thu Jul 30, 2020 2:52 am

Taxable account savings for emergency fund (EF) and short-term goals. Time horizons and recommended savings vehicles:

During a crash,
--Stocks can lose 50-90%. Most stock crashes recover within ~4yrs.
--Bonds can lose 5-15%. Bond fund owners shouldn’t lose money if fund held for reported duration.
--Stock/bond crashes are not typically coincidental.

Given above, these are the recommended vehicles for saving by goal horizon.
--ST (0-5yrs): Insured checking, savings, mmkt account, CDs, US savings bonds (1yr lockout),….
--IT (5-10yrs): Safe bond funds.
--LT (>10yrs): Safe equity funds.


Since most bond dividends are fed-taxed as ordinary income (tax inefficient), and if you considering bonds as an extended-tier EF, then see: viewtopic.php?p=5401453#p5401453
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
crossbow
Posts: 195
Joined: Mon Nov 12, 2018 6:47 pm

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by crossbow » Thu Jul 30, 2020 1:56 pm

dratkinson wrote:
Thu Jul 30, 2020 2:52 am
Taxable account savings for emergency fund (EF) and short-term goals. Time horizons and recommended savings vehicles:

During a crash,
--Stocks can lose 50-90%. Most stock crashes recover within ~4yrs.
--Bonds can lose 5-15%. Bond fund owners shouldn’t lose money if fund held for reported duration.
--Stock/bond crashes are not typically coincidental.

Given above, these are the recommended vehicles for saving by goal horizon.
--ST (0-5yrs): Insured checking, savings, mmkt account, CDs, US savings bonds (1yr lockout),….
--IT (5-10yrs): Safe bond funds.
--LT (>10yrs): Safe equity funds.


Since most bond dividends are fed-taxed as ordinary income (tax inefficient), and if you considering bonds as an extended-tier EF, then see: viewtopic.php?p=5401453#p5401453
Thank you - I checked out the post you linked and see that you have put quite a bit of thought into it! However, it started to get a little complex for me and I prefer to keep things simple, especially since this is an e-fund...

Topic Author
crossbow
Posts: 195
Joined: Mon Nov 12, 2018 6:47 pm

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by crossbow » Thu Jul 30, 2020 1:59 pm

vineviz wrote:
Wed Jul 29, 2020 7:40 pm
crossbow wrote:
Wed Jul 29, 2020 7:22 pm
Quick combined net worth breakdown:

Taxable Equity: $165k
Roth IRA Equity: $35K
401k Equity: $55K
401k Bond: $105K
Cash (Ally savings): $115K ($15K above target e-fund)

...


Any alternatives we could consider? Thanks in advance.
Keep $25k in the Ally savings accounts, and put everything else in a taxable account invested in Vanguard Target Retirement Income Fund (VTINX).

Mentally earmark $75k of the VTINX balance as "emergency fund" and anything above that as the "maybe, someday buy a house fund". VTINX is a one-fund wonder whose name shouldn't distract you : the 30% stock and 70% bond allocation is pretty much a minimum variance portfolio of globally diversified stocks and bonds. The heavy bond allocation means volatility is dampened, but the market exposure is enough that you can reasonably expect the money to grow faster than inflation can erode its value. The all-in-one nature means no one to rebalance it.

If you ever decide to buy the house, or decide for sure you won't, you can likely find a way to split the account up more creatively but for now my advice is to keep it simple.
VTINX it is. I didn't transfer $75K though, my comfort level at this stage is 50/50 (no particular reason other than peace of mind). I hold it in my taxable account and while I realize it is not tax efficient, neither is holding the funds in a savings account. I may increase/decrease the ratio as time passes. Thanks for pointing me in this direction.

ziggny
Posts: 27
Joined: Thu Feb 15, 2018 10:26 am

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by ziggny » Sat Aug 01, 2020 9:56 am

crossbow wrote:
Thu Jul 30, 2020 1:59 pm
vineviz wrote:
Wed Jul 29, 2020 7:40 pm
crossbow wrote:
Wed Jul 29, 2020 7:22 pm
Quick combined net worth breakdown:

Taxable Equity: $165k
Roth IRA Equity: $35K
401k Equity: $55K
401k Bond: $105K
Cash (Ally savings): $115K ($15K above target e-fund)

...


Any alternatives we could consider? Thanks in advance.
Keep $25k in the Ally savings accounts, and put everything else in a taxable account invested in Vanguard Target Retirement Income Fund (VTINX).

Mentally earmark $75k of the VTINX balance as "emergency fund" and anything above that as the "maybe, someday buy a house fund". VTINX is a one-fund wonder whose name shouldn't distract you : the 30% stock and 70% bond allocation is pretty much a minimum variance portfolio of globally diversified stocks and bonds. The heavy bond allocation means volatility is dampened, but the market exposure is enough that you can reasonably expect the money to grow faster than inflation can erode its value. The all-in-one nature means no one to rebalance it.

If you ever decide to buy the house, or decide for sure you won't, you can likely find a way to split the account up more creatively but for now my advice is to keep it simple.
VTINX it is. I didn't transfer $75K though, my comfort level at this stage is 50/50 (no particular reason other than peace of mind). I hold it in my taxable account and while I realize it is not tax efficient, neither is holding the funds in a savings account. I may increase/decrease the ratio as time passes. Thanks for pointing me in this direction.
Is there any meaningful difference in tax efficiency between VTINX and FDIC savings?

User avatar
dratkinson
Posts: 4962
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Where to put cash in excess of e-fund when unsure about house purchase in foreseeable future?

Post by dratkinson » Sat Aug 01, 2020 12:34 pm

ziggny wrote:
Sat Aug 01, 2020 9:56 am
crossbow wrote:
Thu Jul 30, 2020 1:59 pm
...
VTINX it is. I didn't transfer $75K though, my comfort level at this stage is 50/50 (no particular reason other than peace of mind). I hold it in my taxable account and while I realize it is not tax efficient, neither is holding the funds in a savings account. I may increase/decrease the ratio as time passes. Thanks for pointing me in this direction.
Is there any meaningful difference in tax efficiency between VTINX and FDIC savings?

Maybe a little.

I believe this is correct.
--FDIC savings interest is reported on Sch B part 1, off 1099INT.
--VTINX distributions are reported on Sch B part 2, off 1099DIV.

I've adopted livesoft's idea that we should review our Sch B for opportunities to improve tax efficiency.
--Sch B part 1. Eliminate or minimize everything reported here, because it's taxed as ordinary income.
--Sch B part 2. Everything reported here should have offsetting tax benefits for QDI, LTCG, FTC, or tax-exempt dividends. This means we should select investments for those tax benefits. Meaning: taxable bonds may be suboptimal.


VTINX's small equity allocation may have some small offsetting QDI tax benefit*, but the majority allocation to taxable bonds would result in dividends taxed as ordinary income. Its distributions do add to AGI/tax bracket creep. (* Would need a current VTINX owner to tell us what is reported on 1099DIV; I don’t know how to extract this information from Vanguard’s website information.)


Tax returns. I'm required to do a tax return every year on my extended-tier EF investments. But if I'm proactive and produce the sample tax returns before making any investments, then I can select my extended-tier EF investments to give me the tax-return outcome I prefer.

Doing tax returns is a pain….

But Excel1040.com makes it relatively painless to produce sample tax returns. And I used it to select my extended-tier EFs (= retirement bonds in taxable):
--VWLTX (LT national muni fund), 100% fed tax exempt, dividends DON'T add to AGI/tax bracket creep, higher after-tax income than TBM, and within my risk tolerance.
--A single-state muni fund, 100% fed + state tax exempt, dividends DON'T add to AGI/tax bracket creep, higher after-tax income than VWLTX, and within my risk tolerance.
--TSM, >90% QDI, dividends DO add to AGI/tax bracket creep. Note: Use of above munis DON'T add to AGI/tax bracket creep, so should protect more of TSM's QDI benefit.

Note. A muni's TEY calculation can give a first-look and guesstimate as to whether it will outperform TBM after-tax. But the muni's not adding to AGI is an MAGI effect that requires a second-look by producing a sample tax return to see the effect on TSM.



Bottom line. If you care about your tax efficiency, then you should also care about your tax returns which reveal your tax efficiency.

I believe it's more tax-efficient to do the tax returns first, before choosing investments, so we can pick the tax-return outcome we prefer.

I've found livesoft's Sch B ideas to be a beneficial refinement to the Wiki's advice on "tax-efficient fund placement". It's helped me select investments for my taxable account.

And the tax efficiency of the selected investments is confirmed by tax returns---sample and actual.

I like it when tax return surprises are minimized.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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