Welcome to the first installment of the Friday Q&A series which I hope to make a regular feature.  I often get specific questions by email or on internet forums that I know other people out there have.  I’ll try to use them (obscuring personal information obviously) for your education.

Question: 

I have about 100k sitting in a savings account for a down payment on a house for when I do eventually move. I don’t know when a spot will open up [in this group I’m hoping to join.] I imagine it could be anywhere from 6 months to 3 years. I know I should at least put the money into an online savings account, but is there something that would be better, like some type of short term bond fund at Vanguard? I know I obviously don’t want it near the stock market.

Answer:

It’s all about the risk/reward ratio.  You can’t expect more than about 1% risk-free.  I think my Ally Bank savings account is paying 0.95%.  That’s where I keep my emergency fund, but I might need that tomorrow.  You could buy Ally’s CD that has no penalty for early withdrawal, but it only yields 0.92%.  They’ll give you a 2 year “raise your rate” CD at 1.14%.

You might consider taking some risk with the money in hopes of a higher yield.  Perhaps you could put 1/3 of it into an Ally Savings account, 1/3 into a lower risk bond fund such as Vanguard’s Short Term Investment Grade (corporate bonds) Fund which has a current taxable yield of 1.47%, and 1/3 into a riskier bond fund such as intermediate term bond index (yields 1.88%) or even a stock fund like Total Stock Market.


Obviously, once you get out of the guaranteed investments you not only have to worry about the return on your principal, but the return of your principal too. Your choice, but risk and (possible) return are linked.  It’s possible (although fairly unlikely) that you could need the money at a time when bonds have lost 10% of their value and stocks have lost 50% of theirs.

Good luck with your decision.  There’s nothing wrong with just leaving it in your checking account too.  I mean, think about it.  0.95% of $100K is only $950 over a year.  You’re not exactly leaving a ton of money on the table.

 

Agree?  Disagree?  Post your thoughts on how much risk to take with your short term savings in the comments section below.

Image Credit: Kalan, via Wikimedia, CC-BY-SA