Author Topic: All the investment vehicles versus my unicorn 6% savings account?  (Read 2790 times)

pitchshifter

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Hi guys

TLDR - just moved to the US, 34, first job with opportunity for savings (and pretty much went back to school and am now here because of MMM, went from editor, to reading his story, to now doing what he does for the same company, so there's that...), paid off debts and now starting from zero.

GO!

401k - 10% bonds index, 90% in 80%/20% Fidelity Index / BlackRock Extended Index. Rest of money - 18K in 401K, max out Trad IRA, convert later.
 So far so good and all learned from around these parts.

However - from my time in the UK (8 years as editor), I am also in possession of a so-far unused 6% savings account. Pretty much unheard of here, and best in class in the UK.

Finally, I am from Australia and plan on moving back in a few years, if that makes any difference.

I am just wondering whether having this guaranteed 6% savings account versus 7% index funds should make a difference to my savings strategy? Once I have maxed 401k and trad IRA, should I perhaps be putting money into this instead of or in some given preferential proportion to Vanguard index funds?

Would appreciate any suggestions or thoughts on this matter!
« Last Edit: December 25, 2015, 03:13:17 AM by pitchshifter »

mjs111

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #1 on: December 25, 2015, 07:04:05 AM »
Wow, 6%!

I don't see much downside here and if I were you I'd probably keep the money there.  Are there any limitations to the account, ex. limits to the total amount of money you can deposit, limits on what you can take out, when will the interest rate set, etc.  My main question is, are you comfortable with the reason why the account is paying you 6% risk free? That's a pretty amazing interest rate in today's environment, almost a suspiciously high rate. :)

A possible downside would be currency volatility risk, in the sense that you're saving in GBP and will eventually be spending in AUD. That said, currency movements are notoriously hard to predict so I have no advice there other than to point out it's a possible risk.

Sounds like the bulk of your net worth is invested in assets outside this account so your eggs aren't all in one basket.

Mike

pitchshifter

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #2 on: December 25, 2015, 05:54:06 PM »
Well thank you very much for your help. It led me to go back to that account and realised that it was indeed too good to be true - it was only 6% for a year, after which it reverted to a measly 0.5 percent!

And as for the bulk of my assets being invested elsewhere, well, not exactly - as I said, I'm currently starting from zero. The 401k I set up yesterday ;)

I transfer money between my home countries of US, UK and AUS using transferwise.com or currencyfair.com for pretty low rates, so basically any investing opportunities in any of those countries are open to me.

Would anyone suggest after a trad IRA that I should transfer remaining (taxed) money back to Aus first and invest it in Vanguard through there? Though it's more expensive there, perhaps it's simpler later?  And since I need to be a resident alien to have the Vanguard account, would I just need to close it when I leave anyway...?

Excited to start though and believe that 15-20 years from now is very reasonable (20 if I travel more, which seems like a fair swap to me...).I
« Last Edit: December 25, 2015, 06:19:30 PM by pitchshifter »

JLR

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #3 on: December 25, 2015, 06:35:43 PM »
Welcome to the forums.

I was very jealous of your 6%! The best I'm getting here in AUS is 3.55%. Thanks for clearing that up. :)

maizeman

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #4 on: December 25, 2015, 08:39:48 PM »
So you've already cleared this up but I still want to answer your now hypothetical question because it's an interesting question with an unintuitive answer: Even if you had a bank account magically paying 6% interest in perpetuity, in the long run you'll usually be much better off investing money in the stock market.

You'll frequently hear that the rate of return of the stock market over the very long run is about 6.8-6.9% (or 7% if we round to the closest whole number). However, critically, this is the inflation adjusted rate of return. Since interest in a savings account is not -- usually -- adjusted for inflation, we should actually be comparing to the non-inflation adjusted rate of return for the stock market which is closer to 9.1%. That means that over a ten year period the savings account would grow 79% while the index fund would grow 139%.

On top of that, in the US, the tax treatment for interest you earn on a savings account is much worse than for long term capital gains or dividends. If you make $100,000/year as a single person, you'd be paying 28% of your interest in taxes every year, reducing your effective interest rate to 4.32%. Meanwhile in the stock market you'd get about 2 percentage points of growth as dividends (taxed at 15% each year) and the rest as capital gains (taxed at 15% only once when you sell). Factoring all that in, the savings account would return 53% over ten years and the index fund 113%.

dontwannaworkforever

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #5 on: December 26, 2015, 05:41:47 AM »
That 6% savings account looks fantastic for keeping an emergency savings in.

matchewed

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #6 on: December 26, 2015, 06:03:42 AM »
Even if it was true for more than one year don't we also have to consider currency fluctuations in this? That is 6% in British Pounds which then has to be adjusted for whatever currency you need right?

pitchshifter

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Re: All the investment vehicles versus my unicorn 6% savings account?
« Reply #7 on: January 03, 2016, 01:59:05 AM »
Thanks very much Maizeman - you know, I've been reading about this for months now and I never realised that the general 7% stock market increase quoted was inflation adjusted...that obviously changes things a lot!