Short Term Savings

[travis_cooper]

So, I've had this question for a long time and have never known how to find the answer. I'm fairly new to MMM, but I love everything I've been reading. I'm hoping I can finally get a good answer here. Basically what are the best options for short term savings?  So, for example, our heater and air conditioner are getting old. We know that in 3 years or so we will likely need to replace them. My car will eventually die, say I can see about one year out to prepare to replace it. I can probably come up with several other things along those lines as well. So my question is, where do I stick the money while I'm saving up for those types of things?

Up until last week I just put the money in my savings account and on my budget had the money split out into different categories where I had assigned the money. Obviously with almost no gains in the account this has always felt like a bad place for the money, but I didn't know what else to do. I finally took the plunge and put a big chunk of that into a VTSMX. I plan on putting the money I was saving into each of those categories into this account as well. My current thought is that I can see events like this far enough ahead of time that I could then plan for them. I do still have about $5000 in cash still in the savings account just in case of things I couldn't plan for. So, lets say I know I am around the corner from needing a new car. I could then stop putting some, or all, of this money into my vanguard account and put it into my savings until I have enough to make the purchase. Thus my Vanguard account is just left alone during this time, but now that money is sitting in the bank earning next to nothing. I feel this is the best course of action, because you never know what the market is going to do, so I then don't have to worry about this money losing value.

Is that my best option, or is there some better way to save up for things like this? I guess one option would be to just keep putting all the money in the Vanguard account and then just pull it out when you need it. I don't feel like this is a good option because of the risk, and if you did make money you now have to pay capital gains as well. Are there other scenarios I'm overlooking?

I have several categories like this such as car insurance, minor home improvement, etc. Those are all small enough that it would mean just a little less going into the Vanguard account that month, so I think those are no brainers, but it is the bigger type purchases that I'm more concerned about. Obviously I expect those to not happen often, and when they do come up I'd hope to be able to plan for them.

[Crunchy Squirrel]

What sort of rates can you get on term deposits where you live? It's possible you'll get a slightly better return than a savings account, without the risk of losing capital in the stock market. Here in Oz the interest rate on internet savings accounts and term deposits is about even, but you might have better luck.

Personally I'd be inclined to keep money earmarked for such a short term use out of the market, but I'm fairly risk averse. I'd want to know that my capital was at least being maintained against inflation, even if it isn't earning much more than that.

[fiveoclockshadow]

Your intuition is right, for known short term expenditures you should save in a cash like asset (your savings account, CDs, short term US treasuries).  You really don't want risk in that case, remember that risk leads to reward in the long term - often more than ten years.  In the short term it is just gambling.

Right now this is frustrating as interest rates are so low they don't even keep up with inflation and so it is very tempting to put short term savings into something else.  Problem is there isn't much else that is risk free.

Given the amounts you are talking about you might want to look into high interest rate savings accounts that are usually tied to a debit card in some way.  These can have APRs (after accounting for fees) of up to 4% for balances up to around 5K to 10K.  They are a little fussy in that you either need recurring direct deposits going in or a certain number of transactions on the debit card per month or sometimes both.  If you can tolerate those annoyances they really are the best safe return around and are totally liquid.

I would resist the temptation to move your short term savings into equities or even treasuries with maturities more than a year out.  Too much risk, not enough return for such a short period.

If you do a search here you will find a lot of threads about higher interest rate accounts for emergency funds and short term savings.

[travis_cooper]

Thanks for the replies. I look around the forum for a good place for hit interest savings.

[brandino29]

Given the amounts you are talking about you might want to look into high interest rate savings accounts that are usually tied to a debit card in some way.  These can have APRs (after accounting for fees) of up to 4% for balances up to around 5K to 10K.  They are a little fussy in that you either need recurring direct deposits going in or a certain number of transactions on the debit card per month or sometimes both.  If you can tolerate those annoyances they really are the best safe return around and are totally liquid.

I've not seen anything over 1.5% for a couple of years even in the "high-yield" accounts. 

[fiveoclockshadow]

I've not seen anything over 1.5% for a couple of years even in the "high-yield" accounts.

Some accounts coupled with pre-paid debit cards have APRs of 6% up to $5000.  After monthly fees the APR is really more like 4%.  For a married couple with one of each of the cards below you can have $20K earning a bit over 4% which is not bad for an emergency fund.  The annoyance is setting up the required monthly direct deposits and occasionally using the card so you don't pile up too much money on the pre-paid card itself (the card yields no interest, but the savings account attached to it does).  If you do a search these have been discussed here before.

https://www.mangomoney.com/what-is-mango#savings

http://www.unionplus.org/money-credit/prepaid-debit-card

You can also find other credit unions with APRs between 2% and 3% limited to $10K again with various requirements for either direct deposits or debit card transactions.  All of these various accounts have limits on the balances that will get the high interest rate.  This is the opposite of most high yield tiered savings or MM accounts in which only the highest balances get the higher interest rate but that rate is usually less than 1.2% or so these days.  Basically these debit card accounts are hoping the user will use the card a lot to generate merchant fees for the bank to cover the high interest rate they offer.  They also probably assume most people can't save much money so for most accounts it is a win for the bank.

[brandino29]

Interesting, I'd never heard of either of these.  Funny though that you only get the 6% or 5.1% up to a balance of $5,000.  Tricky of them.