New to Investing

[Bea]

Hello everyone,
Here's my situation that I would really appreciate help with.  I have about 26k above my emergency fund sitting in my savings account earning a measly .94%. My husband and I have been thinking of this money as savings for a down payment but given the fact that we are planning a big move buying our first house is at least two years away if not more. I want the money to be available when we want it for the down payment and we don't want to risk it in something that might loose a lot of money before we are ready to buy a house but I feel like it is loosing value and not working for me sitting in my saving account. What should I do?  thanks!

[GreenGuava]

You say two years, if not more.  If you want 100% certainty that it's available, your only options are CDs and similar;  you could also consider series I bonds, for example.

Otherwise, there are varying degrees of risk available to you.  Decide how much you need the money to grow -- if that $26K is enough for the downpayment, then stick with safe options to at least gain something from it.

If you're willing to take some risk, but it's still short term, you could put it into a short-term bond index fund.  But that entails the risk of loss of principal, which you seem to not want to risk (and I fully understand)

[Stache In Training]

I'm going to agree with Green Guava.  CD's are going to be where you want to go.  I'd probably stay away from the bond market for right now, as your principal is going to lose some, as interest rates have started to rise.

Out of curiosity, where are you getting .94% on a savings account?  .75% or .8 is like the best I've seen recently from online banks.  So i'd consider yourself lucky on that front.  In fact, a lot of CD's won't come close to that until you lock it in for a longer period of time, which may be longer than your 2 year time-fram,e. so be careful there.

Good luck!

[beltim]

I agree with GreenGuava, except to note that Bea doesn't want the money in something that might lose a lot of money.  A bond fund with a very low duration improves the potential for appreciation over 2 years compared to savings accounts and CDs.  Such a fund does have some risk of losing money, but the risk of losing a lot of money is small.  And the amount of risk you take (the quality of the bonds) correlates to your potential returns.

I'd be most worried about interest rate risk rather than credit quality risk, so I'd consider a defined maturity bond fund with lower quality (and higher interest) bonds.  This may be more risk than you're willing to take, but is an option.

[Bea]

Thanks for your help! I will look into some bond options though I remain cautious on that front.  CD's that I've found pay the same or lower rates then I'm getting in a savings account. If interest rates go up I don't want to be locked into a CD with a low rate. Maybe I should just stick with what I've got but it feels like such a waste since I'm not even sure when buying a house is going to become an option!

[The Financial Lexicon]

If you think the odds are greatest you will buy a house in two to three years, and you value principal protection higher than maintaining purchasing power, I would stick with what you already have.  If you can hold out for five years, you could consider defined-maturity corporate bond ETFs.  Three possibilities include the iSharesBond 2018 Corporate Term ETF (ticker IBDB), yielding 1.67%; the Guggenheim BulletShares 2017 Corporate Bond ETF (ticker BSCH), yielding 2.00%, or the Guggenheim BulletShares 2018 Corporate Bond ETF (ticker BSCI), yielding 2.37%.

There are, of course, other bond market opportunities (individual bonds and funds) that would be much more speculative but certainly could end up working out well if you can hold out five years before buying a house.

Regards,

The Financial Lexicon
Author of Income Investing Insider
http://get.incomeinvestinginsider.com/