Author Topic: Where to park short term savings in current climate  (Read 422 times)

sss

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Where to park short term savings in current climate
« on: March 17, 2017, 06:49:43 AM »
Hi,

Does anyone have advice on where to park short term taxable cash in the current climate? I have my 401k maxed, and a good home equity line of credit to serve as an emergency fund. Trying to figure out where I could put surplus cash. MMM wrote a ciouple years ago about corporate bond funds. However, in the current climate with interest rates rising this may not be the ideal spot. If the market weren't at such a peak I'd consider equity funds, like putting more into our Wealthfront taxable account, but there seems to be some substantial near term risk eight years in to a bull market. I read warnings about both investment grade and non investment grade corporate bonds given the interest rate situation.

Scott


zombiehunter

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Re: Where to park short term savings in current climate
« Reply #2 on: March 17, 2017, 08:39:12 AM »
I too struggle with this question. My current taxable savings is planned to be used as a down payment on a house in the next 3-5 years. Perhaps it is somewhat risky, but I would prefer to inevest rather than just build savings at 0.75% return.

What I have been doing -- and I would appreciate some feed back on this -- is to target a few Vanguard ETFs:

-- High yield dividend (VYM). 1) Although it's not completely ideal from a tax perspective, as dividends would be completely sheltered in tax advantaged account, it's still preferable to pay cap gains than full income tax as you would on CapOne .75%, which effectively knocks that down to .5%. In comparison the Div ETF is paying about 3.4% yield. (Although Does it make sense to compare the Div yield to the savings rate? Perhaps not as it could be argued the div is not creating value but the savings yield is new money in your pocket). 2) holding the ETF is diversified in about 300 companies, primary blue chip, and not too disimilar to the SP 500. So you have diversified equities, although you do have the market risk which as you point out may be near a peak. Nonetheless returns have been great recently and you have the chance for appreciation. As a whole, I think this fund is well suited for medium term savings when balanced with other holdings.

-- International ETF (VXUS). This is perhaps more risky than the Div fund, but it provides some diversification away from US market risk. It also provides a minimal tax advantage due to the deduction on foreign taxes. I am aiming for 80/20 balance as against the Div fund.

-- Tax Advantaged Bond (vteb). Since this is a taxable account I don't want to hold the BND fund and pay full income tax. At my bracket this is slightly better. And it provides some balance against equities. However I have held this fund for a bit less than a year and have lost a fair bit of capital  (5%) due to interest rate increases and brexit. I would appreciate some opinions on whether this is Better or worse to hold than for example BND or other bond funds such as short term or intermediate term. As I get closer to the 3-5 year end game I may shift more and more to the shorter term bonds. But I don't like frequent trading as there are tax consequences to locking in the gain or the loss in the taxable account, unless I am trading intentionally for that consequence and the preferred holding.

Perhaps there is some upside potential if any infrastructure plan materializes and that boosts the muni market, but that is entirely speculation.

I also hold a tax advanced state bond fund but I have also lost money on that. Thought I was being clever by avoiding state taxes but am down about 5% just as I am with VTEB. Perhaps that is taking the wrong POV however as it could have been equities down 5% and in that scenario in theory the bonds would be doing better.

-- Cash. Over time as I mentioned I will shift more to savings and shorter term bond holdings, perhaps short term gov and corp bond ETFs.

Nonetheless I feel stuck between a rock and hard place and another hard place. Don't want to sit on a growing ball of cash at crappy savings rates (it will take quite a while before the two most recent interest rate hikes make any difference to my .75% CapOne rate. Sigh. I remember when It was ING paying 5%.). So I put some in equities with the Div fund and have rode the wave but am concerned we are near the top. (Queue the market prediction caution.  I am fully aware I don't have a cristal ball and that this feeling is just emotion.) the other hard place is that bonds don't feel any safer -- my understanding is that if interest rates continue to rise gradually, with perpaps another hike later in 2017, the bond ETFs are unlikely to appreciate and are more likely to continue to lose value, and the income produced will not offset the capital losses due to rate hikes, even if the equities plateau or recess.  Perhaps this points to only short term bond holdings for this savings timeline.

So my allocation for this medium term savings goal is:
33% -- Div ETF / equities split 75/25 Div / International
33% -- Tax adv Bond ETFs, shifting to short term Gov and Corp ETFs
33% -- Cash or short term Gov ETFs, although there's not a huge difference in .75% to 1%.

Finally some other ideas are 'high yield' savings or checking. For example Netspend had a 5% savings account, but it was capped at $5,000 and was nuked to just $1000 cap. There are other options but require probably more trouble than they are worth to get a 3% return that is fully taxable at your marginal rate. I have also been doing some checking account Bonus churning. Last year this brought in about $1,000 in taxable 1099 income. Should be completely safe as FDIC insured cash but brings a better return than regular  in exchange for the labor and research/maintenance required.

Hoping the gurus around here have some advice for those in accumulation phase who will need the funds in the next few years. thanks in advance.

NorthernBlitz

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Re: Where to park short term savings in current climate
« Reply #3 on: March 17, 2017, 08:47:13 AM »
Finally some other ideas are 'high yield' savings or checking. For example Netspend had a 5% savings account, but it was capped at $5,000 and was nuked to just $1000 cap. There are other options but require probably more trouble than they are worth to get a 3% return that is fully taxable at your marginal rate. I have also been doing some checking account Bonus churning. Last year this brought in about $1,000 in taxable 1099 income. Should be completely safe as FDIC insured cash but brings a better return than regular  in exchange for the labor and research/maintenance required.

Hoping the gurus around here have some advice for those in accumulation phase who will need the funds in the next few years. thanks in advance.

This is what we do with our cash. I'm not comfortable with volatility in my cash because I use it to pay our property taxes (in Sept and Jan). So, I content myself with online savings accounts and sign up bonuses.

VoteCthulu

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Re: Where to park short term savings in current climate
« Reply #4 on: March 17, 2017, 08:55:52 AM »
For me, cash needed in the next year is cash, everything else is invested as normal (mostly equities). I wouldn't feel comfortable spending a lot for anything (non-emergency) in a down market anyway, but I already own a house.

zombiehunter

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Re: Where to park short term savings in current climate
« Reply #5 on: March 17, 2017, 08:57:04 AM »
Finally some other ideas are 'high yield' savings or checking. For example Netspend had a 5% savings account, but it was capped at $5,000 and was nuked to just $1000 cap. There are other options but require probably more trouble than they are worth to get a 3% return that is fully taxable at your marginal rate. I have also been doing some checking account Bonus churning. Last year this brought in about $1,000 in taxable 1099 income. Should be completely safe as FDIC insured cash but brings a better return than regular  in exchange for the labor and research/maintenance required.

Hoping the gurus around here have some advice for those in accumulation phase who will need the funds in the next few years. thanks in advance.

This is what we do with our cash. I'm not comfortable with volatility in my cash because I use it to pay our property taxes (in Sept and Jan). So, I content myself with online savings accounts and sign up bonuses.

I'd say that is a short to very short term time lin, as it would be a pain to have to cover taxes when due if you are short due to a market drop. However for a medium term goal, there is some time to shift gradually to more cash as the event draws near, plus the option to postpone the purchase if we so choose rather than be forced to pay.

Also if you churn accounts, you should be aware it is not in heard of to get funds locked up for a while. For example if you ACH a large amount in order to hit a direct deposit requirement, one of the banks could flag you for review as it triggers AML / KYC alarms. So if you really need the cash in a month or two, it might be safer in Capone or Ally etc. Although perhaps you were referring to high yield accounts in which case carry on!