Author Topic: Safe way to earn interest long term?  (Read 4949 times)

Johnez

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Safe way to earn interest long term?
« on: May 01, 2016, 02:41:13 PM »
Situation-starting from zero I wish to save between 60-70 thousand dollars in 6-8 years in order to purchase a home. I've researched the high interest savings accounts, and the most I can save in these things is between $10,000 and $15,000. With the direct deposit and debit transaction requirements one or two of these accounts is doable, however that only covers half my savings.

My question-what available instruments are there for storing my money that can keep pace/beat inflation (2-3%) and is totally safe? I see CDs available, and I don't have much problem locking the money away, but I don't have much money to open one, and would prefer to drip into accounts every week. Anything worth trying out there?

AH013

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Re: Safe way to earn interest long term?
« Reply #1 on: May 02, 2016, 07:49:59 AM »
What you're looking for unfortunately doesn't exist.  Mortgage rates are between 2.5-3.5%.  There is no way a bank is going to take your money, pay you over 3% for it, and lend it out for 2.5%, all while 100% guaranteeing your money for you while simultaneously taking a non-recourse risk and locking in these low interest rate returns for themselves for the next 15-30 years.

You could do snowballing CDs.  Typically shorter duration CDs have lower minimums than longer duration CDs.  So for example you might be able to get a 3M CD with a $1,000 investment, then in 3 months when you've got another $1k to invest do a 6M $2,000 CD.  Then when that matures do a 1Y $3,000 CD.  Repeat.

Honestly though, a lot of headache for not a lot of gain.  You sacrifice a lot of liquidity to eek out an extra few bps of interest rates.  There are HY savings accounts paying an intro 1.6%.  APY afterwards is 1.1%.
http://www.bankrate.com/funnel/savings/savings-results.aspx?ic_id=home_investing_bank-rates_globalnav

To get higher than 1.6%, you need to lock up your money in a CD for 3 years
https://www.nerdwallet.com/rates/cds/best-cd-rates/

If you're seeing accounts that require direct deposit / debit transactions etc, don't forget -- moving money in-between accounts often counts as a direct deposit.  But DIME bank, near the top of the APY list on that bankrate link, 1.1% APY up to $500k.  You don't need any more accounts than that for your coverage needs.

Huskie87

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Re: Safe way to earn interest long term?
« Reply #2 on: May 02, 2016, 08:33:07 AM »
I would recommend a muni bond fund for this savings goal.  I would find a transaction free ETF that your brokerage offers.  I use Fidelity, so MUB would be the transaction free version.  If you're going to slowly invest over time, those $8 transaction fees will add up.

Muni bonds should get you 2-3% per year over your time frame.  While they carry interest rate risk, I wouldn't be overly concerned about this.  This type of fund will produce tax-free interest payments and this type of fund will do well in a volatile investment environment so you don't have to worry about loosing a big chunk of your principal.  MUB was up about 1% in 2008 for example.

lthenderson

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Re: Safe way to earn interest long term?
« Reply #3 on: May 02, 2016, 08:41:44 AM »
TIPS - Treasury Inflation Protected Securities

AH013

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Re: Safe way to earn interest long term?
« Reply #4 on: May 02, 2016, 10:34:26 AM »
I would recommend a muni bond fund for this savings goal.  I would find a transaction free ETF that your brokerage offers.  I use Fidelity, so MUB would be the transaction free version.  If you're going to slowly invest over time, those $8 transaction fees will add up.

Muni bonds should get you 2-3% per year over your time frame.  While they carry interest rate risk, I wouldn't be overly concerned about this.  This type of fund will produce tax-free interest payments and this type of fund will do well in a volatile investment environment so you don't have to worry about loosing a big chunk of your principal.  MUB was up about 1% in 2008 for example.

Considering Puerto Rico just announced their intention to default on their municipal bond debt, munis are not without default risk in addition to the stated interest rate risk.

TIPS - Treasury Inflation Protected Securities

Minimum tie-up is 5 years (lowest term for a TIP bond).  Also, I'm not one to be a conspiracy theorist, but quite frankly I think CPI is complete and utter BS.  CPI would suggest that inflation has averaged 1.77% over the past 10 years.  Feel like you're only paying 19% more for stuff now than you did in 2006?  I sure don't.  Rents in my area alone have increased an average of 5% a year, food around the same.  I guess when you aggregate the entire US, maybe.  But you're biasing downwards by looking at urban areas that are in a downward spiral (Detroit, etc.) so there is deflation in certain undesirable areas (crime, lack of jobs, etc.) countering higher than stated inflation in the areas people actually want to live in (low crime, high employment, etc.).  If I collect 10 people, 9 of whom don't have a nickel to their name and 1 dude who has $1B and say "the average wealth of these people is over $100M" technically that's accurate but highly misleading -- I think CPI does the same.

frugaliknowit

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Re: Safe way to earn interest long term?
« Reply #5 on: May 02, 2016, 11:30:27 AM »
I think Husky87 was referring to funds carrying "HIGH GRADE" municipals (which would exclude such places like Puerto Rico, Il, NJ, etc.).

I have my "car fund" in a balanced fund carrying half high grade municipals and half high grade stocks.  The two are highly uncorrelated.  While it's possible for it to drop in any one given year, I can't afford to leave the funds in a 1% savings account.  Let me clarify that my "car fund" is for IF I ever need a car (currently don't need one, but want to be able to buy one in a pinch without debt if circumstances change). 
« Last Edit: May 02, 2016, 11:33:27 AM by frugaliknowit »

Johnez

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Re: Safe way to earn interest long term?
« Reply #6 on: May 02, 2016, 03:58:45 PM »
I would recommend a muni bond fund for this savings goal.  I would find a transaction free ETF that your brokerage offers.  I use Fidelity, so MUB would be the transaction free version.  If you're going to slowly invest over time, those $8 transaction fees will add up.

Muni bonds should get you 2-3% per year over your time frame.  While they carry interest rate risk, I wouldn't be overly concerned about this.  This type of fund will produce tax-free interest payments and this type of fund will do well in a volatile investment environment so you don't have to worry about loosing a big chunk of your principal.  MUB was up about 1% in 2008 for example.

Thank you very much!

Just checked out MUB, looks like a decent safer option. Though there is risk, this is appears to be the best middle road option between higher risk/volatility stocks and high yield savings accounts that still cannot meet inflation.

The buy/ask spread between MUB etf at Fidelity is a point, the CMT etf however is 20 points (109/129) anyone know what's up with that? Seems crazy to take such a hit. Being Californian, I was hoping to get into the CMT.

These bond funds ETFs being commission free is awesome.  Thanks for the help guys.
« Last Edit: May 02, 2016, 04:03:04 PM by Johnez »

dandarc

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Re: Safe way to earn interest long term?
« Reply #7 on: May 02, 2016, 04:11:49 PM »
Why not VCAIX?  Tax treatment you want in California and a lower ER.

dandarc

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Re: Safe way to earn interest long term?
« Reply #8 on: May 02, 2016, 04:15:57 PM »
And short answer about CMF trading at a significant premium, and with a larger bid-ask spread is "lack of liquidity".

Johnez

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Re: Safe way to earn interest long term?
« Reply #9 on: May 02, 2016, 05:46:25 PM »
Why not VCAIX?  Tax treatment you want in California and a lower ER.

Hmmmm, might have to open a Vanguard acct just for this. Which would be a good thing.

Huskie87

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Re: Safe way to earn interest long term?
« Reply #10 on: May 03, 2016, 11:53:44 AM »
Consider how frequently you'll be making purchases and then multiply that by $8 to get the total transaction costs over the full time frame.  Monthly buys for 8 years will be 96*$8= $768 in transaction charges. 

As for default risk, yes it exists but only in very small quantities.  Puerto Rican debt is largely owned by hedge funds now as it has gone beyond high yield junk.  As you can see, MUB is higher today than it was two days ago, before the announcement of the default.

If you have a conservative risk tolerance, are investing in a non-qualified account and are looking to make frequent transactions...MUB is going to be hard to beat.