Author Topic: Too much cash sitting around earning nothing- How to Keep up with inflation?  (Read 4225 times)

April

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Hello:

First, a bit about me to give this context.  I'm 28. Debt free.  Own my home and car (2008 Toyota Prius) free and clear.  Have a 401k with approx $80k in it and have $50k sitting in the bank earning just 1.25% interest (which requires that I make a certain # of transactions each month, etc. to qualify for the rate).

Even on months when I make all required transactions to earn 1.25% on the $50k I can't help but think I need to invest it so I can at least keep up with inflation, which I think currently is 2-3%.  I'm fairly risk adverse so i'm hesitant to put it in the stock market, but I'm hoping maybe someone can help me.  If I could earn even a consistent 4-5% that would be amazing.

Apologies if this has been asked already.  I did a search but didn't see a similar situation.

Thanks!

April

waltworks

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There is no return without risk. You could do gov't bonds or TIPS if inflation is your main concern and you're very risk averse. I'd think hard about just dumping a set amount every month into some form of index stock/bond fund if you don't need the money anytime soon. Over the course of 10+ years you are very, very likely to do well.

-W

Fuzzy Buttons

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OK, first off - you're doing awesome.  I wish I'd had my s%$! that together back when I was 28.  Well done!

Second, the question "Where should I put this money?" always begs the question "What is that money for?".  Money by itself is just numbers.  Only when you assign it a purpose does it have meaning, and only then do you know the time horizon you have.

Is this an emergency fund?  Short term assets, and you'll have to accept lower returns.  But that's fine, because it's not for growth.

Is this your stash?  Then it's long term.  Put that sucker to work in the stock market!

A consistent 2-3% over inflation with no risk?  No investment I know of.  Maybe unicorn futures?  :)

arebelspy

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Are you planning to ever FIRE, or are you going to work the rest of your life?

Assuming you're going to ER before age 70, you'll have to get over your fear of the stock market.  It is literally the best way to not only beat inflation, but build a healthy nest egg.

The best way to get over that fear is by educating yourself and understanding what the stock market really is.  (It's not gambling, though it can be used like that.)

I'd suggest you check out Jim Collins' excellent stock series: http://jlcollinsnh.com/stock-series/

It's long, but tackle it a little bit at a time.

The time you put in now to learn about this stuff can make you way more money than you'll ever actually earn in a job.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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ioseftavi

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I was going to type out a long, thoughtful response...but Arebelspy beat me to it.

You will do better than 4-5% in the stock market, on average.  7-9%, nominally (before inflation) is pretty darned likely over the long haul.  If inflation is around where it's been the past few decades, you'll probably earn a real (subtracting inflation) return of 4-5%, plus dividends to boot.  But there will be some MAJOR bad periods in here - equities will drop 35% in a given year.  They'll come back, but man - that one year will SUCK.

That's how it is.  Volatility is the price of these great returns.  It will be very, very difficult for you to reach F/I if you don't learn to stomach stock market bumpiness.  If you can't take a short term (1-3 years) quotational loss of 35%-40%, lower your percentage in stocks until you get to a number that doesn't make your stomach hurt (say, 50% stocks, 50% bonds - now a bad period might be a loss of 17% - 20% ish), and do that instead.
« Last Edit: September 09, 2014, 03:23:23 PM by ioseftavi »

April

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OK, first off - you're doing awesome.  I wish I'd had my s%$! that together back when I was 28.  Well done!

Second, the question "Where should I put this money?" always begs the question "What is that money for?".  Money by itself is just numbers.  Only when you assign it a purpose does it have meaning, and only then do you know the time horizon you have.

Is this an emergency fund?  Short term assets, and you'll have to accept lower returns.  But that's fine, because it's not for growth.

Is this your stash?  Then it's long term.  Put that sucker to work in the stock market!

A consistent 2-3% over inflation with no risk?  No investment I know of.  Maybe unicorn futures?  :)

In terms of what is this money for, it will likely be for a couple of things.  I plan to start a family within the coming years and it will be money that will allow me to take time off work either in whole or to reduce hours to part-time for the first year.  After that, the remainder will likely be divided into a $10k emergency fund and then the rest can go into more the of Long Term Stash category. 

My issue with the stock market is that I want the money to be relatively risk free and liquid for potential family beginning needs over the next couple years.  I guess my primary issue is that I remember all too well when getting 5% at the bank in a high yield account was really very realistic (within the last 5 years) so it seems that should be something that may come back into play in the future without having to deal with potentially very large dips in the stock market for such a short term investment period.

Thank you also for the other replies since this post as well.  I'm listening to each contribution carefully and taking it all in!  I very much value each advice!!

ender

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There's no such thing as free money.

Better returns comes with either more work or more risk.

Dee18

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If you want it guaranteed, you could keep checking bankrate.com for cd rates.  I think they are quite low across the board now, but in Jan 2014 I was able to get 3% at PenFed Credit Union, which I joined by making a $15 donation to a veterans fund.

4alpacas

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Quote
In terms of what is this money for, it will likely be for a couple of things.  I plan to start a family within the coming years and it will be money that will allow me to take time off work either in whole or to reduce hours to part-time for the first year.  After that, the remainder will likely be divided into a $10k emergency fund and then the rest can go into more the of Long Term Stash category.
What time frame are you thinking?  If you're looking in the next 1-2 years, then you should leave it.  If you're looking out longer 5-10 years, I would put the money (except for a 6 month EF) into index funds. 

Fuzzy Buttons

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In terms of what is this money for, it will likely be for a couple of things.  I plan to start a family within the coming years and it will be money that will allow me to take time off work either in whole or to reduce hours to part-time for the first year.  After that, the remainder will likely be divided into a $10k emergency fund and then the rest can go into more the of Long Term Stash category. 

My issue with the stock market is that I want the money to be relatively risk free and liquid for potential family beginning needs over the next couple years.  I guess my primary issue is that I remember all too well when getting 5% at the bank in a high yield account was really very realistic (within the last 5 years) so it seems that should be something that may come back into play in the future without having to deal with potentially very large dips in the stock market for such a short term investment period.

Thank you also for the other replies since this post as well.  I'm listening to each contribution carefully and taking it all in!  I very much value each advice!!

OK, so 10k is the emergency fund.  That will be there now, when you're taking time out to start a family, and afterwards as well.  So best think of that as a separate amount.  It's fine where it is right now.  No need to worry about returns, it's only job is to be there when you need it.  You're exposed to inflation risk there, but you get around that by checking it against your spending from time to time and adding to it if needed.

So you're left with 40k, and it sounds like you've got a 3-5 year horizon, maybe a bit less?  The question is, how much money do you need to be out of work for a year, with your current spending plus a new baby plus possibly health insurance?  You'll know the amount, but let's assume it's the whole 40k.  You don't want to risk going below that.

But you've also got the money you can put away between now and then.  With 50k after tax already built up, and the house paid off, I'm assuming you'll have more coming in.  Let's assume 10k per year.  If that's the case, then worst-case you could lose 10k a year and still be able to meet your goal.  No sense risking anything near that of course, but my point is you have more than see in your balance.  Adjust that by how secure you are in your job and earnings, of course.

So, with such a short time horizon you wouldn't want to put it all in stock, of course.  You could easily see a 50% drop in a stock index in that time, or more.  But that doesn't mean you can't put some in stock. 

I'd take a look at Vanguard's LifeStrategy Income Fund (VASIX).  This is a low cost index fund (ER 0.14%) made up of 80% bond indexes and 20% stock indexes.  It's purpose is for investing in 3-5 year horizons.  Trailing returns put it around 5%.  You might end up with a loss as well, but it's unlikely to be more than a couple of percent*.  And using the assumptions here, that wouldn't come close to endangering your goals.

If you want to completely avoid loss, you could invest in individual CDs.  Since you'd be buying them yourself and holding them to term, you could be sure of your return on each.  It wouldn't be much, but it would be better than the 1.25%.  But it's more work and management to keep the CDs started and re-invested.  For my money, I'd just go with the Vanguard fund.  Think of it as a higher return savings account that sometimes loses a bit of money, but not a lot.  Then as you get closer to starting that family, start pulling it out, or just let the incoming savings from your job build up.

* UPDATE - OK, looking over the historical returns for that fund, I see that in 2008, during the biggest crisis in recent memory, it dropped 12% in a month.  So, "a couple" isn't a good thing for me to say.  It's still unlikely that another 2008 will happen in the next 3-5 years, but you should be able to handle it if it does.  And using these assumptions, you would be.  For a compromise between this risk and the CDs, you could go directly to Vanguard's Total Bond Market (VBTLX).  That's the main holding of the LifeStrategy Income fund, you'd just be leaving out the stocks and international exposure.  Drops the ER to 0.08%, too because it's an "Admiralty" share fund with a $10k minimum.
« Last Edit: September 09, 2014, 06:19:52 PM by FuzzyButtons »

Cwadda

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Re: Too much cash sitting around earning nothing- How to Keep up with inflation?
« Reply #10 on: September 09, 2014, 07:03:56 PM »
Couldn't have put it any better than A Rebel Spy (arebelspy).

Depending on your income you're going to want to max an IRA account this year, next, and hopefully many more years. Tax-deferred growth is awesome.