I'm almost debt free and I'm going to be saving tons of cash every month with a goal of hitting no less than $80K in savings by June 2014. My current savings account (like most these days) pays next to nothing in interest. CD's the same. I want to be able to access the money in June 2014 as a house down payment, money to travel with my family, or money to assist in any business opportunities that I want to exploit. Bottom line: I need to be able to access it then.
Should I just get the best interest savings account or is there another choice that makes sense in my situation? Thanks MM'ers!
I check CD rates at the usual three suspects: USAA, Navy Federal Credit Union, and Pentagon Federal Credit Union. For those MMM readers who haven't used these institutions before the first is open to everyone (for investments) while the last two are open to servicemembers, veterans, and DoD civilians.
I think the root question you're asking could be rephrased as "Where's a safe place to chase yield?" The answer: there isn't one. When you're saving for a down payment, your mandate for liquidity and preservation of principal outweighs the goal of yield. But when you actually buy the house with that cash, you'll gain all sorts of rewards. You'll have:
- paid off a bunch of debt so your FICO scores should be higher and you'll get a lower interest rate.
- a bigger down payment so your mortgage has a lower loan-to-value ratio and you'll get a lower interest rate.
- enough equity in the home that you won't have to pay for PMI.
- enough cash to be sure to qualify for a mortgage and get the seller's signature on your offer, while other buyers are still scrambling for financing.
- enough cash in savings after buying the house to be able to self-insure for some home damage via high deductibles.
- enough cash in savings after buying the house that you'll sleep soundly at night.
If you guesstimate the value of those factors in your June 2014 purchase, I think the APY becomes quite satisfactory.
On one of Buffett's shareholder letters, he mentioned a 1930s relative who advised his progeny to keep $1000 cash in their safe deposit box for urgent spending needs. (I get the impression that the "need" was buying for the business or an emergency home repair.) Today that's roughly the equivalent of keeping $13K in a safe deposit box. Seems a little extreme to me, but in a low-inflation environment for a few years it won't hurt too badly. In the 1930s when banks were closing left & right it was a great liquidity idea.
I don't do lending club type stuff because I believe the marketplace for loans is pretty efficient in America. If the return was relatively safe and as high as 8-10% then the market would already be providing that service.
I wonder about that. The marketplace might be efficient but it's also heavily regulated. In addition, fair lending practices mean that they can't arbitrarily turn away customers who are able to properly fill out a loan application and meet the qualifications.
Meanwhile at P2P lending businesses, the lenders are assumed to be grownups about the risks they're assuming. They're also permitted to choose where, when, & how much to participate.
As always, my issue is being properly compensated for outsize risk (which seems about right) and doing it in volume (which seems like too much work). Hypothetically you'd need to put about 10-20% of your investment portfolio into an asset to move the needle on returns, and that seems like a lot of money to properly push through the P2P pipe. For that type of asset yielding 7% I'd rather go with church bonds. You're diversified much more quickly and the borrowers feel a much stronger obligation to repay.
