Author Topic: Growing Cash-- Options?  (Read 10069 times)

mike@livetheneweconomy

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Growing Cash-- Options?
« on: September 01, 2012, 05:35:23 AM »
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.

I would put it into Lending Club or Prosper loans, but won't get it back from there for a minimum of three years (well, at least fully). 

Should I just get the best interest savings account or is there another choice that makes sense in my situation?  Thanks MM'ers!

Shandi76

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Re: Growing Cash-- Options?
« Reply #1 on: September 01, 2012, 06:23:48 AM »
Do Prosper or Lending Club offer a Rapid Return facility?

I'm in the UK and loan out money through ZOPA. They have a Rapid Return facility whereby you can sell on your loans to new investors, and ZOPA charge you a 1% fee, so you still get most of the benefit of the higher interest rates. The only problem is you can't sell on loans where the borrower has even been late with a payment, so if you will need all the cash back immediately then it's probably not an option.

atelierk

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Re: Growing Cash-- Options?
« Reply #2 on: September 01, 2012, 06:36:37 AM »
I keep most of my cash in ING. Interest rate for August was 0.80%. Crappy, I know but not as crappy as a brick-and-mortar. When I signed up with ING in January of 2008 they were paying 4%. It's been dropping ever since.

mike@livetheneweconomy

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Re: Growing Cash-- Options?
« Reply #3 on: September 01, 2012, 08:09:05 AM »
Shandi76, LC does have a marketplace where you can sell your notes, but the uncertainty of having to sell them makes me nervous.  An average LC return of 10% sure makes it worth considering though.

Atelierk, yeah I might just find a savings account that is better, but even the best are so low that it just seems not worth the effort.

grantmeaname

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Re: Growing Cash-- Options?
« Reply #4 on: September 01, 2012, 08:18:48 AM »
I don't know if it's safe to say the average return is 10%. Many here had very mixed things to say about it, and it seems like you're taking on a pretty sizable risk of not getting your principal returned in exchange for what you're getting. If you're open to that much risk, why not just throw it in a Vanguard account?

I've never used it, YMMV, etc. Just thought I'd chime in anyway.

arebelspy

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Re: Growing Cash-- Options?
« Reply #5 on: September 01, 2012, 08:20:27 AM »
I don't care for lending club at all.  But I know you and BraveNewLife are all about it right now, so good luck.  Try to keep 5% or less of your portfolio in there, IMO.

Smarty Pig has 1% on cash, a little better than ING.  Check one year CD rates.
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Another Reader

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Re: Growing Cash-- Options?
« Reply #6 on: September 01, 2012, 08:29:30 AM »
TIAA-CREF has a new bank that has a high yield savings account rate of 1.25 percent.  The website is TIAAdirect.org and then click on High Yield Savings under Bank.  These promotional rates don't last forever. but the rate is not labeled promotional and has been in place since the bamk opened to the general public.

James

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Re: Growing Cash-- Options?
« Reply #7 on: September 01, 2012, 08:46:58 AM »
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 use ING for my routine savings, I don't consider it a real "return", but it beats a poke in the eye with a sharp stick.  For less than two year time frame I'd just go with cash at ING.

arebelspy

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Re: Growing Cash-- Options?
« Reply #8 on: September 01, 2012, 09:54:20 AM »
Recent cash thread on the e-r.org forums:
www.early-retirement.org/forums/f28/where-do-you-park-ca-h-62850.html

Most interesting answers (to me):
Quote
VCSH up 4.4% YTD.
Quote
VAIPX 5.19% YTD. Our 6-figure e-fund sits there for now. A bit riskier than VCSH and certainly not everyone's mama.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

mike@livetheneweconomy

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Re: Growing Cash-- Options?
« Reply #9 on: September 01, 2012, 10:23:01 AM »
LC stats seem to support those returns.  Other than the lack of liquidity, I don't see the downside.

http://www.lendingclub.com/public/diversification.action

Thanks for all the other info!

arebelspy

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Re: Growing Cash-- Options?
« Reply #10 on: September 01, 2012, 10:40:00 AM »
I disagree.

I have a lack of faith in the company and stability of offerings.

FWIW, so it doesn't seem like I'm talking about something I have no experience with: I have invested 50k+ in P2P loans, with a positive return.

If you want to discuss more, one of the lending club threads, or a new one, would make more sense.

YMMV, and good luck, like I said.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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mike@livetheneweconomy

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Re: Growing Cash-- Options?
« Reply #11 on: September 01, 2012, 11:04:46 AM »
Fair enough. I'm just trying to figure out why. I'll find those threads.

MacGyverIt

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Re: Growing Cash-- Options?
« Reply #12 on: September 03, 2012, 08:26:24 AM »

mike@livetheneweconomy

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Re: Growing Cash-- Options?
« Reply #13 on: September 03, 2012, 08:53:53 AM »
Check one year CD rates.
Google Adviser has a nice site for aggregated CD rates:

https://www.google.com/advisor/uscd?b=E&kw=cd+rates&q=cd+rates&s=1

Thanks!  That is a great site.  I thought CDs weren't really an option, but some of those choices aren't too bad I think!  (Going to read the fine print.)

arebelspy

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Re: Growing Cash-- Options?
« Reply #14 on: September 03, 2012, 09:29:07 AM »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Nords

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Re: Growing Cash-- Options?
« Reply #15 on: September 03, 2012, 04:58:14 PM »
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.

MooreBonds

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Re: Growing Cash-- Options?
« Reply #16 on: September 03, 2012, 08:56:59 PM »
IUSAA, 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. 

Just a small money mustache community public service announcement correction:

Pentagon Federal is open to ANYONE who first pays a one-time $20 fee to join the National Military Family Association. Definitely worth it just for their credit card that gives 5% 'points' (redeemable 100 points = $1), or essentially 5% cash back on all gas purchases, and 3% cash back on all grocery store purchases, without limit, 24/7.

But also damn good mortgage rates (I have a 5/5 ARM with them).

jpo

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Re: Growing Cash-- Options?
« Reply #17 on: September 04, 2012, 01:44:39 PM »
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.
Very much this.

I am also saving for a down payment. I have a regular cash savings account that I regularly contribute to and CDs that I've timed to coincide with my purchase.

Sylly

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Re: Growing Cash-- Options?
« Reply #18 on: September 05, 2012, 11:57:57 AM »

Just a small money mustache community public service announcement correction:

Pentagon Federal is open to ANYONE who first pays a one-time $20 fee to join the National Military Family Association. Definitely worth it just for their credit card that gives 5% 'points' (redeemable 100 points = $1), or essentially 5% cash back on all gas purchases, and 3% cash back on all grocery store purchases, without limit, 24/7.

But also damn good mortgage rates (I have a 5/5 ARM with them).

Thanks for the tip. I went to check them out, and found that you also have the option of joining Voices for America's Troops for a one-time one year membership of $15 to qualify for PenFed.

Unfortunately their 1-yr CD (0.90%) is still not high enough for me to pull the trigger and shift my cash (also for future/soon-ish down payment) out of ING's 0.80%.

mike@livetheneweconomy

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Re: Growing Cash-- Options?
« Reply #19 on: September 05, 2012, 03:18:17 PM »
I just wanted to say thanks for all the thoughtful replies.  So, thanks!

sol

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Re: Growing Cash-- Options?
« Reply #20 on: September 05, 2012, 05:29:14 PM »
Most interesting answers (to me):
Quote
VCSH up 4.4% YTD.
Quote
VAIPX 5.19% YTD. Our 6-figure e-fund sits there for now. A bit riskier than VCSH and certainly not everyone's mama.

Aside from keeping a few thousand in operating expenses in a checking account, this is has been our choice for short term cash reserves, too.

VAIPX is the admiral shares version of VIPSX, and is inflation-protected treasury bonds, basically like a mutual fund for TIPS.

We also use VFIIX instead of VCSH.  VCSH is a ETF of short term corporate bonds, not a bad bet, but it only has a short track record and is technically invested in pretty crappy credit ratings.  VFIIX, on the other hand, is 100% government insured GNMA backed mortgage bonds and has a better ROI over a longer period.

We're split between these two funds and have together averaged about 8% over the past few years.  If we had held the same allocation through the financial crash in 2008, we would have lost about 1% of our value.  I think that speaks well to the real risks involved in this kind of investing, and it helps me sleep at night to think that even a total meltdown will only mean a tiny decline.

Frankly, with >5% returns available through so many corporate and government funds these days, I'm not sure why anyone would park their short term money anywhere else.  CDs offer lower rates and lock it up for longer.  Checking and savings account offer terrible rates, but I guess you theoretically can get your money back in an hour instead of three days.

I'm sure there are downside risks I haven't recognized, so if anyone here would like to offer reasons why these bond funds are less than ideal for short term cash reserves, I'm all ears.


ShavinItForLater

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Re: Growing Cash-- Options?
« Reply #21 on: September 05, 2012, 11:40:53 PM »
Frankly, with >5% returns available through so many corporate and government funds these days, I'm not sure why anyone would park their short term money anywhere else.  CDs offer lower rates and lock it up for longer.  Checking and savings account offer terrible rates, but I guess you theoretically can get your money back in an hour instead of three days.

I'm sure there are downside risks I haven't recognized, so if anyone here would like to offer reasons why these bond funds are less than ideal for short term cash reserves, I'm all ears.

I believe the primary downside risks to these conservative bond investments are:

1) We have been in an artificially falling interest rate environment for several years.  When that trend reverses as it inevitably must, lower interest rate bonds will go down in value.  One could also reasonably argue that the lowering trend has hit bottom, as interest rates can't really drop much further.

2) Many investors have been in a flight to quality, looking for the safest harbor during all this financial uncertainty--these government and high quality corporate bonds have been driven up in price due to their "safety".  Ironically this reduces their safety, as when other investment choices come back into favor, these bonds are likely to lose value.

You can't predict when or how suddenly these trends will reverse.  If the Fed suddenly announces one day that they are no longer willing to keep interest rates down, there could be an instantaneous and large drop in the value of these bonds.  If the collective masses decided that the clouds have cleared and stocks are now the investment du jour, you could see a mass exodus from these bonds.

If you can afford to take those risks then the reward may far outweigh it--but if you cannot afford to take any risk to losing principal value, and need the money in the short term--let's say you're stashing cash to pay for this semester's tuition bill and have saved just enough to cover it--then I think it would not be a wise choice.