Where to Stash 25k for Future Housing Purchase?

[The Mobile Mustachian]

Hello everyone,

I'm setting aside 25k from the rest of our investments that I would like to keep liquid enough to access within 2 weeks for a future house purchase. I would like the investment to preserve the cash value with minimal fluctuation (2 to 3% fluctuation is fine). My target is something that earns 3% or more. The money is currently in a savings account earning .75% and I am ready for a change :)

What investment would you recommend?

Thank you for your advice!

[MgoSam]

You might get a little more money without sacrificing much (though it is not risk-less) by using Vanguard's Money Market
https://personal.vanguard.com/us/funds/snapshot?FundId=0030&FundIntExt=INT

That said, I am in a similar position as you but I am keeping almost all my money in Vanguard funds, keeping only money in the bank for occasional expenses. When I find a property worth buying, I plan on pulling money from Vanguard for the down-payment, and then lower my weekly contributions in order to make mortgage payments. Of course there is a chance that there may be a dip in the stock market, but that is the reason I have been saving and investing for many years. This has positioned me to withstand hard times.

Another way I look at it is (though those my knowledge here may disagree with me) is that if the stock market takes a hit, housing prices may also fall, so while I have less assets available, I might still be able to buy a similar property. This is not a fail-safe plan, or but rather me thinking of contingencies.

[butchmonkey]

Tough to get a low volatility short term asset with a guaranteed 3% return.

I would save a little more so I could handle a little more volatility.

So if you want to have 25K ready to go, save 33K and invest it in a 50% stock and 50% short term bond fund.

This way even if stocks drop by 50% your portfolio will likely maintain 80% of its value (since Hot money will flow into bonds and your short-term bond fund will likely go up in value.)

But if you really want to keep it safe with minimal volatility keeping it in your bank account is probably the way to go.


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[matchewed]

If you need the money in two weeks keep it in the savings account.

[The Mobile Mustachian]

Thanks butchmonkey, matchewed, and MgoSam for your thoughts. I think investing in a short-term bond fund might be a good approach to help earn some additional yield. However, since we are in an environment where interest rates are rising, is there a substantial risk that bond fund prices will go down 5+%?

[matchewed]

Thanks butchmonkey, matchewed, and MgoSam for your thoughts. I think investing in a short-term bond fund might be a good approach to help earn some additional yield. However, since we are in an environment where interest rates are rising, is there a substantial risk that bond fund prices will go down 5+%?

I don't think that's even a relevant question. You're trying to chase yield for a two week window. There is no investment I can think of that is safe and will guarantee the 3% you're looking for. If you need liquidity for a short time frame the savings account is still the best option. If you're looking to chase profit don't do it with down payment money. It'd be much easier to cut your spending for two weeks to "earn" 3% than it would be to chase around whatever gains you're looking for for whatever reasons you have.

[The Mobile Mustachian]

Hello matchewed, I don't think I was clear in my post. I haven't picked out a property yet, but I would like to be able to access the money within 2 weeks when I do find a property. So it could be 3 months, 6 months, or 1.5 years before I actually require the money. Once I find a property, then I would like to be able to access the funds inside the 2 week window.

[matchewed]

Okay so you're looking to buy a house within the next year and a half right?

I'd still keep it in a savings account and cut your expenses as low as you can do so comfortably. That will give you your best return and will include less risk while maintaining liquidity.

Risk and return go hand in hand. In order to get the return you're seeking you'll need to up the risk which will make it so that you may not have the money when the time comes. If you're okay with that and you're okay with extending that time frame further and further out then I could see investing it in something riskier. But given your criteria I can only recommend a savings account or a CD within that time frame.

[trailrated]

Hello matchewed, I don't think I was clear in my post. I haven't picked out a property yet, but I would like to be able to access the money within 2 weeks when I do find a property. So it could be 3 months, 6 months, or 1.5 years before I actually require the money. Once I find a property, then I would like to be able to access the funds inside the 2 week window.

So the largest horizon of time there is 1.5 years if I understand this correctly. Investing the money getting 3% with no fees at all for the entire 1.5 years would yield $1,133.40.

If you left that money in your bank account accruing .75% interest you would yield $281.28.

1,133.40 - 281.28 = 851.62 

Since there is no "non risk, guaranteed investment" you need to ask yourself if risking losing money is worth the best possible outcome of gaining $851.62 in a year and a half for your down payment... I would recommend keeping it where it is. 

[.22guy]

Barclay Online Savings has a .9% APY or SmartyPig has 1.00%.  It's not much more, but it's a little higher than your .75% and will be safe until you need it for the house.

[butchmonkey]

I think SHY might be a reasonable choice for you.

The most recent one year return even in this time of low interest rates was 2.6%.

There is close to zero credit risk in short term treasuries.

And due to the less than 2 year maturity of its holdings there is almost no interest rate risk.

Finally if the broader market tanks your value will likely rise.

And if you want to stretch to reach 3% yield you could mix in 5-10% equities. (Understanding that this increased your risk of a short term loss of value.)


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[catccc]

Our house fund is in SmartyPig at 1%.  I know 1% is not much, but IDK when we'll find what we are looking for.  We've been home shopping for 5 years now.  I just kept stashing the non-retirement cash into the house fund, and it exceeded our house fund goal and over the years got to $130K or so.  Just moved 80K out to some Vanguard funds earlier this year.  It's a shame I didn't have a better allocation for all of those years.  Of course, rates were not as sorry as they are now in some of those years, but still!

[Mr Mark]

Yes, but I can has big returns wiz no risk, plsze?

Please recommend.

[RapmasterD]

Money Market at Vanguard, and then focus on making and saving more within your window, not to mention buying the property. As for this topic, IMHO you're wasting your time figuring out how to maximize return on 25K over an unpredictable SHORT TERM period.

[Mr Mark]

Money Market at Vanguard, and then focus on making and saving more within your window, not to mention buying the property. As for this topic, IMHO you're wasting your time figuring out how to maximize return on 25K over an unpredictable SHORT TERM period.

+1

Look, if it is short term, money market.

Longer term what everyone is saying is that your savings and dividends in the interim more than cover this weird 'the sky might fall' thing. Heck, look at super conservative funds like Wellesley,  with 65% bonds. Look at how that compared to the 2009 crash vs housing prices. Fear not.

but sitting in cash with no plan is how rookies loose big time. Just saying.

[The Mobile Mustachian]

Thank you everyone for your thoughtful feedback and advice. I've decided to take on slightly more risk and am thinking of putting the 25K in Vanguard Intermediate-Term Tax-Exempt Fund (VWITX). Average return is about 4% per year and the based on reviewing the graphs, the largest drops that the fund has seen have resulted in about a 12% decline in the short-term. This will be in a taxable account. Do anyone have recommendations on funds that return more with about this same level of risk (they don't need to be tax-exempt).

Thank you

[rocketpj]

I don't think anyone has mentioned the Canadian angle here yet (I am assuming OP is not Canadian, but some of us are so here goes).

Canadians can and should use their RRSPs for the first home purchase.  So any savings towards a first home purchase should be within an RSP, to make the most of the tax deductions and get to the downpayment needed faster.  Yes, you need to repay the amount you use over 18 years, but who cares? 

As for where within an RSP, my first instinct would be a highly liquid money market fund of some sort, unless you expect to be at least 6 months before using the money - in which case there might be some decent return savings accounts or GICs.  That said my ING (now Tangerine) savings account currently pays just under 2%, and my kid's account actually pays 2.5%.

[butchmonkey]

Thank you everyone for your thoughtful feedback and advice. I've decided to take on slightly more risk and am thinking of putting the 25K in Vanguard Intermediate-Term Tax-Exempt Fund (VWITX). Average return is about 4% per year and the based on reviewing the graphs, the largest drops that the fund has seen have resulted in about a 12% decline in the short-term. This will be in a taxable account. Do anyone have recommendations on funds that return more with about this same level of risk (they don't need to be tax-exempt).

Thank you

I would keep it short term. If you get an intermediate term fixed income fund you're placing yourself at interest rate risk. Meaning if interest rates go up the value of the bond fund will go down. This is a very real risk in the current low interest rate environment.

if you want to take on risk in order to get 4% yield I would argue that you would be better off getting a short-term tax-exempt fund and mixing in a small amount of equity (5-10% VTI) in order to increase yield.




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[moustache1979]

Buying a short term bond fund is not a great idea, you aren't going to yield more than a savings account and still have some risk if rates rise (remember - rates can move quickly)

IMO - you are better off avoiding anything like a SHY or intermediate Bond fund if you may need the cash soon

Vanguard Mmkt fund yields less than savings account

With my cash, I have the following -

Series I savings bonds; yield is about 1.8% now, but they are not liquid for 12 months and have purchase limits
5yr CD's with Barclays, Ally - minimal early withdrawal penalities if cash needed but you need to hold for at least a year to break even if you do redeem early
Rewards checking account - some community banks and credit unions offer high interest if you meet certain qualifications.  I have one with 3% on $10k if you use debit card 10x per month (which I already do) and have a direct deposit

Through a blend of the above plus Barclays savings Acct I am getting about 2.5% on my cash.  I started this over a year ago so everything is 100% daily liqudity now if I need it and I don't need it all on 2 weeks notice like you...

[JoyBlogette]

I don't think anyone has mentioned the Canadian angle here yet (I am assuming OP is not Canadian, but some of us are so here goes).

Canadians can and should use their RRSPs for the first home purchase.  So any savings towards a first home purchase should be within an RSP, to make the most of the tax deductions and get to the downpayment needed faster.  Yes, you need to repay the amount you use over 18 years, but who cares? 

As for where within an RSP, my first instinct would be a highly liquid money market fund of some sort, unless you expect to be at least 6 months before using the money - in which case there might be some decent return savings accounts or GICs.  That said my ING (now Tangerine) savings account currently pays just under 2%, and my kid's account actually pays 2.5%.

This.  For Canadians you can put up to $25,000 in RRSP (must be for at least 90 days) and withdraw for (first) house purchase.  Pay back period is equal payments over 15 years with no interest and you get a tax refund for the $25k contribution.

[waltworks]

Leave it where it is. You have very little to gain moving it elsewhere and little/no tolerance for risk or volatility... so stop spending mental effort on it and do... nothing.

-W

[bdc]

One reason not yet mentioned you should have this money in a bank account: you will need it for a bank to underwrite / pre-qualify you.  Plus, you'll need to be able to show cash reserves beyond just your down payment and closing costs.

As others pointed out, the bond fund is also a bad idea because it could drop in value if interest rates rise (or are expected to rise). 

[butchmonkey]

One reason not yet mentioned you should have this money in a bank account: you will need it for a bank to underwrite / pre-qualify you.  Plus, you'll need to be able to show cash reserves beyond just your down payment and closing costs.

As others pointed out, the bond fund is also a bad idea because it could drop in value if interest rates rise (or are expected to rise).

The interest rate risk is quite small on short term bond funds (as is the yield.)

But I fully agree with avoiding any bond fund of longer than short duration, and less than investment grade rating.


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[The Mobile Mustachian]

Hello everyone,

Thank you very much for your feedback! After thinking it over, I decided to put the money into Vanguard Short-Term Corporate Bond Index. Based on my research, it is a short term bond fund with a reasonable return for the level of risk (around 2% annually). This is better than the .75% rate of return I was getting in my savings account. Of Vanguard's short term bond funds, this one has the highest rate of return. Please feel free to provide any additional feedback. Again, thanks very much for providing your thoughts.

[Mr Mark]

Thanks for this post. We get it frequently, but as the market is always in flux the answer can vary when combined with individual situations.

in this case it prompted me to take my own medicine and move a heap of cash that is waiting for a few Real Estate deals to mature out of the bank and into bonds, as the time frame has lengthened.

So just bought VSCSX , short term corp bonds, and       VFIDX intermediate investment grade bonds.

Yes, there is a risk of a sharp correction, maybe up to 8% on the intermediate, but a good chance of 2 years of spectacularly lower rates ( look at EU right now) and much bigger returns than cash.

So, thanks!