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  • short term investment

    Hi everyone,

    I'm looking for the best place to park some cash for about 6 years.  We're going to be getting a lump sum of money around $115k, and would like to take $1,500 of it per month to put toward our mortgage to help lower the payments. The idea is to make the payments more bearable until my largest student loan is paid off, which will be in about 4 years.  Mortgage will be at 3.65%.

    Any advice is appreciated!

  • #2
    What's the term on the mortgage and how many payments have you made? Balance on the mortgage? Balance on this larger loan? Why not consolidate and refinance? Why 6 years when the loan balance is expected to be paid off in 4?

    Making payments more bearable implies a cash flow problem. Have you explored expense reduction?

    Sorry to not answer your question. Just want to see if I agree with the strategy.


    • #3
      Why not pay off the student loan early? If you'd still have a cash flow problem, you could refinance the student loans.

      If you have the loans paid off (work, grant, PSLf, other) in 4 years... why do you have a cashflow problem now.

      Granted I'm not privy to all the details but I'm suspicious I hear of a cashflow (spending) problem.

      To directly answer your question:
      1. Taxable account, but ha some risk of losing value, even if tempered by some bonds.
      2. TBills. Low, but Guaranted rate growth (likely = or less than inflation (and interest) )
      3. Laddered CDs?

      If I had to pick, I'd probably vote for this one maybe:
      4. "High interest" savings account?


      • #4
        The mortgage will be for $660k, 30 yr fixed at 3.65%.
        We’re closing on the house next month, currently living with family.
        The loan is already refinanced; I graduated with $405k in student loan debt, currently the refinanced one is down to $218k at 2.99% fixed, paying $5,300 per month. Other loan is $44k at 1.86% fixed, paying minimum at $450 per month.
        I meant for 4-6 years, sorry. Big loan will be paid off in 3yrs 8 months at my current pace, but longer if I cut down to minimum payments.
        I figure no point in paying extra on the loans or mortgage since interest rates are low, I thought I might do better on an investment.


        • #5
          I'm not sure I really understand what you're trying to do. You're on the cusp of the short-term/long-term investment period. What will you do with the $$ in 4 - 6 years? If you don't have a written-in-stone obligation at that time, I'd just put it in a well-balanced equity fund portfolio, rebalance annually and, if the market is down, leave it there until it recovers. The key is what you're doing with the $$ after you're finished with the investment - that's the part I either overlooked or don't understand.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


          • #6
            So you have a million dollars in debt.


            • #7
              I’m planning to use $1,500 of it per month towards the mortgage to bridge the gap until my big loan is paid off. Any left over I’ll just throw into the retirement account. Once the loan is done, we got an extra $5,300 per month to play around with.

              Yes I know exactly how much debt I have lol. I’m buying a house near NYC. It’s expensive, but it’s low rate fixed interest. Retirement is already covered so don’t worry ?


              • #8
                I have no idea what you’re trying to accomplish as you haven’t provided a ton of info. It doesn’t make any sense to keep cash in a low rate liquid investment if your plan is to use it to pay off a higher rate loan in the short run, unless liquidity/cash flow is a problem. Either invest it for the long haul according to your asset allocation, or pay off your debt sooner rather than later.


                • #9
                  When you say that your retirement is already covered, what do you mean by that?  If it is, why not just take a chunk of cash and pay off your loans?  It sounds like what you are trying to do is sort of counter-intuitive and it's hard to understand without hearing more about your situation.  It SEEMS that what you want to do will make sense to you psychologically but will be hard to justify financially.

                  But if I do understand you correctly, I guess you can park that cash in a CD at around 2.25 or maybe consider a tax free NY muni bonds fund through Vanguard.


                  • #10
                    If retirement is "already covered" and you're looking for cash flow, why not put all that money towards your loans? Putting it towards the mortgage is smarter from a math perspective but if you're looking for cash flow the student loans are the way to go. Doubt you'll get a better interest rate out there in a safe, interest-bearing account.


                    • #11
                      Either you are ok with the million in debt situation or it is keeping you up at night.  I think you are young so you could open up a taxable account and go with a high equity exposure in an index like vtsax.  I am assuming your tax deferred space is funded and you have an e fund.  OTOH if the loans are bugging you and interfering with sleep then throw it at the larger loan.  I personally would take half and open a taxable and half at the loan. I like splitting the difference.


                      • #12
                        Maybe I'm missing something here. Why not use the $115k to pay off student loan debt?


                        • #13
                          In case you're wondering, if you can get better than a 3.2% CAGR in a taxable investment over the next 30 years the best decision here is to invest that lump sum.  A 7.2% CAGR on that $115k in taxable brings you nearly $600k ahead in 30 years.  These are both compared to the $1500/month payoff you're talking about.  If you lump sum it towards the highest interest rate (your mortgage) immediately you should invest it if you can get a 3.6+% CAGR in a taxable investment.  Lump summing it is superior than paying it off in increments and earning little on the side while the remainder sits there.  If you're looking for more immediate cash flow, paying off your loans is better but less wise from a strict financial perspective.

                          Lastly, regarding the "lowering the payments" idea, I'm assuming your payments will be automatic from a checking account of sorts, so unless you set up something whereby there are automatic deductions from the $115,000 per month into that checking account your payments will not change.  If you did engage in this elaborate scheme then all you're doing is helping with cash flow.  And if you're engaging in that you won't be able to put it in a CD and extract on a regular basis and expect to earn anything on it.  If you're talking about applying the $1500/mo to the principal, then that will lower the term of the payments but not the payments themselves.


                          • #14
                            The student is low interest at 2.99% so that is my ROI if I throw extra money at it. I was hoping I could do better than that by investing it. For example, my SEP IRA at Wealthfront has averaged 24% over the past 2 years. Problem is I want to withdraw $1,500 every month.
                            Yes I’m fine with the debt. It’s not a million; in 4 years my only debt will be the $660k mortgage and a small student loan at <2%. Makes no sense to pay these low interest loans early.
                            For the next few years we want to keep our mortgage payment lower until the $5,300 monthly payment goes away. If we throw the $115k at the mortgage, yes it’s less payed over the lifetime of the loan but it doesn’t lower the monthly payment much. We have money coming our way in the coming years and want to enjoy the money we have now by getting a nice house. I’m not losing sleep over this by any means. I could work 1 extra shift per month and that would cover the mortgage. This is just about minimizing my hours away from the family.
                            The original question is quite simple-
                            Best place to park $115k for a few years while being able to withdraw monthly. I guess I don’t really see why the reason is relevant...


                            • #15
                              I THINK the OP is trying to optimize the lump sum and betting that they an short term investment will outperform the current low interest rates of the refinanced loans and great mortgage since everything else is presumably funded - Efund, Retirement, 529s

                              What's left over is a decision to go taxable or pay down cheap.  This is understandable for young folk who have only known a bull market of 10+% a year vs the millennials who experienced the great recession and are extremely debt averse.

                              Debt isn't bad and OPs debt is pretty well structured.  What's unknown is income and cash flow.  I believe what worries folk here is a 'good lump sum' of $115k doesn't quite reflect a high annual income and cash flow.    It's also perplexing why the intermediate timeline 5-6 years; perhaps that's when the restructured loans are finalized and then can move to a more aggressive long term savings (like we have a mortgage balance fund instead of paying off the mortgage directly).

                              OP just needs to clarify the why on the holding of this sum.  To KIS, would pay down the 2.99% student loan and be done with it as you still will have a decent debt load to chew off over the years.