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High interest savings vs bonds

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  • High interest savings vs bonds

    We are saving money for the down payment for our house. We know for sure that we are at least one year away from using it. Right now we are just saving the money in Ally Bank but I was wondering if anyone would suggest anything else like bonds and if yes, which ones. We don't know for sure when we will use the money but probably towards the second half of the next year.

  • #2




    We are saving money for the down payment for our house. We know for sure that we are at least one year away from using it. Right now we are just saving the money in Ally Bank but I was wondering if anyone would suggest anything else like bonds and if yes, which ones. We don’t know for sure when we will use the money but probably towards the second half of the next year.
    Click to expand...


    You won't get much more from a short-term bond and you have to purchase in fixed increments, so buying bonds when your balance of savings increases regularly will not really work. Absolutely do not recommend the risk of a bond fund, especially for short-term savings. In the short-term (< 5 years), liquidity and safety trump income. I recommend sticking with Ally.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Thank you Johanna!

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      • #4







        We are saving money for the down payment for our house. We know for sure that we are at least one year away from using it. Right now we are just saving the money in Ally Bank but I was wondering if anyone would suggest anything else like bonds and if yes, which ones. We don’t know for sure when we will use the money but probably towards the second half of the next year.
        Click to expand…


        You won’t get much more from a short-term bond and you have to purchase in fixed increments, so buying bonds when your balance of savings increases regularly will not really work. Absolutely do not recommend the risk of a bond fund, especially for short-term savings. In the short-term (< 5 years), liquidity and safety trump income. I recommend sticking with Ally.
        Click to expand...


        I'm in a similar situation, except I'm saving up for a low six figure buy-in in just over two years.

        I've been investing the money in a mix of relatively safe Vanguard funds, particularly the total bonds and something with a little stock, like the 2020 retirement fund.

        Johanna, can you explain why you wouldn't use this approach? I'm still new to investing and would love for someone to correct me.

         

        The benefits in my mind are the following.

        1.) I could withstand a decent loss (say up to 20%) and I figured I would try to maximize my gains even if there's more risk over a short period of time. The average yearly gain on any of these Vanguard funds is well over 1%. I know, I know, bonds may go down with increasing interest rates, but I feel as though the bond prices already factor in this likely increase and nobody knows when and how much interest rates will go up. I suppose I could put it into higher risk/ reward funds.

        2.) I don't have to open up another online account and incur whatever minimal security risk there is with that. I feel secure with my Vanguard account.

        3.) I can pay the lower long term capital gains rate on whatever I get in before one year before I withdraw it all vs paying my marginal rate on the 1% savings (effective .65% or so rate).

        4.) These funds in a brokerage account seem like they are just as liquid as cash in an online savings account. Am I incorrect?

        Thank you.

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        • #5
          StatBariumEnema - Please see this blog post. The fact that you "could withstand" a decent loss of 20% doesn't mean this is a good plan. For money you'll need in 2 years, why would you accept that risk? The downside risk, imo, is much greater than the upside potential. Your other "benefits" are actually justifications, for taking on unnecessary risk, imo. It's your decision, but I would never advise a client to do so. (Some in my industry would disagree but for the reason that it would mean less revenue under an AUM model.) btw, #4 is a false assumption. A brokerage account is liquid but the amount of liquidity is not guaranteed, as it is with a savings account protected by FDIC.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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