I'm 32 and have been saving pretty heavily for three years. I was planning on buying a house, but there is also a possibility that I will use the money to start a business. I should have enough money accumulated to make the down payment in roughly one year, but I want to have access to the money in the interim in case I go the business route. I realize that stock funds are too volatile for short-term savings so I am wondering; what is a better place than my bank's low-interest savings and checking accounts to keep my money safe for such a short period of time?
Chris,
Tempe, AZ
Dear Chris,
You're right on about stock funds being too risky for a short-term investment. There really is no stock or bond fund that is immune from at least some degree of volatility. Even the MAXadvisor Newsletter's Safety Portfolio can get hit with short-term losses, which is exactly what investors like you don't want when they absolutely, positively don't want to suffer any loss of capital.
As you mentioned, your bank's savings accounts are certainly safe (in fact, they are largely insured by the government), but the amount of interest they generally pay is so low (especially for smaller balances) that you could do almost as well burying your loot in the backyard. Fortunately there are several attractive options for a guy in your position. Here's our short list:
1. The ING Direct Orange Savings Account is an ingenious little product that has no minimum balance requirement, pays a great rate, and is remarkably convenient. ING pays a variable (meaning it moves with prevailing interest rates) 3.30% Annual Percentage Yield on all funds in the Orange account, starting with the very first dollar deposited. Compare this to the 0.25% some bank savings account pay.
The Orange Savings Account links to your ordinary low interest checking account. You can transfer money between your checking account and higher yield Orange Savings Account online, through their Interactive Phone Service, or by speaking with an ING representative. You can also set up an automatic savings plan that allows you to have a fixed amount of money regularly transferred to your Orange account from your linked checking account. ING says the movement of money, back and forth, generally takes about three business days. You can't pay bills directly from the ING account, and like your bank account, the Orange Savings Account is FDIC insured.
2. Another attractive option is to invest in a low-cost money market fund. Money market funds are NOT FDIC insured, but in practice they don't really need to be. Historically, investors have never lost a dime in money market funds (a few came close before fund companies stepped in and reimbursed losses).
The Vanguard Federal Money Market Fund (VMFXX) currently coughs up a nice 3.25% yield, comes with a low 0.30% expense ratio, and requires only $3,000 to invest. Vanguard has several low fee money market options with slightly different risk profiles and yields, including tax-free, municipal bond-based choices. Vanguard also offers automatic investing and withdrawal plans, but moving money into and out of the account at frequent intervals isn't as convenient as ING's setup. You can get check writing privileges on your Vanguard money market fund, which ING Orange doesn't offer. A Vanguard Money Market fund is a particularly good option for investors who plan on moving some or all of their cash into a Vanguard fund at some point in the future.
3. For investors that have a significant amount of cash sitting at a discount broker waiting for a dip in the market, we strongly suggest moving that money out of the broker's low-yielding sweep account into a higher-yield but still ultra-safe, short-term bond fund. While Vanguard funds are not generally available without paying a commission to buy or sell at most discount brokers, there are some solid non-Vanguard options that are.
We like the Payden Limited Maturity Bond fund (PYLMX) for this purpose. The fund sports a low, 0.40% expense ratio and a minimum investment of $5,000. The fund doesn't charge a redemption fee, so you have the flexibility to move in and out of it freely, but make sure your broker doesn't impose a redemption fee of his or her own (some do).
For those who want to save below the $5,000 minimum, consider SSgA Yield Plus (SSYPX), a fund very similar to our Payden choice with a $1,000 minimum but a slightly higher expense ratio of 0.57%. If your time horizon is over 180 days you should be able to buy both of these funds with no commissions or fees. Unlike your brokerage sweep account, you can't automatically settle trades with the balances in these ultra short-term bond funds; you will have to sell the funds a few days before you need the money to make any new purchases.
Thanks for the question,
MAX
Want to ask MAX a question of your own? Send him an email by clicking here. Please include your name and where you live.
Dear MAX,
I'm 32 and have been saving pretty heavily for three years. I was planning on buying a house, but there is also a possibility that I will use the money to start a business. I should have enough money accumulated to make the down payment in roughly one year, but I want to have access to the money in the interim in case I go the business route. I realize that stock funds are too volatile for short-term savings so I am wondering; what is a better place than my bank's low-interest savings and checking accounts to keep my money safe for such a short period of time?
Chris,
Tempe, AZ
Dear Chris,
You're right on about stock funds being too risky for a short-term investment. There really is no stock or bond fund that is immune from at least some degree of volatility. Even the MAXadvisor Newsletter's Safety Portfolio can get hit with short-term losses, which is exactly what investors like you don't want when they absolutely, positively don't want to suffer any loss of capital.
As you mentioned, your bank's savings accounts are certainly safe (in fact, they are largely insured by the government), but the amount of interest they generally pay is so low (especially for smaller balances) that you could do almost as well burying your loot in the backyard. Fortunately there are several attractive options for a guy in your position. Here's our short list:
1. The ING Direct Orange Savings Account is an ingenious little product that has no minimum balance requirement, pays a great rate, and is remarkably convenient. ING pays a variable (meaning it moves with prevailing interest rates) 3.30% Annual Percentage Yield on all funds in the Orange account, starting with the very first dollar deposited. Compare this to the 0.25% some bank savings account pay.
The Orange Savings Account links to your ordinary low interest checking account. You can transfer money between your checking account and higher yield Orange Savings Account online, through their Interactive Phone Service, or by speaking with an ING representative. You can also set up an automatic savings plan that allows you to have a fixed amount of money regularly transferred to your Orange account from your linked checking account. ING says the movement of money, back and forth, generally takes about three business days. You can't pay bills directly from the ING account, and like your bank account, the Orange Savings Account is FDIC insured.
2. Another attractive option is to invest in a low-cost money market fund. Money market funds are NOT FDIC insured, but in practice they don't really need to be. Historically, investors have never lost a dime in money market funds (a few came close before fund companies stepped in and reimbursed losses).
The Vanguard Federal Money Market Fund (VMFXX) currently coughs up a nice 3.25% yield, comes with a low 0.30% expense ratio, and requires only $3,000 to invest. Vanguard has several low fee money market options with slightly different risk profiles and yields, including tax-free, municipal bond-based choices. Vanguard also offers automatic investing and withdrawal plans, but moving money into and out of the account at frequent intervals isn't as convenient as ING's setup. You can get check writing privileges on your Vanguard money market fund, which ING Orange doesn't offer. A Vanguard Money Market fund is a particularly good option for investors who plan on moving some or all of their cash into a Vanguard fund at some point in the future.
3. For investors that have a significant amount of cash sitting at a discount broker waiting for a dip in the market, we strongly suggest moving that money out of the broker's low-yielding sweep account into a higher-yield but still ultra-safe, short-term bond fund. While Vanguard funds are not generally available without paying a commission to buy or sell at most discount brokers, there are some solid non-Vanguard options that are.
We like the Payden Limited Maturity Bond fund (PYLMX) for this purpose. The fund sports a low, 0.40% expense ratio and a minimum investment of $5,000. The fund doesn't charge a redemption fee, so you have the flexibility to move in and out of it freely, but make sure your broker doesn't impose a redemption fee of his or her own (some do).
For those who want to save below the $5,000 minimum, consider SSgA Yield Plus (SSYPX), a fund very similar to our Payden choice with a $1,000 minimum but a slightly higher expense ratio of 0.57%. If your time horizon is over 180 days you should be able to buy both of these funds with no commissions or fees. Unlike your brokerage sweep account, you can't automatically settle trades with the balances in these ultra short-term bond funds; you will have to sell the funds a few days before you need the money to make any new purchases.
Thanks for the question,
MAX
Want to ask MAX a question of your own? Send him an email by clicking here. Please include your name and where you live.