Safest way to invest 25k?

Discussion in 'Financial Planning' started by Josh B., Sep 5, 2006.

  1. Josh B.

    Josh B. Guest

    I currently have about 25k sitting in a money market account at my
    local bank. The rate is 3.5%. I've been doing some research and have
    noticed that some online accounts are yielding higher rates of
    typically 5%+. I was considering moving this money to one of the
    higher rate online accounts just to take advantage of the better
    return. Would this be a worthwhile move? In addition to the 25k, we
    have about 7k in bill pay/misc expense money that we keep liquid for
    everyday purposes. Since I'm not really looking to get involved in any
    high risk investing, I would like to know if the money market is my
    best bet for what I need? I know that I could look into CDs but it
    seems to me right now with the money market rates being relatively
    high, it makes more sense to keep the money liquid in a money market
    rather than tying it up in a CD.

    Some background that will hopefully help: I am 26 years old, married,
    with no children (maybe in the future). My wife and I have a combined
    annual income of about 70k gross. We both have company 401ks (two
    different companies) that we are contributing the maximum matching
    percentage each month. We do not have any IRAs. We do not have any
    credit card debit. We do have a mortgage of 91k for a house we
    purchased last year. We have about 60k combined in school loans and
    one car loan of 23k. We usually contribute about $500 to our savings
    account each month.

    My priority is to get the most for my money in saving for the future.
    One question I have is related to taxes. I haven't had a chance to
    consult my accountant yet but one issue I see with money market
    accounts is the fact that they are taxable, correct? So if my annual
    return is 1k, 20%+ of that is going to be subject to taxes? Taking the
    tax issue into consideration, are there other avenues I should be
    persuing that may be lower percentage yields but are not subject to
    tax...gov't bonds, etc? Or in the end it typically balance out?

    I appreciate your input.
     
    Josh B., Sep 5, 2006
    #1
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  2. Josh B.

    zxcvbob Guest

    Josh B. wrote:
    > I currently have about 25k sitting in a money market account at my
    > local bank. The rate is 3.5%. I've been doing some research and have
    > noticed that some online accounts are yielding higher rates of
    > typically 5%+. I was considering moving this money to one of the
    > higher rate online accounts just to take advantage of the better
    > return. Would this be a worthwhile move? In addition to the 25k, we
    > have about 7k in bill pay/misc expense money that we keep liquid for
    > everyday purposes. Since I'm not really looking to get involved in any
    > high risk investing, I would like to know if the money market is my
    > best bet for what I need? I know that I could look into CDs but it
    > seems to me right now with the money market rates being relatively
    > high, it makes more sense to keep the money liquid in a money market
    > rather than tying it up in a CD.
    >


    Overly simplistic answer:
    26-week T-bills, at http://treasurydirect.gov

    Buy some 4-week and 13-week treasuries also, and roll them over into
    26's when they mature. That way, you don't have all your money tied up
    for 6 months; part of it will always by maturing in another month or two.

    Best regards,
    Bob
     
    zxcvbob, Sep 5, 2006
    #2
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  3. "Josh B." <> writes:

    > I currently have about 25k sitting in a money market account at my
    > local bank. The rate is 3.5%. [snip]
    >
    > Some background that will hopefully help: I am 26 years old, married,
    > with no children (maybe in the future). My wife and I have a combined
    > annual income of about 70k gross. We both have company 401ks (two
    > different companies) that we are contributing the maximum matching
    > percentage each month. We do not have any IRAs. We do not have any
    > credit card debit. We do have a mortgage of 91k for a house we
    > purchased last year. We have about 60k combined in school loans and
    > one car loan of 23k. We usually contribute about $500 to our savings
    > account each month.


    If you are looking for a high-rate, "safe" investment, your best bet
    right now is one of the online bank savings accounts. Some of them
    are paying over 5% nowadays, and they are completely insured.

    OTOH, if it were me, I'd use the money to pay off the car loan instead.
    As a homeowner, you need an emergency fund, but getting rid of one of your
    big monthly expenses means you can save more quickly and need less of a
    savings cushion. I'd also start using some of your savings to fund
    Roth IRAs for both you and your wife.

    -Sandra the cynic
     
    Sandra Loosemore, Sep 5, 2006
    #3
  4. Josh B.

    dapperdobbs Guest

    Josh B. -

    Some quick Q's - what interest rate you are paying on your student
    loans? Is there a pre-payment penalty on those? (If so, what is it?)
    The reason I ask is that usually interest you pay is higher than
    interest you earn, so your best use of funds may be to pay down the
    loans.

    CD's and money market funds are taxable as ordinary income both
    Federal and State. Clearly the higher the rate, the higher the
    after-tax return, but getting the actual after-tax return is
    complicated by interactions of all factors involved. I recommend
    getting a piece of tax software to get more accurate numbers for
    different scenarios. E.g. your student loans are probably tax
    deductible, and I wonder if your tax rate is 20%. Tax software usually
    runs about $50 bucks, but you can use it to get decent estimates for a
    couple of years, and since most State forms are simple once you have
    Federal you don't need to pay the $15 (or whatever) for the State
    software.

    It sounds like you want to put together a pretty comprehensive
    long-term picture of your finances (which is GOOD!). Tax software will
    estimate after-tax effects, but won't incorporate savings plans and so
    forth, so you should work on a spreadsheet going forwards 20-30 years -
    those numbers will be pretty rough estimates of what actually happens,
    but will give you a sense of direction.
     
    dapperdobbs, Sep 5, 2006
    #4
  5. Josh B.

    Elle Guest

    "Josh B." <> wrote
    > We do not have any
    > credit card debit. We do have a mortgage of 91k for a
    > house we
    > purchased last year. We have about 60k combined in school
    > loans and
    > one car loan of 23k.


    Generally, when the interest rate of a loan exceeds the
    expected return one could "safely" get through investing in
    stocks or CDs etc., the superior investment is to pay off
    the loan.

    What are the interest rates on your school and car loans?
     
    Elle, Sep 5, 2006
    #5
  6. Josh B.

    jIM Guest

    Josh B. wrote:
    > I currently have about 25k sitting in a money market account at my
    > local bank.


    In addition to the 25k, we
    > have about 7k in bill pay/misc expense money that we keep liquid for
    > everyday purposes. Since I'm not really looking to get involved in any
    > high risk investing,
    >
    > Some background that will hopefully help: I am 26 years old, married,
    > with no children (maybe in the future). My wife and I have a combined
    > annual income of about 70k gross. We both have company 401ks (two
    > different companies) that we are contributing the maximum matching
    > percentage each month. We do not have any IRAs. We do not have any
    > credit card debit. We do have a mortgage of 91k for a house we
    > purchased last year. We have about 60k combined in school loans and
    > one car loan of 23k. We usually contribute about $500 to our savings
    > account each month.
    >
    > My priority is to get the most for my money in saving for the future.
    >


    Snipped for brevity.

    7k emergency is about one months "gross pay"- how many months expenses
    is this for you?

    If taxes (or tax avoidance) is the primary concern, my two best choices
    would be
    1) increase 401k contribution percentage
    2) Open a Roth IRA

    My "rules of thumb" suggest 401k should be 10% for each- you and your
    wife- but this is another topic discussed in numerous threads.

    There was a point in a few other responses about paying off student
    loans and the car. I agree with these comments. I would add to that a
    question- you owe 91k on your mortgage, how much of house do you own?
    (Is it more or less than 20%)?

    Why are you "saving" $500/month- do you have a reason for this mkoney
    being set aside? Maybe a vacation, bigger house or other reason? If
    you don't "know" what this money is for, then it may be difficult to
    suggest to many alternatives (Money Market vs CDs vs Other).
     
    jIM, Sep 5, 2006
    #6
  7. Josh B.

    Josh B. Guest

    Thanks for the responses thus far.

    Since I just bought the house last year and the car this year, I do not
    have much equity in either. The rate on the car is 6%, house is 5.5%,
    and we've consolidated our school loans so they are fixed at 3.5%. The
    $500 is money left over after we pay all our monthly expenses. On the
    car, house, and student loans, we have been paying above what is due
    which would work out to be one additional payment each year for each of
    those expenses. So to answer one of the questions, there is no
    prepayment penalty on any of our current long term expenses. We haven't
    been saving the 25k for any particular cause, more just as insurance
    for any future expenditures. I know that my best course of action
    would be to pay off the car, or pay down the house or student loans.
    But I personally feel more comfortable with having that money liquid
    just in case there is any reason that I need it. I understand that the
    low yields that I earn on the 25k won't counter the interest that I'm
    paying on my expenses, but I think I've done pretty well at getting
    decent fixed rates so that the interest isn't killing me...guess I just
    accept the fact that the interest, even over long term, is the cost of
    doing business. So with that being said, are the CDs, MMA, and t-bills
    my best options?

    Thanks!
     
    Josh B., Sep 5, 2006
    #7
  8. Josh B.

    jIM Guest

    Josh B. wrote:
    > Thanks for the responses thus far.
    >
    > Since I just bought the house last year and the car this year, I do not
    > have much equity in either. The rate on the car is 6%, house is 5.5%,
    > and we've consolidated our school loans so they are fixed at 3.5%. The
    > $500 is money left over after we pay all our monthly expenses.


    A possible alternative perspective:

    would the 25k pay off

    a) all of the car?
    b) all of the student loan?
    c) both?

    You are saving $500 per month already.

    If the car was paid off add the amount (or payment) into this. I
    assume payment is around $500.
    If the student loans are paid off, add the amount (of payment) into
    this. I assume this payment is around $300-$500.

    $1500/month will get you back to 25k savings in less than 20 months,
    closer to 16 months.

    The risk of using the savings to pay down principle exists for 16
    months. If something bad happens (within 16 months) you would have

    a) your 7k "cash"
    b) less debt to worry about
    c) more disposable income to deal with issue

    I am not suggesting you need to pay off any of the debts, and if one
    was paid off first, I would choose the car. 3.5% is cheap money on the
    student loans. If the repayment term is around 20 years, I might
    emphasize paying off loans sooner (relative to car). This is an
    alternative idea, I am not recomending or discouraging this, just
    giving a "what -if".
     
    jIM, Sep 5, 2006
    #8
  9. Josh B.

    dapperdobbs Guest

    Josh -

    I see. Sometimes some stuff a little less organized than yours gets
    posted :)

    The toss up is the current and future yield curve. It has been puzzling
    a lot of people. Compared to two years ago, interest rates look good
    right now. Compared to long term historical, they are still below
    average - not by much. The general conventional investment wisdom I
    have been exposed to, is to stay short-term when rates are rising, and
    to lengthen maturities when yields are falling. "Today's" environment
    is puzzling because the Fed raises, and rates fall. Go figure.
    Generally an inverted yield curve presages a drop in interest rates,
    but it's been inverting on and off for two years now. Go figure some
    more.

    IF you avoid commissions on T-Bills (earlier thread indicated that
    buying at auction avoids all commissions), I'd recommend six month
    bills - to try to maximize your returns. You could do a small ladder -
    12k in 6 mo. and 13k in one year notes. Commissions are important when
    dealing with T-Bills.

    Money market yields have been dropping, and may drop further.
    www.bigcharts.com is a useful resource, and the symbol for short term
    rates is IRX. The five-year Bills are FVX. The US Treasury site gives
    you last auction numbers and dates.

    My personal take is that the extra 1%+ in Bills may not be worth the
    convenience of a money market fund.(For six months, that's what? about
    $125 bucks - buy a couple of candles $3, and have a **priceless**
    dinner at home twice a month instead of your restaurant, and you've
    made it up.) But make sure you have a good MM fund at a
    well-capitalized financial institution.

    The one mistake I think I see in your post is your estimated 20% tax
    rate. Check on that with some tax software, and run some spreadsheets
    for long range plans. As Yogi Berra said (paraphrased): if you don't
    know where you're going, you have to be careful, because you might not
    get there. Having a carefully worked out long range plan I think in
    your case will far outweigh the next year's fluctuations in interest
    rates.

    Hope you find time to stick around and participate some more in this
    forum.
     
    dapperdobbs, Sep 5, 2006
    #9
  10. Josh B.

    Josh B. Guest

    Also just to add...7k in emergency would last two months with our
    current spending pattern. Total owed on the car is actually 19k as we
    put 4k down...tried to get 20% down on the car so I wouldn't get upside
    down on the loan. Not that it matters cause all cars depreciate
    significantly but it is a Honda Accord so I plan to hold on to it even
    after it is paid off. If for some reason I would need to unload it, I
    should be far enough ahead on it so I don't take a huge loss.

    Hope that helps...Thanks.
     
    Josh B., Sep 5, 2006
    #10
  11. Josh B.

    jIM Guest

    Josh B. wrote:
    > Also just to add...7k in emergency would last two months with our
    > current spending pattern. Total owed on the car is actually 19k



    if there anything 6k of "cash" does not get you which 25k does? This
    would be a total of 4 months expenses "in the bank".

    Assuming car payment of $500/month and current savings of $500/month,
    you could pay off car now and be back to 25k in savings within 19
    months.

    this would reduce "car risk" (if it gets totaled, no cash is depleted
    to pay off).
     
    jIM, Sep 5, 2006
    #11
  12. Josh B.

    Elle Guest

    >From all you've said, maybe ramp up the (6% interest)
    payments on the car but do not pay it off. I agree about
    bolstering your emergency fund. The rational decision on the
    other debt is to not pay them off right now, AFAIC,
    especially the low rate student loan. You get the tax break
    on the mortgage. In the FWIW department, much is said of the
    emotional advantages of having no debt. When you reach the
    point where you just hate making payments and being "owned"
    by anyone, pay off the student loan etc. It won't be a
    financially rational decision, but lots of folks do this.

    Some online banks with high yields that come up here and at
    other financial fora are EmigrantDirect and INGDirect. Check
    the details (especially whether the rates are promotional)
    and strings attached like minimum required; other fees; etc.

    On municipal MM funds and taxable MM funds: Yes, both are
    available, and your suspicions are correct. Municipal MM
    funds have an "effective yield" that competes well with the
    taxable MM funds. E.g. one Fidelity municipal MM fund is
    yielding 3.2% while a taxable fund is yielding 4.97%. After
    federal taxes, you'd net 0.8(4.97) = 3.98% on the taxable
    fund. Even with state taxes, it might likely be a wash.

    The best short term rates are going to be plentiful and
    similar. One's local bank tends not to have the best short
    term rates.

    Consider a Vanguard or Fidelity account to get their very
    competitive money market rates and excellent brokerage,
    FDIC-insured, short term CD offerings. One day when you open
    a Roth IRA, you will then have some experience with Vanguard
    or Fidelity and can strongly consider them to hold your
    Roth, especially in anticipation of buying mutual funds and
    stocks within your Roth IRA.

    Yours are good questions. Keep lurking here, and ask more as
    needed.
     
    Elle, Sep 5, 2006
    #12
  13. Josh B.

    joetaxpayer Guest

    Josh B. wrote:

    > Thanks for the responses thus far.
    >
    > Since I just bought the house last year and the car this year, I do not
    > have much equity in either. The rate on the car is 6%, house is 5.5%,
    > and we've consolidated our school loans so they are fixed at 3.5%. The
    > $500 is money left over after we pay all our monthly expenses.


    I'd not pay an extra dime right now on the car. You can find CDs over 5%
    and yield more than the 3.5% SL cost after tax. Accelerating the car
    payment is a good idea if there's no prepayment cost.
    I'd consider funding IRAs for you two. If you can open a Roth, you can
    put $4K/yr right now, and invest it as you are comfortable. Compounding
    the return tax free till retirement, you'll find the Roth to be a great
    account to have opened. Also, good as an estate planning tool as your
    heirs can take their withdrawals tax free as well.

    You can find CDs 6mo 5.31%, 1 yr 5.15%, and break up the 25K into 2 or 3
    separate chunks, different maturities, adding to each as they become due.
    JOE
     
    joetaxpayer, Sep 6, 2006
    #13
  14. Josh B.

    The Guy Guest

    In article <>,
    "Josh B." <> wrote:

    > Thanks for the responses thus far.
    >
    > Since I just bought the house last year and the car this year, I do not
    > have much equity in either. The rate on the car is 6%, house is 5.5%,
    > and we've consolidated our school loans so they are fixed at 3.5%. The
    > $500 is money left over after we pay all our monthly expenses. On the
    > car, house, and student loans, we have been paying above what is due
    > which would work out to be one additional payment each year for each of
    > those expenses. So to answer one of the questions, there is no
    > prepayment penalty on any of our current long term expenses.

    [stuff deleted]

    What I would do:
    Open Roth IRA accounts for both of you and stick 4K in each. Set aside
    another 10K toward emergencies and build it up to at least 4 months of
    expenses over the next year or two. Save the rest for adding to the Roth
    accounts in 2007.
    --
    Chainyanker
     
    The Guy, Sep 7, 2006
    #14
  15. While I've enjoyed reading the sophisticated strategies for maximizing
    return on Josh's cash reserve, sometimes I think we get a little carried
    away here. :)

    Josh's $19K car loan is costing him SIX PERCENT in AFTER TAX dollars. He
    has $25K in hand and he's looking for the "safest" way to invest it.

    In my view it's a no-brainer. Pay off the car loan. There is no easier and
    safer way to make a guaranteed six percent after tax. Once he does that,
    he can come back and ask for advice on how to invest the extra cash he's
    not paying on the car every month.
     
    Paul Michael Brown, Oct 7, 2006
    #15
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