Where to park this chunk of change?

August 4, 2011 10:26 AM

Best way to grow a not insignificant chunk of cash?

Through complete happenstance, my wife recently received a somewhat sizable amount of money from a family trust. We have no need for it right now, as we don't really spend much, so we've been trying to think of ways to possibly grow it. We'd like to get into a house within the next year or so, so we'd like for it to be fairly liquid, and we understand that we would have to pay capital gains taxes on any growth once we got out. I was thinking several staggered CD's might be a good way to handle it, but would stocks, stock funds, index funds, etc. be a better way to go?

posted by Gilbert to Work & Money (6 answers total)

Best answer: If you're going to want the money all at once to buy the house, then a CD ladder (staggered end dates) doesn't make sense. CD ladders are ideal for an emergency fund where the need would be unexpected but not 100% - for example $24,000 in 6 $4000 CDs with dates separated by 2 months means that one CD would be enough to cover a car/roof repair, etc. and a job loss would just mean liquidating each one as it comes. In your case, you want to have a large amount of money all ready in the month that you're ready to close on a house, and you don't know what month that will be. A ladder would just ensure that at least half your money is mid-cycle, whereas a conservative single date would just mean storing it in a savings account for a while. Say a 12-month CD released your money into a bank account next August, where it sat until you bought a house in November, that 3 months is not going to kill you.

HOWEVER, this is all kind of a moot point. Savings account rates, 1-year CD rates, and 2-year CD rates are all basically equivalent, at 1%, 1.2%, and 1.4%, respectively. The answer is, they're all pretty low interest rates, not worth devising elaborate schemes over, or tearig your hair out over whether it'll be 18 months or over 2 years. Decide if you'll want it in more or less than one year, check the terms of early withdrawal, sock it away and reconsider a year from now.

If you want more income, you have to take more risk - bonds, index funds, etc. That's out of my expertise, so I'll shut up now.
posted by aimedwander at 10:46 AM on August 4, 2011 [2 favorites]

We'd like to get into a house within the next year or so, so we'd like for it to be fairly liquid

One year is not a very long time when it comes to investing, so if you invest in something with a decent amount of risk you could see significant short-term losses. Generally the conventional wisdom is that for very short term investments you should stick to very safe investments, and safer investments tend to have smaller returns.

we understand that we would have to pay capital gains taxes on any growth once we got out

You will have to pay taxes on any returns from this investment one way or another, but it might not necessarily be capital gains taxes (which only come into play if you buy something and then later sell it at a higher price).

I was thinking several staggered CD's might be a good way to handle it

CD ladders don't really make a lot of sense with today's rates and CD options, especially for such a short time. You would be doing a lot of work for probably not a lot of money. If you go with a CD you should probably just find a long term one with a high rate that doesn't have much of a penalty for closing it out early. But really the main point of CDs are to "lock in" high rates, and the current interest rates are so low that you shouldn't really bother. Get a high interest savings account (such as the ones here) and it will give you around the same rates as a CD with the same sort of risk and protection. Also if it's a low enough amount to be under the limits for a rewards checking account and you can easily meet the requirements (such as direct deposit) then that might give you better rates than any other option.

but would stocks, stock funds, index funds, etc. be a better way to go?

These are all the same thing. If you invest in stocks you should diversify, which is the main point of funds in general and index funds in particular. The reason why you probably don't want to invest in stocks is that you have such a short window where you will be investing. If you want to invest long term, put your money in stocks with a retirement account and let it earn returns tax-free for decades. If you need it soon, you're probably better off with something safer (which is why as you get closer to retirement age you should shift away from stocks and into safer investments like bonds).
posted by burnmp3s at 10:55 AM on August 4, 2011

As others said, if you might need the money in the next year or two, you really can't afford to invest the money in stocks or bonds. For example, the stock market has gone down 10% in the last couple of weeks. That might not be a big deal if you aren't retiring for 20 years, but it could put you in a bad position if you need the money right away to close on a house.

So put it in a high rate online savings account or CDs. At these low interest rates it isn't going to matter much. And the penalties for early withdrawal of a CD are pretty insignificant. You aren't investing the money. You are just parking it in a safe place for easy access when you need it.
posted by JackFlash at 11:27 AM on August 4, 2011

Best answer: If you need the money within 3 years, do not put it in the stock market (rule of thumb). Especially right now while the market is in the middle of a correction.

Put it in a high interest savings account.
posted by blue_beetle at 2:45 PM on August 4, 2011

If you have a moderate appetite for risk, take advantage of the artificially tight bank commercial lending market, and look into private capital placement brokers. A year isn't much of an investment horizon, but it may be long enough to let you re-think buying a house as the best use of a capital windfall, in a down realty market.
posted by paulsc at 6:13 PM on August 4, 2011

I-bonds are at 4.6% now.
posted by buzzman at 12:43 AM on August 5, 2011