Help me build long-term savings!
March 20, 2012 6:55 PM Subscribe
I have just been given a substantial raise and promotion. Yay! Now, I want to take most of that extra income and stash it away, for the time being, in some kind of savings vehicle. What kind of savings vehicle is right for me?
I am 27-year-old single male. I don't make a lot of money, but I'm debt-free, I live pretty modestly and I basically want to stash my extra income away and forget about it for awhile. The point of this is to build long-term savings for eventual big expenses: starting a family, getting married, a down payment on a home (possibly), etc. This is not a rainy day fund, or a travel fund - I've already got money for that. It's not a retirement fund, either, at least not now - I already have a 401(k).
Stuff I want in this particular savings vehicle (ideally).
1. I want to be able to deposit a certain amount of money into it every paycheck, without thinking about it. I'd really like to just tell my employer or my bank to route x amount of dollars into this account.
2. However, I want to be able to change that amount at will, anytime - let's say my rent goes up, I want to be able to reduce the contribution. Conversely, if my income goes up, I'd like to be able to raise the contribution.
3. In addition to the regular contribution, I'd also like to be able to make one-off contributions, of any amount, freely.
4. I want to have easy access to this money, just in case I need it. Now, I do not anticipate needing it, and I'm disciplined enough that I would not put it towards any unintended use except in the case of a dire emergency. But, should such an emergency occur, I don't want to be shut off from my own money.
5. Highest possible return with lowest possible risk. Err on the side of low-risk, as I'll be counting on this money in the medium-to-long term (say, five to ten years).
Does such a thing exist? I'm open to some kind of mutual fund, provided it is low-risk, though I'm fairly knowledgeable about the stock market and don't see much upside there. I know I could max out my 401(k), but I really want to be able to access this money well before retirement.
So: how could I best put my money to work, while also conserving it? What savings vehicles are available that would fit my parameters, if any? I'm happy to research things myself, but I just want an idea of what to look at and where to start.
P.S.: When I say I'm not interested in hearing about maxing out my 401(k), I mean that. I know that option exists. Do not suggest it, as it is not useful here.
I am 27-year-old single male. I don't make a lot of money, but I'm debt-free, I live pretty modestly and I basically want to stash my extra income away and forget about it for awhile. The point of this is to build long-term savings for eventual big expenses: starting a family, getting married, a down payment on a home (possibly), etc. This is not a rainy day fund, or a travel fund - I've already got money for that. It's not a retirement fund, either, at least not now - I already have a 401(k).
Stuff I want in this particular savings vehicle (ideally).
1. I want to be able to deposit a certain amount of money into it every paycheck, without thinking about it. I'd really like to just tell my employer or my bank to route x amount of dollars into this account.
2. However, I want to be able to change that amount at will, anytime - let's say my rent goes up, I want to be able to reduce the contribution. Conversely, if my income goes up, I'd like to be able to raise the contribution.
3. In addition to the regular contribution, I'd also like to be able to make one-off contributions, of any amount, freely.
4. I want to have easy access to this money, just in case I need it. Now, I do not anticipate needing it, and I'm disciplined enough that I would not put it towards any unintended use except in the case of a dire emergency. But, should such an emergency occur, I don't want to be shut off from my own money.
5. Highest possible return with lowest possible risk. Err on the side of low-risk, as I'll be counting on this money in the medium-to-long term (say, five to ten years).
Does such a thing exist? I'm open to some kind of mutual fund, provided it is low-risk, though I'm fairly knowledgeable about the stock market and don't see much upside there. I know I could max out my 401(k), but I really want to be able to access this money well before retirement.
So: how could I best put my money to work, while also conserving it? What savings vehicles are available that would fit my parameters, if any? I'm happy to research things myself, but I just want an idea of what to look at and where to start.
P.S.: When I say I'm not interested in hearing about maxing out my 401(k), I mean that. I know that option exists. Do not suggest it, as it is not useful here.
What you really want is simply an online savings account that's set up to withdraw a set amount of money every month from your primary checking. It has all the features you want, is highly liquid so you can get at your money at will, and easily modified. High return? Nah. But right now, there really isn't much room between high-risk, high return options like mutual funds, and low-risk, low-return savings. CDs aren't liquid, and the interest rates are rarely much over savings accounts anyway.
posted by Tomorrowful at 7:01 PM on March 20, 2012 [2 favorites]
posted by Tomorrowful at 7:01 PM on March 20, 2012 [2 favorites]
For what it's worth, given your goals, it sounds like you have the right idea not to max out your 401(k). Since you are planning to use this money, it is entirely appropriate NOT to keep it in a 401(k) to avoid tax penalties.
What comes to my mind is a IRA investing in high yield bonds. Contributions can always be withdrawn tax-free (earnings on the contributions are a bit more complicated). If you're contributing to an IRA right now, there's no reason not to use it to get the tax advantages. I say high yield bonds because there's no reason to make an IRA tax-efficient (since it's tax-advantaged).
posted by saeculorum at 7:16 PM on March 20, 2012
What comes to my mind is a IRA investing in high yield bonds. Contributions can always be withdrawn tax-free (earnings on the contributions are a bit more complicated). If you're contributing to an IRA right now, there's no reason not to use it to get the tax advantages. I say high yield bonds because there's no reason to make an IRA tax-efficient (since it's tax-advantaged).
posted by saeculorum at 7:16 PM on March 20, 2012
At my company the best place to put money first is a company-sponsored plan with a 2/3s match up to 6%. If you have an option like that, make sure you use your eligibility for that.
posted by Mad_Carew at 7:23 PM on March 20, 2012
posted by Mad_Carew at 7:23 PM on March 20, 2012
Mad_Carew: that would be a 401(k).
posted by saeculorum at 7:27 PM on March 20, 2012
posted by saeculorum at 7:27 PM on March 20, 2012
I have a big-branch local bank and also have a savings account online through ING. I contribute a bit every month to it straight out of my paycheck, and I never have to think about it. Neither my bank (BB&T) or ING charge a fee for the transactions. I usually put my tax refunds in there, too, as a one-time transaction, and have never been charged a fee by either bank for doing so.
The interest rate is only about 1.5% right now, but otherwise this meets all of your criteria. I like it because I don't have a debit/checking account with it. If I need to access the money, I would need to do a transaction through my local bank, which would take a couple of days (long enough to curb the impulse to buy a cruise or some crazy thing I don't need).
You may want to ask some local banks about their money market accounts. These are like savings accounts but only very slightly riskier and often offer a high savings interest rate.
I also think you might want to look into a Roth IRA. The Roth IRA differs from the 401(k) or regular IRA because you put money in after it's been taxed, so you can withdraw your *contribution* amount (not profits/interest earned) without penalty before retirement age. So, if you were saving for a house or wedding, you could take out your previous contributions without a penalty. I have an account through Vanguard and I like it. You could do a (relatively) safe portfolio of 5 diversified blue-chip stocks with decent dividends, do a money market account through them. I max out my Roth ($5,000 a year) automatically through my bank as well, so I never think about it.
A raise is a nice thing to have! Congratulations!
posted by shortyJBot at 7:28 PM on March 20, 2012
The interest rate is only about 1.5% right now, but otherwise this meets all of your criteria. I like it because I don't have a debit/checking account with it. If I need to access the money, I would need to do a transaction through my local bank, which would take a couple of days (long enough to curb the impulse to buy a cruise or some crazy thing I don't need).
You may want to ask some local banks about their money market accounts. These are like savings accounts but only very slightly riskier and often offer a high savings interest rate.
I also think you might want to look into a Roth IRA. The Roth IRA differs from the 401(k) or regular IRA because you put money in after it's been taxed, so you can withdraw your *contribution* amount (not profits/interest earned) without penalty before retirement age. So, if you were saving for a house or wedding, you could take out your previous contributions without a penalty. I have an account through Vanguard and I like it. You could do a (relatively) safe portfolio of 5 diversified blue-chip stocks with decent dividends, do a money market account through them. I max out my Roth ($5,000 a year) automatically through my bank as well, so I never think about it.
A raise is a nice thing to have! Congratulations!
posted by shortyJBot at 7:28 PM on March 20, 2012
Saeculorum: Maybe for you. At AT&T, it's a savings plan, 100% vested and on top of the 401(k).
posted by Mad_Carew at 7:30 PM on March 20, 2012
posted by Mad_Carew at 7:30 PM on March 20, 2012
Best answer: Hi there. I'm obsessed with saving,so I've spent a whole lot of time on this subject. Apologies in advance for the long-windedness.
There are three major considerations:
1. Liquidity (most important -- savings must be accessible when you need them)
2. Safety (you need the money to be there when you need it)
3. Yield (you could just keep cash if it wasn't for pesky inflation)
I'll give you all the options I've looked at and their pros and cons:
1. I bonds
My favorite savings vehicle is the I series savings bond. I bonds earn money based on the rate of inflation so you never lose purchasing power. I bond interest rates are set twice per year and are variable.
You purchase them online by opening up an account at www.treasurydirect.gov
You purchase I bonds at face value, starting at $25. You can set up a weekly or monthly recurring purchase. These bonds are backed by the full faith and credit of the US government.
Down sides: I bonds are not redeemable for 1 year after purchase, and you receive a penalty to accrued interest if you redeem within 5 years of purchase. Furthermore, there is a $10,000 per person per year purchase limit. I bonds are best for intermediate-term savings.
1/3 of my family's emergency fund is in I bonds.
2. CDs
A CD is also called a time deposit. This is when you give a bank a certain amount of money (usually $1000 minimum) for a fixed period of time -- and you just can't access the fund before that established date.
CD rates are extremely low right now. The best I've found that are open to everyone are at Alliant Credit Union (1.8% APY on a 5-year deposit). Most but not all banks give you the option of cashing out early with a penalty (3-6 months of interest). Read the fine print.
The minimum investment is $1000 and you cannot make additional contributions. Instead, save up another $1000 and buy another CD.
CDs are covered by the FDIC up to $250,000 per institution if I remember correctly.
1/3 of my family's emergency fund is in CDs at Alliant. Unfortunately, due to low interest rates, this money is losing purchasing power to inflation.
3. Short-term bond mutual fund
This is starting to get more complex. A bond mutual fund holds lots and lots of bonds, IOUs from companies or governments or other organizations.
Go to Vanguard -- they have the lowest expense rates in the industry. Select a short-term mutual fund based on your tax bracket. Most bond mutual funds are about as accessible as a bank account: you can even write checks out of them.
Municipal bond funds are federal- (and can also be state-) tax exempt. Yield is lower than taxable bond funds. Do a little math to make sure you come out on top.
If not, then pick a taxable bond fund like Vanguard Short-Term Investment Grade Bonds. This is slightly higher risk than municipal bonds, or Treasury bonds -- but the yield is a smidge higher. But remember that higher yield means higher risk, and this is your safe money, so keep duration short and credit quality high.
There are THOUSANDS of bond mutual funds. Make sure that you understand what you're buying before you lay your money down. I recommend Vanguard -- they're excellent stewards and maintain super-low
Regardless of which fund you choose, there's at least a $3000 minimum investment. After that you can invest smaller amounts regularly.
1/3 of my family's emergency fund is in VFSTX.
What NOT to do
If this is your safe money, your rainy-day or blown-up-car or lost-my-job fund, then you don't want to take risks with it. Don't:
- invest it in stocks (stocks are volatile and individual stocks can go all the way to $0)
- invest in long-term bonds (30-year Treasurys are as volatile as stocks)
- invest in commodities, including gold (volatility!)
- invest in physical goods (liquidity is key. A bar of gold bullion is beautiful but a real hassle to liquidate in an emergency
- "invest" in collectibles -- the funds should be liquid
- Series EE savings bonds -- at current interest rates, they just don't hold up to inflation
Also check out these awesome summaries of William Bernstein's investing books by Derek Sivers:
http://sivers.org/book/InvestorsManifesto
http://sivers.org/book/FourPillarsOfInvesting
I hope this helps. MeMail me if you want any other input, and good luck!
posted by honkeoki at 7:33 PM on March 20, 2012 [58 favorites]
There are three major considerations:
1. Liquidity (most important -- savings must be accessible when you need them)
2. Safety (you need the money to be there when you need it)
3. Yield (you could just keep cash if it wasn't for pesky inflation)
I'll give you all the options I've looked at and their pros and cons:
1. I bonds
My favorite savings vehicle is the I series savings bond. I bonds earn money based on the rate of inflation so you never lose purchasing power. I bond interest rates are set twice per year and are variable.
You purchase them online by opening up an account at www.treasurydirect.gov
You purchase I bonds at face value, starting at $25. You can set up a weekly or monthly recurring purchase. These bonds are backed by the full faith and credit of the US government.
Down sides: I bonds are not redeemable for 1 year after purchase, and you receive a penalty to accrued interest if you redeem within 5 years of purchase. Furthermore, there is a $10,000 per person per year purchase limit. I bonds are best for intermediate-term savings.
1/3 of my family's emergency fund is in I bonds.
2. CDs
A CD is also called a time deposit. This is when you give a bank a certain amount of money (usually $1000 minimum) for a fixed period of time -- and you just can't access the fund before that established date.
CD rates are extremely low right now. The best I've found that are open to everyone are at Alliant Credit Union (1.8% APY on a 5-year deposit). Most but not all banks give you the option of cashing out early with a penalty (3-6 months of interest). Read the fine print.
The minimum investment is $1000 and you cannot make additional contributions. Instead, save up another $1000 and buy another CD.
CDs are covered by the FDIC up to $250,000 per institution if I remember correctly.
1/3 of my family's emergency fund is in CDs at Alliant. Unfortunately, due to low interest rates, this money is losing purchasing power to inflation.
3. Short-term bond mutual fund
This is starting to get more complex. A bond mutual fund holds lots and lots of bonds, IOUs from companies or governments or other organizations.
Go to Vanguard -- they have the lowest expense rates in the industry. Select a short-term mutual fund based on your tax bracket. Most bond mutual funds are about as accessible as a bank account: you can even write checks out of them.
Municipal bond funds are federal- (and can also be state-) tax exempt. Yield is lower than taxable bond funds. Do a little math to make sure you come out on top.
If not, then pick a taxable bond fund like Vanguard Short-Term Investment Grade Bonds. This is slightly higher risk than municipal bonds, or Treasury bonds -- but the yield is a smidge higher. But remember that higher yield means higher risk, and this is your safe money, so keep duration short and credit quality high.
There are THOUSANDS of bond mutual funds. Make sure that you understand what you're buying before you lay your money down. I recommend Vanguard -- they're excellent stewards and maintain super-low
Regardless of which fund you choose, there's at least a $3000 minimum investment. After that you can invest smaller amounts regularly.
1/3 of my family's emergency fund is in VFSTX.
What NOT to do
If this is your safe money, your rainy-day or blown-up-car or lost-my-job fund, then you don't want to take risks with it. Don't:
- invest it in stocks (stocks are volatile and individual stocks can go all the way to $0)
- invest in long-term bonds (30-year Treasurys are as volatile as stocks)
- invest in commodities, including gold (volatility!)
- invest in physical goods (liquidity is key. A bar of gold bullion is beautiful but a real hassle to liquidate in an emergency
- "invest" in collectibles -- the funds should be liquid
- Series EE savings bonds -- at current interest rates, they just don't hold up to inflation
Also check out these awesome summaries of William Bernstein's investing books by Derek Sivers:
http://sivers.org/book/InvestorsManifesto
http://sivers.org/book/FourPillarsOfInvesting
I hope this helps. MeMail me if you want any other input, and good luck!
posted by honkeoki at 7:33 PM on March 20, 2012 [58 favorites]
Response by poster: Just wanted to pop in and say thanks for the answers thus far. Also, I'm open to using more than one vehicle, if that makes sense, though we're not talking about a huge amount of money here. I will have some initial funds to invest in the account, though.
Mad_Carew: Sadly, my company does not offer such an option. It's the 401(k), and that's it.
saecolorum: wouldn't high-yield bonds be high risk? I don't think I'd want to invest in any bonds here that are not investment-grade.
posted by breakin' the law at 7:44 PM on March 20, 2012
Mad_Carew: Sadly, my company does not offer such an option. It's the 401(k), and that's it.
saecolorum: wouldn't high-yield bonds be high risk? I don't think I'd want to invest in any bonds here that are not investment-grade.
posted by breakin' the law at 7:44 PM on March 20, 2012
Oh, I also wanted to mention that my Roth IRA through Vanguard is not tied to my employer. It's just my personal account I set up online. I like that it is not tied to my employer, so I don't have to change anything if I ever switch jobs.
posted by shortyJBot at 7:49 PM on March 20, 2012
posted by shortyJBot at 7:49 PM on March 20, 2012
"High risk" is not a well-defined term. If you don't want to go below investment grade, there are many bond funds that provide pretty good yield compared to a savings account. For instance, any risk in VUSTX is based on the federal government failing, which isn't something I usually like to consider.
Do note that inflation is a risk, so just avoiding direct cost losses doesn't mean that you won't lose money.
As an aside, when I meant IRA, I really meant Roth IRA. Traditional IRAs don't allow contribution withdrawals without a tax penalty.
posted by saeculorum at 7:52 PM on March 20, 2012
Do note that inflation is a risk, so just avoiding direct cost losses doesn't mean that you won't lose money.
As an aside, when I meant IRA, I really meant Roth IRA. Traditional IRAs don't allow contribution withdrawals without a tax penalty.
posted by saeculorum at 7:52 PM on March 20, 2012
CD laddering with a bank that will let you invest at relatively small amounts - like $500 - might be the way to go.
A new x-year CD at $500 followed in six months by a x-year CD at $500 and so on, till every six months a $500 CD is maturing (and you invest a NEW $500 plus the mature principal and the accrued interest, in a new x-year CD.) Eventually you have a ton of money in savings, which can be withdrawn at not-horrible penalty levels early, or you can wait a little while and get part of it out at no cost.
Build up the money for the next CD purchase in your ordinary savings account. Save $X per check (my bank lets me do this automatically.) Come to think of it, my bank actually has a CD type instrument that lets you pull a fixed (but changeable) amount each period and stick it in a CD. The interest was almost as good as the higher dollar CDs.
posted by SMPA at 7:53 PM on March 20, 2012 [3 favorites]
A new x-year CD at $500 followed in six months by a x-year CD at $500 and so on, till every six months a $500 CD is maturing (and you invest a NEW $500 plus the mature principal and the accrued interest, in a new x-year CD.) Eventually you have a ton of money in savings, which can be withdrawn at not-horrible penalty levels early, or you can wait a little while and get part of it out at no cost.
Build up the money for the next CD purchase in your ordinary savings account. Save $X per check (my bank lets me do this automatically.) Come to think of it, my bank actually has a CD type instrument that lets you pull a fixed (but changeable) amount each period and stick it in a CD. The interest was almost as good as the higher dollar CDs.
posted by SMPA at 7:53 PM on March 20, 2012 [3 favorites]
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posted by Proginoskes at 6:59 PM on March 20, 2012