Saving Smarter
September 3, 2015 4:32 PM Subscribe
Where should I put my money, with specific goals in mind?
I'm making decent money right now and I'm saving a good chunk, but I'm not that financially savvy and I feel like I could be investing my money more wisely. Travel/experiences are definitely a huge priority for me and I am willing to spend a lot of money there. On the other hand, I want to be smart about the future. I live in LA and am setting aside money to buy a place, even though I am happy renting now and definitely NOT ready to own a home at the moment. Frankly I don't even know if it's possible for me to ever own a single-family home in LA (a condo, maybe). The current breakdown:
Retirement Savings:
- I belong to a union, which has two pension plans--I am already vested in both
- The union also offers a non-matching 401k plan, I contribute 18% and max out every year (I chose a Vanguard Target retirement fund)
- I have a Roth IRA (ANOTHER vanguard target retirement fund). I contributed the max for a few years but have slacked in the past two years. I plan on starting contributions again soon.
Aside from that I have an automatic withdrawal of 30% of my take home pay that is deposited into an online savings account. Currently the account is divided into emergency funds, travel, and future home. I'm currently working on getting my emergency funds up to cover 6 months living expenses and paying off my cc balances, which should all be doable by the end of the year. Once that is done, I plan on upping my automatic withdrawal to 50% of my take home to cover my yearly savings goals, which include the Roth max contribution amount, Travel/experiences (Travel is a big priority for me so I'm shooting for 7-8k?), and future home contributions. If I stay on course with the 50% I should have a 18-20% house down payment in about 4 years.
My main question is what to do with that "future home" fund. Currently it's sitting at 20k with 0.75% APY. Is there a better place to put this money if I don't plan on touching it for at least 4-5 years? I know that generally interest rates are dismal but if possible I'd like to make that money work a little harder. I don't know a dang thing about stocks and funds etc etc but I could try to learn.
Other than that, is there anything I should reshuffle? I just want to stay on the right path!
I'm making decent money right now and I'm saving a good chunk, but I'm not that financially savvy and I feel like I could be investing my money more wisely. Travel/experiences are definitely a huge priority for me and I am willing to spend a lot of money there. On the other hand, I want to be smart about the future. I live in LA and am setting aside money to buy a place, even though I am happy renting now and definitely NOT ready to own a home at the moment. Frankly I don't even know if it's possible for me to ever own a single-family home in LA (a condo, maybe). The current breakdown:
Retirement Savings:
- I belong to a union, which has two pension plans--I am already vested in both
- The union also offers a non-matching 401k plan, I contribute 18% and max out every year (I chose a Vanguard Target retirement fund)
- I have a Roth IRA (ANOTHER vanguard target retirement fund). I contributed the max for a few years but have slacked in the past two years. I plan on starting contributions again soon.
Aside from that I have an automatic withdrawal of 30% of my take home pay that is deposited into an online savings account. Currently the account is divided into emergency funds, travel, and future home. I'm currently working on getting my emergency funds up to cover 6 months living expenses and paying off my cc balances, which should all be doable by the end of the year. Once that is done, I plan on upping my automatic withdrawal to 50% of my take home to cover my yearly savings goals, which include the Roth max contribution amount, Travel/experiences (Travel is a big priority for me so I'm shooting for 7-8k?), and future home contributions. If I stay on course with the 50% I should have a 18-20% house down payment in about 4 years.
My main question is what to do with that "future home" fund. Currently it's sitting at 20k with 0.75% APY. Is there a better place to put this money if I don't plan on touching it for at least 4-5 years? I know that generally interest rates are dismal but if possible I'd like to make that money work a little harder. I don't know a dang thing about stocks and funds etc etc but I could try to learn.
Other than that, is there anything I should reshuffle? I just want to stay on the right path!
Response by poster: Oh I should have specified...the cc "debt" is because I'm "riding the float", I pay off the monthly balance/never incur interest but I was just holding off on the more aggressive savings while I correct that.
posted by sprezzy at 4:47 PM on September 3, 2015
posted by sprezzy at 4:47 PM on September 3, 2015
Only thing I'd suggest is to replace your 0.75% savings account with something like a money market (Vanguard, etc.) tied to the S&P 500 (or other index fund). You should be able to get a much better interest rate from something like that.
posted by rhizome at 5:09 PM on September 3, 2015 [2 favorites]
posted by rhizome at 5:09 PM on September 3, 2015 [2 favorites]
If you might need the money in 4-5 years, investing it in mutual funds carries more risk than you would probably want to take. The shorter the investment horizon, the higher the chances that you will be better off in an FDIC-insured deposit account. You should shop the online banks for the best 5-year CD rates. There are websites that compile the best current rates. If there's a chance you would need to withdraw the money early, also compare the early withdrawal penalties and policies. You will probably find better CD rates at an online-only bank, since they tend to have lower expenses, but not necessarily. Having said that, since you are in good shape overall, you might be willing to take the higher risk of a stock/bond mutual fund in return for higher potential returns. It just depends on your circumstances.
posted by jkent at 5:15 PM on September 3, 2015 [1 favorite]
posted by jkent at 5:15 PM on September 3, 2015 [1 favorite]
I actually do put my house money in stock market index funds, but it's not a great idea if your time horizon is either short or very specific (like if you know for sure you want to buy a house in 2020 exactly). But it sounds like you're not very specific about when you would want to buy, so it might be ok for you, assuming you don't get freaked out if you lose money.
A bond market index fund (available at something like Vanguard) might be a good choice... less volatility than a stock market index fund and better returns than a CD - but not always that much better, and it is still possible to lose money.
posted by mskyle at 5:24 PM on September 3, 2015
A bond market index fund (available at something like Vanguard) might be a good choice... less volatility than a stock market index fund and better returns than a CD - but not always that much better, and it is still possible to lose money.
posted by mskyle at 5:24 PM on September 3, 2015
I put my house money in an REIT that invested in residential properties. My logic was that if the housing market went up, then my investment would likely track up with it; and my investment would probably only lose money if the property I wanted to buy with that money got cheaper.
I don't actually know how crazy of an idea that was, seeing as I was also betting on the management of a specific REIT not to do anything stupid, but it worked out in my case.
posted by whisk(e)y neat at 5:57 PM on September 3, 2015 [2 favorites]
I don't actually know how crazy of an idea that was, seeing as I was also betting on the management of a specific REIT not to do anything stupid, but it worked out in my case.
posted by whisk(e)y neat at 5:57 PM on September 3, 2015 [2 favorites]
1. You're doing really great. Future you will be really thankful for the investing and saving present you is doing.
2. The hardest term to say anything about is the medium term of 4-5 years. Long enough that the returns from investing can be worth something, short enough that you can get burned by a stock market crash.
3. A know-next-to-nothing fire-and-forget approach that has some risk but is not insane and might work for you (especially since you're already almost doing this) is to buy the Vanguard Target fund not for your retirement date, but for the date you are planning on taking the money out to buy a house (i.e. the 2020 target fund) - the intention behind the fund is to try and balance between having growth, but be conservative since people are close to taking out the money. It doesn't really matter if the money is for a retirement or a first house purchase.
4. Something that may help you gauge the risk/reward is the website portfoliocharts.com; they have three charts that allow you to describe an index fund or group of funds and see how historically (since 1972) that has performed, in "real" terms (that is, after inflation - if you are getting 0.75% on your money and inflation is 2% - a fairly typical rate from recent years - then you're in effect losing money every year; at the end of year 1, your $100 balance has risen to $100.75, but you can only buy $98.77 of stuff with it.)
As an example, look at the pixel calculator; this shows what returns have been like historically for different combinations of asset classes. If you don't want to do interest calculations, that's okay - as a decent approximation, over 5 years your $20,000 will change by $1000 for every 1% of return. (20K and 5 years happen to be lucky for this).
So the pixel chart shows that if you had historically chosen 60% total stock market and 40% total bond market (the default) and kept in for 5 years, your $20K would have been worth less than $17K if it's dark red (which occurs one time in column 5), $17K-20K if it's pink (4x), $20-23K if it's sort of taupe (9x), $23-26K for light green (5x), $26-29K for medium green (8x) and > $29K for dark green (12x). So 5 out of 39 times in the past, you would have had less money than you started with. But 12 times, you would have gained $9000 or more from your money. There's also a table labeled "total returns" showing the maximum, minimum and median returns over 1, 3, 5 and 10 years. For this mix, at 5 years the minimum was -20%, that is, your $20K would become $16K. The median is 37%, i.e. your $20K would go up to 27.4K. (I'd ignore the maximum. Greed is a powerful emotion.)
Is this a good tradeoff for you? Your call. You are in a position where you could take some risks with this money if you want to. Note that past performance is no guarantee of future returns; for instance, using the default 60/40 split, notice that if we were making that decision in 1998, almost all the previous returns would be solid green with the pinks in the far history. But since then, returns have generally been much lower.
You can try different values in the asset allocation cells (the black) to look at other possibilities; Total Bond Market as suggested above, for example, or total Stock Market. The Vanguard 2020 Target fund is approximately 37% Total Stock Market, 22% Total International Stock Market ("Total Int'l" in the blue section), 40% Total Bond Market* and 1% Synthetic TIPS. The other two calculators on the site also have useful visualizations.
* it's actually 28% Total Bond and 12% International Bond, but the latter isn't an option.
posted by Homeboy Trouble at 6:20 PM on September 3, 2015 [1 favorite]
2. The hardest term to say anything about is the medium term of 4-5 years. Long enough that the returns from investing can be worth something, short enough that you can get burned by a stock market crash.
3. A know-next-to-nothing fire-and-forget approach that has some risk but is not insane and might work for you (especially since you're already almost doing this) is to buy the Vanguard Target fund not for your retirement date, but for the date you are planning on taking the money out to buy a house (i.e. the 2020 target fund) - the intention behind the fund is to try and balance between having growth, but be conservative since people are close to taking out the money. It doesn't really matter if the money is for a retirement or a first house purchase.
4. Something that may help you gauge the risk/reward is the website portfoliocharts.com; they have three charts that allow you to describe an index fund or group of funds and see how historically (since 1972) that has performed, in "real" terms (that is, after inflation - if you are getting 0.75% on your money and inflation is 2% - a fairly typical rate from recent years - then you're in effect losing money every year; at the end of year 1, your $100 balance has risen to $100.75, but you can only buy $98.77 of stuff with it.)
As an example, look at the pixel calculator; this shows what returns have been like historically for different combinations of asset classes. If you don't want to do interest calculations, that's okay - as a decent approximation, over 5 years your $20,000 will change by $1000 for every 1% of return. (20K and 5 years happen to be lucky for this).
So the pixel chart shows that if you had historically chosen 60% total stock market and 40% total bond market (the default) and kept in for 5 years, your $20K would have been worth less than $17K if it's dark red (which occurs one time in column 5), $17K-20K if it's pink (4x), $20-23K if it's sort of taupe (9x), $23-26K for light green (5x), $26-29K for medium green (8x) and > $29K for dark green (12x). So 5 out of 39 times in the past, you would have had less money than you started with. But 12 times, you would have gained $9000 or more from your money. There's also a table labeled "total returns" showing the maximum, minimum and median returns over 1, 3, 5 and 10 years. For this mix, at 5 years the minimum was -20%, that is, your $20K would become $16K. The median is 37%, i.e. your $20K would go up to 27.4K. (I'd ignore the maximum. Greed is a powerful emotion.)
Is this a good tradeoff for you? Your call. You are in a position where you could take some risks with this money if you want to. Note that past performance is no guarantee of future returns; for instance, using the default 60/40 split, notice that if we were making that decision in 1998, almost all the previous returns would be solid green with the pinks in the far history. But since then, returns have generally been much lower.
You can try different values in the asset allocation cells (the black) to look at other possibilities; Total Bond Market as suggested above, for example, or total Stock Market. The Vanguard 2020 Target fund is approximately 37% Total Stock Market, 22% Total International Stock Market ("Total Int'l" in the blue section), 40% Total Bond Market* and 1% Synthetic TIPS. The other two calculators on the site also have useful visualizations.
* it's actually 28% Total Bond and 12% International Bond, but the latter isn't an option.
posted by Homeboy Trouble at 6:20 PM on September 3, 2015 [1 favorite]
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posted by srboisvert at 4:42 PM on September 3, 2015