What to do with extra emergency fund.

[Branhammer]

I know that you should have a decent emergency fund in the bank. I don't know what the rule of thumb is for how big an emergency fund should be, but I'm pretty sure ours is big enough. With the amount we have saved, my wife and I could probably both quit our jobs for two years and still pay for everything. With that said, I really think we are being stupid with our savings, because it is all just sitting in a savings account that yields .08% interest.

We have plenty going into our retirement. We each have a 401k, she has a pension, and I have both the FERS retirement program and military retirement. So I'm not looking to put our extra savings into retirement accounts that we can't touch for 20+ years. At the same time, I'm not looking for something totally liquid, as that is what we are currently doing with it and it yields practically nothing.

I explored CDs, as a relatively short, pre-determined savings term was appealing. We would be fine putting the money into some sort of account for 3-4 years and making interest, but even the best CD I've seen only yields .55% over 58 months. So that still seems like garbage to me.

We really want something that would yield a decent return that is still liquid enough that we could have access to it within 5 years. While we have a good bit saved, it's not enough to buy any kind of real estate outright and use it as a rental property.

At this point, we are considering something like Sharebuilder.

So, if you had plenty of retirement funds and a big enough emergency fund to support you for over 2 years, how much of it would you take out of the savings account and what would you do with it?

 

[ford fanatic]

Subscribing...

Wife and I are in the same situation.

 

[Branhammer]

It sucks because in order to see any gains at all, it seems like you have to go high-risk.

I don't want to use it to put a down payment on real estate, but it's not enough to buy a 2nd home outright. If I'm going to buy an investment property, it makes no sense to me to be paying interest on it. But it'll be a LONG time before we can basically double our savings and buy a property straight up.

 

[SonicDTR]

1 year of expenses in a liquid account, aka savings. Which sucks b/c it doesnt gain much. The rest you should invest.

Some folks think 3 months liquid, 9 months easily retrievable(within 7-10 days) is acceptable. Its all about your situation and future risks.

 

[13COBRA]

It sucks because in order to see any gains at all, it seems like you have to go high-risk.

That makes sense though, right? In order to yield high results, you have to take high risks. If it were low risk, high return, every one would be doing it.

 

[Branhammer]

That makes sense though, right? In order to yield high results, you have to take high risks. If it were low risk, high return, every one would be doing it.

Very true, it's just crazy to me that even the "coveted" CD, which ties your money up for up to 5 years or so, still yields nothing. But if the bank gives me a personal loan, they can charge me 6%+ in interest. They can rape me for profit even though I'm a low-risk (great credit score/history) but I can't get any kind of decent yield for my money. Maybe I just need to start my own bank or CC company...

 

[13COBRA]

Very true, it's just crazy to me that even the "coveted" CD, which ties your money up for up to 5 years or so, still yields nothing. But if the bank gives me a personal loan, they can charge me 6%+ in interest. They can rape me for profit even though I'm a low-risk (great credit score/history) but I can't get any kind of decent yield for my money. Maybe I just need to start my own bank or CC company...

I've had the same thoughts. But then you'll just want to loan to low risk consumers...and typically they already have a bank that works with them.

I bet you wouldn't want to loan to <500 scores haha

 

[MovingZen]

Look at Vanguard Admiral funds. There's varying risk/return levels depending on the fund you choose and you can get your money back out within days.

 

[Branhammer]

I've had the same thoughts. But then you'll just want to loan to low risk consumers...and typically they already have a bank that works with them.

I bet you wouldn't want to loan to <500 scores haha

Haha as someone who grew up in an area where everyone has either no credit or horrible credit, I can definitely say I would not lend them money. I could probably sell those people smart phones and big stupid rims for there '95 Cutlass Supreme though.

Look at Vanguard Admiral funds. There's varying risk/return levels depending on the fund you choose and you can get your money back out within days.

Thanks, I'll research that.

Unrelated, but another thing I'm curious about is this: what will the FED rate hikes over the next year or so mean for home prices? I worry that if they raise mortgage rates too much, home prices will have to drop in order for anyone to afford to buy a home. Should I be worried about our home being worth less than we paid for it?

 

[ford fanatic]

It sucks because in order to see any gains at all, it seems like you have to go high-risk.

I don't want to use it to put a down payment on real estate, but it's not enough to buy a 2nd home outright. If I'm going to buy an investment property, it makes no sense to me to be paying interest on it. But it'll be a LONG time before we can basically double our savings and buy a property straight up.

We're in the process of selling our second home now that has been a rental for the last 5 years (was my wife's house before we got married). Being a landlord just wasn't our cup of tea, for what we made off the house wasn't worth the hassle of renting. I would have to see a profit of $500+ a month to make it worth it, and we weren't even close.

 

[MovingZen]

Thanks, I'll research that.

Unrelated, but another thing I'm curious about is this: what will the FED rate hikes over the next year or so mean for home prices? I worry that if they raise mortgage rates too much, home prices will have to drop in order for anyone to afford to buy a home. Should I be worried about our home being worth less than we paid for it?

I'm no expert but I bought my house 10 years ago at a higher interest rate than I have now (re-fi) and the house is worth more now. To me, a home budget is based on how much you can afford a month including interest rate. A house is worth what a house is worth, if a person can't afford a payment they should be looking at a smaller house, older house, worse neighborhood, or whatever it takes to get that monthly payment into their budget. If you're going to take interest rates into account, what credit score are you going to market to? Different credit score will result in different interest rates. I'm sure there are other's who know more about home buying but I look at it like this: You buy a home for $100k, live in it long enough to pay down the loan to $75k. If you only sell the house for $75k or whatever the break even point is with closing costs and all that, then you essentially rented the property. Anything above that is bonus round.

 

[Branhammer]

I'm no expert but I bought my house 10 years ago at a higher interest rate than I have now (re-fi) and the house is worth more now. To me, a home budget is based on how much you can afford a month including interest rate. A house is worth what a house is worth, if a person can't afford a payment they should be looking at a smaller house, older house, worse neighborhood, or whatever it takes to get that monthly payment into their budget. If you're going to take interest rates into account, what credit score are you going to market to? Different credit score will result in different interest rates. I'm sure there are other's who know more about home buying but I look at it like this: You buy a home for $100k, live in it long enough to pay down the loan to $75k. If you only sell the house for $75k or whatever the break even point is with closing costs and all that, then you essentially rented the property. Anything above that is bonus round.

That is a really awesome way of looking at it that I had not thought about.

 

[ON D BIT]

The rule of thumb is 3-6 months savings of what you spend each month. If your monthly expenses are 4K each month you want 24-25k dollars in your Emergancy account to deem it fully funded. This should be liquid money and separate from your 401k and other retirement expenses.

If you lose your income this way you have a full 6 months to find something that duplicate it.
I would also make sure you have no dept and cheap term life for 10 times the value of your yearly salary.
Then pay off your mortgage.

Once you've done that you can use the extra money on things you enjoy, continue saving(1k a month for 20 years should net you close to 1 million), or investment that has higher yield. Remember this is money above and beyond retirement.

Presonally I would like to not live off my retirement but live off the interest of my retirement. I don't want to be in the situation where I hope I die before my retirement runs out.

 

[R.D.P.]

Open a brokerage account and put it in mutual funds except for 3 months expenses. You can choose funds that basically are a lock for modest gains and have zero chance of suddenly losing significant value.

 

[Screw-Rice]

Consult with a financial planner. Go with one that is fee based, and some offer a free initial consultation. I did this last week since I was all over the place with what I was wanting to do for investments. It shed a lot of light on things and helped me narrow down what I want to do, and will meet up with him again next month to make sure my ducks are in a row.

 

[LS2GTO]

I don't want to use it to put a down payment on real estate, but it's not enough to buy a 2nd home outright. If I'm going to buy an investment property, it makes no sense to me to be paying interest on it.

Why not? Unless you have a specific thing for that exact statement, I think you should reconsider based on the numbers. Here's my example of the numbers I worked out:

I had $60,000 that was just sitting around just like you and wanted to keep it all in a liquid and safe manner. I put it in a money market earning 1% netting $600 a year, $50 a month. Big whoop right?

Instead I took that money and put it as a downpayment for a condo in my area. Mortgage with interest, fees and insurance comes out to about $1900 a month and the place is currently renting out for $2100 a month.

So let's look at what my "$60,000" is getting me by having it invested in a property:

$200 a month straight profit
$400 a month of straight equity in a property that is relatively liquid (in this market and location, I can have it sold in less than 1 month)

For a grand total of $600 a month...a far cry compared to the $50 a month the same money would be earning in a money market account.

This does not take into account the actual value of the property which has gone up $40,000 in the past 3 years.

So even after paying interest and all that other crap you did not want to get involved in, my stack of money is earning me alot more in this instance than in any other safe investment. And yes, there will be realtor's fees when I sell...and yes there are upkeep costs to maintain the unit. But in the end, it's still going to be earning me a helluva lot more than it sitting in a shitty savings account. No it's not as good of a return as you can get in a high risk investment, but then again it's nowhere near as risky.

 

[Machdup1]

Get a certified financial advisor who does not get commissions on financial products you invest in.

 

[Never_Enough]

Open a brokerage account and put it in mutual funds except for 3 months expenses. You can choose funds that basically are a lock for modest gains and have zero chance of suddenly losing significant value.

What mutual funds is your money in?

 

[MG0h3]

Piss away on car......

J/K

I have a friend at work that is in the same boat. Hes worried about losing money and wants to do a CD. Like you said, garbage.

Ill also never use a stock broker or financial planner, unless I just need info on how to avoid taxes.

Id start watching the stock market and get a feel for it. I started out making small trades on Scottrade and now just do it through an IRA. You can put 5500 a year in and can take the principal out penalty free.

Ive made over 30% this year on maybe 10 trades.

 

[ON D BIT]

What mutual funds is your money in?

There a are a ton out there. Look for ones with 10%+ ave yearly return for 10/20 years or more.