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Better place for emergency fund/primary residence down payment fund?
Old 02-23-2011, 11:58 AM   #1
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Better place for emergency fund/primary residence down payment fund?

Hello:

I have money set aside in case I lose my job or if I run into some other type of economic problem. I currently rent, so this money may alternatively be used for a down payment on real estate. The money is in a money market account that currently yields .75%

Since you know the nature of the use for the money, and my time frame for use, can you recommend any other alternative investments that would beat the .75% yield that I am currently earning? Or is this the best that I can currently earn on this money?

Thank you for your insight.
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Old 02-23-2011, 12:23 PM   #2
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Some people put this sort of savings in CD's, which earn a little bit more. Other than that, I have no idea.

You DO realize that you will still need an emergency fund, in case of losing your job or other economic problem, even after buying a new home, right? So best to continue saving in order to accumulate enough to cover both down payment and emergency fund.
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Old 02-23-2011, 12:26 PM   #3
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I use some of the various internet banks, such as Ally, for my cash reserves. You can access this money any time, and they are paying about 1.2%.
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Old 02-23-2011, 12:55 PM   #4
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I like short-term corporate bond funds such as VFSUX and VCSH. They are more risk and can lose money, but that's a chance I have been willing to take.

For example, if your emergency fund is set to supply you with 12 months of living expenses, I see no reason to worry about a 10% loss in your short-term bond fund. You can simply increase the amount in the emergency fund now by 10%, so it is has 13.2 months of expenses.

And what you use for a home down payment will depend on how flexible that goal is. If the goal is 3 to 5 years away, you can take on more risk than if was in August 2011. Also it will depend on how much you increase that fund each month or year. If you are increasing the home down payment fund by 25% each year (finished in 4 years), then if the fund value drops by 25%, you only have to save another year. For some folks, that is no big deal. If it is no big deal, I would use a balanced fund of stocks and bonds.

Other folks are more conservative than I am.
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Old 02-23-2011, 01:18 PM   #5
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Quote:
Originally Posted by midnighter777 View Post
Since you know the nature of the use for the money, and my time frame for use, can you recommend any other alternative investments that would beat the .75% yield that I am currently earning? Or is this the best that I can currently earn on this money?
CDs are the next-best approach. If you break the fund into a large CD chunk and a small "emergency-fund" CD chunk, then you could redeem the emergency money early (if necessary) and only pay a small early-redemption penalty.

You're heading down the slippery slope of "chasing yield"-- by taking bigger risks of losing principal. It hurts to look at cash earning such small amounts, but the real benefits of cash come when you buy that home with a 20% down payment (no mortgage insurance required), when you can negotiate with the seller from a position of strength because your loan has been pre-approved, and when you can have some cash left over to negotiate with home-improvement contractors if necessary. That's when the discounts and lower prices and rebates really begin to leverage the "yield" on your money.
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Old 02-23-2011, 01:31 PM   #6
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I use i-Bonds. But you have to assess if it will work for you. You can't touch them for 1 year and then there is a penalty if you withdraw before 5 years term.
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Old 02-23-2011, 01:55 PM   #7
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I would suggest either CDs (which can have a higher than savings account yield even after an early withdrawal penalty) or an online savings account. As a Costco member I recently opened a CapOne account that pays 1.3% plus a quarterly bonus of 10% of interest earned. I also have a pool of longer term CDs as part of the e fund.
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Old 02-23-2011, 05:35 PM   #8
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If you are in a state with Dollar Bank they have a savings account that pays 2% interest on up to $20,000. It has to be tied to a Free Checking that requires 6 transactions a month.

I'm close to a Dollar Bank so I opened these accounts for a better paying, easily accessible, emergency fund. The monthly interest gets moved to an online savings (Discoverbank 1.2%) since anything over $20,000 gets only .25%.

Dollar Bank in Pittsburgh and Cleveland offers true internet banking services including online checking accounts, savings, certificate of deposit (CDs), online bill payment, consumer & home equity loans, mortgages, credit cards, personal, small busin
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