SunsetSail
Recycles dryer sheets
- Joined
- Jul 28, 2010
- Messages
- 255
I would appreciate thoughts and comments on my situation in regard to where to hold cash. I specifically would like to avoid any rent vs. buy discussion as that debate has been address enough in my opinion. The question of where to hold cash has probably been debated enough as well, but I would like thoughts on my specific situation as the answer to that question often starts with ‘it depends’.
DW, my two kids (2 & 4) and I are currently renting. We sold our house last year and originally planned to buy in the area where we currently rent toward the end of this year. We now are considering renting longer (2 years+) given our good rent situation and the high price of houses in our area.
We pay $2,100/month in rent (this is a moderately high cost area of so cal., good schools, safe area, etc.). At current prices we want spend about $500K on a house and we have about $225K set aside to purchase it. The money is currently earning .9% in a fully liquid savings account. My hope is that house prices will continue to drop and the purchase price will be closer to $400K but we aren’t counting on it.
The heart of my question is what to do with the cash. I’ve mentally categorized the general options as follows:
(1) Nothing – leave it where it is now.
(2) Several long term CDs at a low early withdrawal penalty bank (like Ally), currently paying about 2.4% for five years with a two-month interest penalty for early withdrawal.
(3) CA tax-exempt intermediate term muni bond fund yielding about 3.44% with an after-tax equivalent of about 5.6% in my marginal bracket.
Option 1 isn’t really an option compared to Option 2. So it really comes down to the level of risk I’m willing to accept at a given return between 2 and 3. I’m fully aware of the risks involved in holding bonds, especially in this economic environment as well as the financial condition of CA. Normally I wouldn’t have a question about avoiding the risk of Option 3. However, I can’t help but thinking that there generally is an inverse correlation between housing prices and market interest rates. This situation may mitigate some of the interest risk rate risk for Option 3.
What would you do in this situation and what considerations am I missing?
DW, my two kids (2 & 4) and I are currently renting. We sold our house last year and originally planned to buy in the area where we currently rent toward the end of this year. We now are considering renting longer (2 years+) given our good rent situation and the high price of houses in our area.
We pay $2,100/month in rent (this is a moderately high cost area of so cal., good schools, safe area, etc.). At current prices we want spend about $500K on a house and we have about $225K set aside to purchase it. The money is currently earning .9% in a fully liquid savings account. My hope is that house prices will continue to drop and the purchase price will be closer to $400K but we aren’t counting on it.
The heart of my question is what to do with the cash. I’ve mentally categorized the general options as follows:
(1) Nothing – leave it where it is now.
(2) Several long term CDs at a low early withdrawal penalty bank (like Ally), currently paying about 2.4% for five years with a two-month interest penalty for early withdrawal.
(3) CA tax-exempt intermediate term muni bond fund yielding about 3.44% with an after-tax equivalent of about 5.6% in my marginal bracket.
Option 1 isn’t really an option compared to Option 2. So it really comes down to the level of risk I’m willing to accept at a given return between 2 and 3. I’m fully aware of the risks involved in holding bonds, especially in this economic environment as well as the financial condition of CA. Normally I wouldn’t have a question about avoiding the risk of Option 3. However, I can’t help but thinking that there generally is an inverse correlation between housing prices and market interest rates. This situation may mitigate some of the interest risk rate risk for Option 3.
What would you do in this situation and what considerations am I missing?