Where to invest various "funds"

[corn18]

I find that I am starting to collect a significant amount of cash in my various "funds":

$40,000 job loss fund (this is just for job loss. My EF covers emergencies other than job loss)
$22,000 new car fund (no immediate need for this)
$35,000 taxable college fund (I contribute $2,000 annually to a 529 for the tax break. Will need to start withdrawing in 2016 so don't need to tie it all up in a 529)

I am hesitant to dump it all into the market as it seems to be at historic highs. But I am also not happy about losing value to modest inflation.

Where do you put this kind of savings?

Thanks,

Tom

[feh]

I am hesitant to dump it all into the market as it seems to be at historic highs. But I am also not happy about losing value to modest inflation.

Depends on your time horizon - when will you need the money?

Bolded text above is a red flag...do not try to time the market. Markets being near/at an all time high is not relevant. If you're going to invest the money in equities, do it ASAP.

[corn18]

Depends on your time horizon - when will you need the money?

Bolded text above is a red flag...do not try to time the market. Markets being near/at an all time high is not relevant. If you're going to invest the money in equities, do it ASAP.

Timeline:

Job loss fund: Unknown. I hope I never, ever need it. But if I do, I need it to be there and not be down 20% because of a market correction. Maybe this is a good candidate for a bond fund?

Car fund: 2-5 years. Truck is 6 years old but only has 57,000 miles and running strong. Other cars are new. So I could be a little more aggressive with this. And if it drops 10%, so be it. Not a big deal. Maybe an index fund?

Taxable college fund: need it 2016-2019 and will be adding to it as I withdraw from it. Would like to preserve capital, but a dip wouldn't kill me. This might be best in a money market account?

As far as timing the market, I don't. 100% of my investments go into the market. I don't consider these funds as "investments". They are savings. Maybe I am looking at this all wrong?

[feh]

Timeline:

Job loss fund: Unknown. I hope I never, ever need it. But if I do, I need it to be there and not be down 20% because of a market correction. Maybe this is a good candidate for a bond fund?

Car fund: 2-5 years. Truck is 6 years old but only has 57,000 miles and running strong. Other cars are new. So I could be a little more aggressive with this. And if it drops 10%, so be it. Not a big deal. Maybe an index fund?

Taxable college fund: need it 2016-2019 and will be adding to it as I withdraw from it. Would like to preserve capital, but a dip wouldn't kill me. This might be best in a money market account?

As far as timing the market, I don't. 100% of my investments go into the market. I don't consider these funds as "investments". They are savings. Maybe I am looking at this all wrong?

I wouldn't put any money you may need in less than 5 years in equities. So, you'd be looking at fixed income options, such as:
short term bond funds
money markets
CDs
savings accounts

None of these options are gonna provide big returns, given how low interest rates are. You're essentially trying to keep up w/ inflation, or maybe eek out a small gain.

I Bonds are an excellent option; they are tax free if used for education. Google for more info.

[Like2Plan]

I have been pondering the same question.
Some options I have been considering:

Vanguard Wellington Fund Investor Shares (VWELX)--asset allocation about 65% stocks and 35% cash and bonds.
Vanguard Wellesley Income Fund Investor Shares (VWINX)--asset allocation about 37% stocks and 64% cash and bonds.
(More risky--maybe not appropriate for short time horizons).


I-bonds. But, you can't cash them in until after one year. And, if you cash them in before five years, you lose the last three months of interest.

CD's

Savings account.

[corn18]

I think I am going to put the short term stuff in a USAA Short Term Bond fund. Not big returns (2.5% to 3%) with a .5% expense fee. So total return will be 2%. The thing that looked good was the only time it was a negative return was 2008 and it was break even that year. So at least I can almost keep up with inflation while minimizing downsize risk and preserving liquidity. Just seems better than letting it depreciate as cash or saving.

There are more aggressive bond funds that return 8% but in 2008 they dropped 12%. And the index funds are frightening from a downside risk standpoint. I'll leave those in my 401k and IRA.

Tom

[JodieWRoberts]

Yeah, don't invest all your money over marketing. If you want your money after long time then the best option is to choose a fixed deposit for long term. It also depend the time period or money you want.

[jIM_Ohio]

I find that I am starting to collect a significant amount of cash in my various "funds":

$40,000 job loss fund (this is just for job loss. My EF covers emergencies other than job loss)
$22,000 new car fund (no immediate need for this)
$35,000 taxable college fund (I contribute $2,000 annually to a 529 for the tax break. Will need to start withdrawing in 2016 so don't need to tie it all up in a 529)

I am hesitant to dump it all into the market as it seems to be at historic highs. But I am also not happy about losing value to modest inflation.

Where do you put this kind of savings?

Thanks,

Tom

I posted many years about a layered emergency fund, and this is a great example of why.

Let me add, consider house maintenance in the same pool of money, and how much cash do you add to this stack each month?

For example, if you you own a house, there should be a line item in budget for house maintaince. Even if that money goes 10 years without being touched, when you need a new roof, hot water heater, HVAC or similar, at minimum you need a process to replenish your emergency fund after fixing the problem (and paying for it).

I mention the above, because the solution I would suggest is not simple.


Step 1- analyze cash flow. I am looking for the amount you add to these sources EACH MONTH. Some numbers might be an annual contribution, but break that down to a monthly amount (is the 529 $166/mo or $2000 per year)? Are you adding to the car fund each month or year? Are you adding to taxable college fund?

Step 2, look at your balance sheet. Focus on assets and liabilities.

Step 3, when analyzing above, you need to focus on what I call "timeline" planning.


Create a timeline. Begin it at today, and add items to timeline which cost money. For example, we know from age 18-22 there will be college expenses- add those in. You can likely predict when you need a new car within 3-5 years. Add that to timeline.

There are other line items in cash flow (such as house repairs) you cannot guess. This is why looking at this from different directions helps.

The timeline can suggest which money can be tied up for a length of time
The timeline can suggest how much money is needed any given year
The cash flow analysis will suggest how much each year is being "added" to the above.


Here is an example of how this might look:

Car replacement fund: $200/mo
House repair fund $100/mo
College contribution $300/mo
Job replacement fund $200/mo

There is some logic to above. $200/mo for a car replacement (to me) is $2400/year, car lasts 10 years, so it's about a $24k car. If you drive better cars than this, increase this amount. For example a $48k car would be $400/mo for 10 years.

$100/mo house repairs is $1200/year and if you think of remodeling 1 room per year, this likely covers cost of a bedroom, or you might save 5 years for a new bathroom. Every 10 years you are spending $12k on the house repairs (new hot water heater or new HVAC might cost half that). 1 remodel and 1 appliance every 10 years eats this money up fast.

The college contribution should be backed out- if you think you need to save $200k for college and have 5 years to do it, you should be saving $40k per year (the interest should cover cost inflation, but I would not risk this money in market- plan on saving nearly 100% of cost).


Look at the monthly amounts above

Car replacement fund: $200/mo
House repair fund $100/mo
College contribution $300/mo
Job replacement fund $200/mo

This is $800/mo of money.

What I would do is make sure you have
a) disability insurance
b) 6 months cash in an emergency fund
c) any short term money needs in cash equivalents (CDs for example)
short term is defined here as 2 years or less, if you think you need a new car in 4 years, that is a gray area explained below
d) take the $800/mo above and invest it (I recommend muni bonds, Permanent Portfolio, Wellesley or Wellington, or T Rowe Spectrum Income as examples of funds to use which pay better than savings accounts with A LOT more risk). Less risk than market for sure, but principal is at risk.
e) With the existing cash which exists now, you need to allocate it to c) or d) based on timeframe

If you need the money, the first thing you do is tap into d). Meaning stop the $800/mo contributions and use cash flow to pay the expense. Need a new HVAC, put it on a credit card, and the $800/mo pays it off in 2-4 months. Car repair- use the $800/mo. When child goes to college, you might stop the $800/mo entirely and just fund college right from cash flow, without liquidating many assets (if you need a house repair while $800/mo is being sent for tuition, that is when you tap into the assets).

If you don't have enough cash to cover the next 2 years on the timeline, the $800/mo is always added to cash first, then an investment second. The investments chosen are some mix of 25% bonds-75% bonds with equities mixed in for most of the examples. I would consider their yearly values stable- most yearly returns positive- but there is risk to each.

If you see a new car on timeline in 4 years, no worries, if you see need in 2 years, I would be adding $800/mo to a cash position and within 2 years you have $20k available in cash, no actual investment was touched. The investment gets touched when life happens and you need a new car while paying college tuition when your roof gets replaced and the hot water heater goes out too.

I am just finishing year 1 of implementing this system for myself.
If you get really into this, you can have a vacation item in the cash flow ($400/mo??) and then the $800/mo becomes $1200/mo and you have more options to pay for large expenses right from cash flow.

[corn18]

I posted many years about a layered emergency fund, and this is a great example of why.

Let me add, consider house maintenance in the same pool of money, and how much cash do you add to this stack each month?

For example, if you you own a house, there should be a line item in budget for house maintaince. Even if that money goes 10 years without being touched, when you need a new roof, hot water heater, HVAC or similar, at minimum you need a process to replenish your emergency fund after fixing the problem (and paying for it).

I mention the above, because the solution I would suggest is not simple.


Step 1- analyze cash flow. I am looking for the amount you add to these sources EACH MONTH. Some numbers might be an annual contribution, but break that down to a monthly amount (is the 529 $166/mo or $2000 per year)? Are you adding to the car fund each month or year? Are you adding to taxable college fund?

Step 2, look at your balance sheet. Focus on assets and liabilities.

Step 3, when analyzing above, you need to focus on what I call "timeline" planning.


Create a timeline. Begin it at today, and add items to timeline which cost money. For example, we know from age 18-22 there will be college expenses- add those in. You can likely predict when you need a new car within 3-5 years. Add that to timeline.

There are other line items in cash flow (such as house repairs) you cannot guess. This is why looking at this from different directions helps.

The timeline can suggest which money can be tied up for a length of time
The timeline can suggest how much money is needed any given year
The cash flow analysis will suggest how much each year is being "added" to the above.


Here is an example of how this might look:

Car replacement fund: $200/mo
House repair fund $100/mo
College contribution $300/mo
Job replacement fund $200/mo

There is some logic to above. $200/mo for a car replacement (to me) is $2400/year, car lasts 10 years, so it's about a $24k car. If you drive better cars than this, increase this amount. For example a $48k car would be $400/mo for 10 years.

$100/mo house repairs is $1200/year and if you think of remodeling 1 room per year, this likely covers cost of a bedroom, or you might save 5 years for a new bathroom. Every 10 years you are spending $12k on the house repairs (new hot water heater or new HVAC might cost half that). 1 remodel and 1 appliance every 10 years eats this money up fast.

The college contribution should be backed out- if you think you need to save $200k for college and have 5 years to do it, you should be saving $40k per year (the interest should cover cost inflation, but I would not risk this money in market- plan on saving nearly 100% of cost).


Look at the monthly amounts above


This is $800/mo of money.

What I would do is make sure you have
a) disability insurance
b) 6 months cash in an emergency fund
c) any short term money needs in cash equivalents (CDs for example)
short term is defined here as 2 years or less, if you think you need a new car in 4 years, that is a gray area explained below
d) take the $800/mo above and invest it (I recommend muni bonds, Permanent Portfolio, Wellesley or Wellington, or T Rowe Spectrum Income as examples of funds to use which pay better than savings accounts with A LOT more risk). Less risk than market for sure, but principal is at risk.
e) With the existing cash which exists now, you need to allocate it to c) or d) based on timeframe

If you need the money, the first thing you do is tap into d). Meaning stop the $800/mo contributions and use cash flow to pay the expense. Need a new HVAC, put it on a credit card, and the $800/mo pays it off in 2-4 months. Car repair- use the $800/mo. When child goes to college, you might stop the $800/mo entirely and just fund college right from cash flow, without liquidating many assets (if you need a house repair while $800/mo is being sent for tuition, that is when you tap into the assets).

If you don't have enough cash to cover the next 2 years on the timeline, the $800/mo is always added to cash first, then an investment second. The investments chosen are some mix of 25% bonds-75% bonds with equities mixed in for most of the examples. I would consider their yearly values stable- most yearly returns positive- but there is risk to each.

If you see a new car on timeline in 4 years, no worries, if you see need in 2 years, I would be adding $800/mo to a cash position and within 2 years you have $20k available in cash, no actual investment was touched. The investment gets touched when life happens and you need a new car while paying college tuition when your roof gets replaced and the hot water heater goes out too.

I am just finishing year 1 of implementing this system for myself.
If you get really into this, you can have a vacation item in the cash flow ($400/mo??) and then the $800/mo becomes $1200/mo and you have more options to pay for large expenses right from cash flow.

I like this approach. Hadn't thought about it this way, but it makes sense.

Current state:

$40,000 EF job loss no monthly add (fully funded)
$8,000 EF no monthly add (fully funded)
$3,000 house repair, no monthly add (fully funded, house was new in 2008)
$21,000 new car fund, add $500 / month (fully funded, no foreseeable need for a new car in the next 2 years)
$47,000 college fund, add $1,000 / month (need a lot more, but the ins and outs are ok for now)
$2,000 investment account, add $1,000 / month (no designated purpose)

Retirement savings come out before I get paid. Vacation dollars comes from cash flow.

Maybe I could make a small adjustment and follow the cash flow plan:

$40,000 EF job loss no monthly add
$8,000 EF no monthly add
$3,000 house repair, no monthly add
$20,000 new car fund, no monthly add
$47,000 college fund, add $1,000 / month ($166.67 / mo to 529 to get the Ohio tax break, rest goes to cash for now)
$2,000 investment account, add $1,500 / month

So the $1,500 / month would be my fund accumulator and I could be a bit more risky with that. If nothing happens to require EF, house repair or new car, I keep contributing to the investment account (or dump some of it into additional retirement savings). If life happens and I need to tap a fund, just divert the $1,500 / month going into the investment account into the appropriate fund to replenish it or just pull what I need from the investment account.

As I'm thinking through this though, why not use the accumulator fund as a cash fund and go a bit riskier on all of the other funds? Put the $116,000 of "fund money" into something like the funds you recommended. Hopefully they grow, but if they shrink, I have the cash in the accumulator fund to cover any shortage. That way I have $100,000+ that can grow, with a cash backup if they don't. And if I need some out of the EF's, maybe the accumulated cash would cover that and I never have to touch the real funds. That maximizes my ROI while mitigating downside risk when I actually need the money. This would address my aversion to watching that much money devalue over time due to inflation.

Thoughts?

Tom

[jIM_Ohio]

I like this approach. Hadn't thought about it this way, but it makes sense.

Current state:

$40,000 EF job loss no monthly add (fully funded)
$8,000 EF no monthly add (fully funded)
$3,000 house repair, no monthly add (fully funded, house was new in 2008)
$21,000 new car fund, add $500 / month (fully funded, no foreseeable need for a new car in the next 2 years)
$47,000 college fund, add $1,000 / month (need a lot more, but the ins and outs are ok for now)
$2,000 investment account, add $1,000 / month (no designated purpose)

Retirement savings come out before I get paid. Vacation dollars comes from cash flow.

Maybe I could make a small adjustment and follow the cash flow plan:

$40,000 EF job loss no monthly add
$8,000 EF no monthly add
$3,000 house repair, no monthly add
$20,000 new car fund, no monthly add
$47,000 college fund, add $1,000 / month ($166.67 / mo to 529 to get the Ohio tax break, rest goes to cash for now)
$2,000 investment account, add $1,500 / month

So the $1,500 / month would be my fund accumulator and I could be a bit more risky with that. If nothing happens to require EF, house repair or new car, I keep contributing to the investment account (or dump some of it into additional retirement savings). If life happens and I need to tap a fund, just divert the $1,500 / month going into the investment account into the appropriate fund to replenish it or just pull what I need from the investment account.

As I'm thinking through this though, why not use the accumulator fund as a cash fund and go a bit riskier on all of the other funds? Put the $116,000 of "fund money" into something like the funds you recommended. Hopefully they grow, but if they shrink, I have the cash in the accumulator fund to cover any shortage. That way I have $100,000+ that can grow, with a cash backup if they don't. And if I need some out of the EF's, maybe the accumulated cash would cover that and I never have to touch the real funds. That maximizes my ROI while mitigating downside risk when I actually need the money. This would address my aversion to watching that much money devalue over time due to inflation.

Thoughts?

Tom

Here is what I would recommend:

EF needs to be larger
$8000 is two months expenses?
Make it 6 months at $24k cash. Because 3-4X this amount is being put at risk, I think a larger cash position is prudent.


I would invest $86k in Permanent Portfolio (I own this) or one of the other investments I suggested.

This money is for college, car, house repair and more

The $2000 investment fund is different than this fund- be as aggressive as you want in the investment fund, the $86k needs to beat inflation (which is stated goal of permanent portfolio) and the investment fund has a different goal. Keep those monies seperate.

I would take the $2500/mo and decide how to split it between investment fund and short term savings.
What is the timeline for college fund?

$1250 to each makes sense to me.

[jIM_Ohio]

One additional note with the technique I suggested-

Saving for cars and college is a "negative" net worth savings. Meaning when you look at balance sheet, it shows as an asset (short term) when money is invested, and when you spend the money, the balance sheet will be less than it was when money was liquid.

That is why I separate "short term" savings from the investment account, and why I also recommend to pay for as much from cash flow as possible, as too many "negative net worth" transactions will send you to the poor house.

[corn18]

Here is what I would recommend:

EF needs to be larger
$8000 is two months expenses?
Make it 6 months at $24k cash. Because 3-4X this amount is being put at risk, I think a larger cash position is prudent..

The total EF is $48,000 which is 6+ months expenses. I make the distinction between a lose my job EF ($40k = 6 months) and an emergency fund which is for emergencies other than job loss ($8k).

I would invest $86k in Permanent Portfolio (I own this) or one of the other investments I suggested.

This money is for college, car, house repair and more.

The $2000 investment fund is different than this fund- be as aggressive as you want in the investment fund, the $86k needs to beat inflation (which is stated goal of permanent portfolio) and the investment fund has a different goal. Keep those monies seperate.

Like. Wilco.

I would take the $2500/mo and decide how to split it between investment fund and short term savings.
What is the timeline for college fund?

$1250 to each makes sense to me.

College starts next year. Depending on where she goes, I either have enough now or I am $100,000 short (after factoring in the $1,000 / month over 4 years.)

Tom

[corn18]

One additional note with the technique I suggested-

Saving for cars and college is a "negative" net worth savings. Meaning when you look at balance sheet, it shows as an asset (short term) when money is invested, and when you spend the money, the balance sheet will be less than it was when money was liquid.

That is why I separate "short term" savings from the investment account, and why I also recommend to pay for as much from cash flow as possible, as too many "negative net worth" transactions will send you to the poor house.

Agree. None of my "funds" show up in the net worth balance sheet. Only things that shows up there is retirement and long term investments. No cars, house or personal property in there either. Makes me look less wealthy, but it is a more accurate reflection of where I am. Helps me make better long term decisions.

[jIM_Ohio]

The total EF is $48,000 which is 6+ months expenses. I make the distinction between a lose my job EF ($40k = 6 months) and an emergency fund which is for emergencies other than job loss ($8k).



Like. Wilco.



College starts next year. Depending on where she goes, I either have enough now or I am $100,000 short (after factoring in the $1,000 / month over 4 years.)

Tom

I would suggest $40k cash and invest the $8k then. You have the cash flow to quickly repay EF if you are saving $2500/mo plus funding vacations from cash flow.

We should get a beer in BA Ohio sometime.