My Two Dollars reader Kelly sent in the following question to the M-Network’s new feature “Ask The M-Network“:
“My husband and I currently have 30K in savings and put in 2500 a month into a HSBC Online account paying about 2.4% currently. Is this the best place to save or grow this money? We have about 12 months of emergency money in the 30K, have a 200K house mortgage at 4.875%, 75K in student loans at 2% and no CC debt. We are not interested in paying down the mortgage or the student loans as they are at such a low rate. We will need new cars in the next 2 years but do not foresee any more expenses. Should we put some/all of this new savings into the stock market as it is so low right now and we can afford to wait to pull it out if necessary? I am a teacher and my husband is an attorney and we have 95% job security.”
That’s a good question Kelly. If I were in your shoes, I would be thinking of ways to conserve that money – and putting it in the market right now might not be the best idea. Because you said this was part of your emergency fund and you think you might need to buy a new car or two in the coming years, can you really afford to lose it in the market? I have lost about 32% of my money I had in the market, so unless you are willing to leave it in there for at least, let’s say, 5 years or so, I would keep it out of the market. Start checking out high interest online savings accounts like ING Direct and the like, where you can either put the money in straight savings accounts or CD ladders. That way, you will continue to earn money, you can access it in case of an emergency, and you will still have it when the time comes for you to make a big purchase. Good luck!
And here are the responses from several of the M-Network members to try to answer Kelly’s question…
Patrick from Cash Money Life says:
Congratulations on being on top of your finances. I think you have several options. If you want to retain liquidity, then you should keep your money in a high yield savings account. There are a couple other banks that offer slightly higher rates, such as WTDirect, which currently offers 2.8%. On $30k that will earn you a couple hundred extra per year.
If you don’t need access to all the money at once, you can consider building a CD ladder which will allow you to lock in higher interest rates. Since your savings also function as your emergency fund, you may consider putting part of the money in a CD ladder, and leaving some of it in a savings account for better access.
Finally, don’t forget about retirement. If you have a long term investment horizon, then you should consider investing in a balanced portfolio of stocks, bonds, and other investments. Be sure to take advantage of any employer matching opportunities such as with a 401(k), 401(b), or equivalent. If you don’t have any matching opportunities, then consider investing in a Roth IRA. Here is more information regarding the decision to invest in a 401(k) or an IRA.
Kelly, I think you are in a great financial shape. But before we go into what you could do with your $30k in savings, I want to address a few things missing from your question. This doesn’t mean you’re not doing it, but they should be pointed out nonetheless.
* Retirement Savings — I don’t see retirement savings mentioned and I believe you would be eligible to participate in a 403(b) plan and your husband in a 401(k) plan. If you guys are, you may want to consider starting or contributing more toward these plans. Otherwise, you can each start a Roth IRA or a Traditional IRA. Here’s more information about 2009 401k And IRA contribution limits and the phase out rules. You mentioned getting into the stock market, and I think this is a good way to do it.
* Educational Savings — You didn’t mention anything about children. If you are parents, you may want to look into starting a 529 Plan. Even if you don’t have one yet, you can start investing in 529 Plan now and later transfer the fund to your baby.
As far as putting the $30k in the stock market right away, I don’t recommend this unless you’re a seasoned investor and can afford to keep the money there for several years. You also mentioned that you’ll need money for a car down payment, so that’s another strike against putting the entire sum in the stock market. Lastly, you said your emergency fund is part of this $30k, and I would definitely say no to putting your emergency fund in the stock market. At the very least, your emergency fund should be big enough to cover 3-6 months worth of living expenses, and I think the best place to keep your emergency fund is in a high yield savings account.
I think the key question you need to consider is your own risk profile – how much loss are you willing to stomach in the short-term, in the expectation of gain in the long-term?
My investments lost 22% of their value in 2008 because the stockmarket decreased. As far as I’m concerned, this is ok because I don’t intend to touch this money for 30-40 years and I’m (personally) confident that the stockmarket will be higher then, than it is now. If you can be realistic about the likelihood of paper losses over short time frames and are interested in learning about investing, then go for it.
Perhaps it would be easier to start by putting a portion of the money you currently add to your savings into investments. You should definitely look into tax-advantaged accounts like Roth IRAs or 401(k)/403(b)/457 retirement accounts – but don’t forget that you basically won’t be able to access this money until you are much, much older.
Hope these answers can provide a little guidance, Kelly! Do you have a question you would like to have us try to answer? Send it in to Ask The M-Network!
And please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a certified financial expert as needed.