Short/Long Term Saving

[ehendu13]

Hey everybody - my wife and I are looking for a bit of advice about how we should set up some short term and long term savings. We currently have no debt except a mortgage (just refi'd at 4.875%). We have a Roth IRA (wife) that we plan on maxing out and a Roth 401(k) that is about 70% maxed out annually.

We have saved up $15k in a savings account. We would like to take a chunk of that and set it aside for long term savings. We figure probably start with $5k and add a bit every month. This would leave 10k in short term savings for emergencies and large purchases (like a car downpayment, furnace failure, etc.).

We figure that the short term is fine in an online high yield savings account, but we are unsure of where to put the long term savings. Do you have any suggestions for what sort of investment product would be the best? Our risk tolerance for this account would be "medium".

Thank you very much in advance for any suggestions!

[conancare]

If you are looking for lonf term saving then kindly go ahead for Education savings, Emergency fund, Retirement account. These the areas where people tend to do do savings on.

Hope this helps you out.
Regards,
Coanan

[disneysteve]

What do you mean by long term savings? Is that additional money for retirement? If so, then you probably want the bulk of it in the market, depending on your age, risk tolerance and what else is already in your portfolio. Do you have an asset allocation plan? Keep in mind that it is generally best to keep less tax efficient investments in your Roth and more tax efficient investments in your taxable accounts.

[conancare]

Hi Steve,
Long term savings is like making savings so as to enjoy the return or benefits in future. As it is not based on retirement alone as i have mentioned it earlier there Education savings, Emergency fund etc. Asset allocation is something different, where risk is also involved, so as to get things balanced we need to plan according to make positive investments but long term saving are just like putting into safe investment and guaranteed returns.

Regards,
Conan

[disneysteve]

Conan, my question was actually meant for the OP. I was asking what he is counting as long-term savings. For me, at this point in my life, long-term savings means retirement and not much else. College savings is short-term as my daughter is entering 8th grade and will be in college in 5 years. And I don't count Emergency Fund as long-term savings either.

So OP, tell us what you mean when you say "long-term savings" and we can suggest how best to invest that money.

[Joan.of.the.Arch]

You might consider a fixed or indexed annuity accounts for your long term savings. Indexed carry slightly more risk, but neither can ever lose any money for you unless you surrender the account early.

Tax deferral and compounding interest would help to build up a good nest egg for your retirement.

Hammer : Nail :: Annuity : Savings question?

[Scanner]

Forget the annuity. . .just give me all your money and I promise you that I'll send a check every month. Really, I promise

Anyway. . .it does get complex with goals. I seperate matters into 4categories:

Retirement (long term for me)
College (mid to long term for 3 kids)
Short term (vacation, house improvement, etc)
Emergency (furnace failure you talked about)

I'll admit though, I do merge the last 2 together into 1 high interest checking account. That being said, the last 2 should only be CD's or savings (or maybe short term muni bonds if you are comfortable with that and have a high tax bracket)

[disneysteve]

Hammer : Nail :: Annuity : Savings question?

Thanks for that. I was beginning to think I was the only one who noticed that his answer to every question is buy an annuity.

[GREENBACK]

Thanks for that. I was beginning to think I was the only one who noticed that his answer to every question is buy an annuity.

When you go by "insurance guy" what would you expect.

[ehendu13]

Thanks for all the responses.

I guess I should have been a bit more specific...I was actually thinking along the lines of Scanner and conancare. The way I had organized it was almost exactly like Scanner:

*Retirement
*Long Term Savings (College and investments that I want to have access to prior to retirement)
*Short Term Savings (Vacation, Home Improvement, Car)
*Emergency Fund

Current age = 26

I am looking for the best way to set this up.

Retirement: Roth 401k is already set up through employer and my wife has a Roth IRA (will be transferring to Vanguard soon). So that is pretty well set.

Long term savings: Not sure I want to set up a 529...anybody have thoughts on this? I am thinking about a brokerage acct at Vanguard and buying one stock fund and one bond fund, and adding the min each month ($100).

Short Term Savings: We currently have a savings account at savingssquare.com for this $. However, if I set up that account at Vanguard, I was thinking that I could just keep the $ there in a money market or a very safe, very liquid investment of some sort. This would consolidate the accounts and might make things simpler. Any thoughts on this?

Emergency: This is kept in the savingssquare account, but I could conceivably put it in that Vanguard account in a money market or very liquid, very safe investment.

Does this seem like a logical set-up? I would like to keep things simple, but at the same time have some structure to what we are doing. Also, I don't really have a good idea about which investment vehicles are the best for the Long Term Savings and the Short Term Savings. If anyone has any advice, I would appreciate it greatly.

Thanks!

[jIM_Ohio]

Thanks for all the responses.

I guess I should have been a bit more specific...I was actually thinking along the lines of Scanner and conancare. The way I had organized it was almost exactly like Scanner:

*Retirement
*Long Term Savings (College and investments that I want to have access to prior to retirement)
*Short Term Savings (Vacation, Home Improvement, Car)
*Emergency Fund

Current age = 26

I am looking for the best way to set this up.

Retirement: Roth 401k is already set up through employer and my wife has a Roth IRA (will be transferring to Vanguard soon). So that is pretty well set.

Long term savings: Not sure I want to set up a 529...anybody have thoughts on this? I am thinking about a brokerage acct at Vanguard and buying one stock fund and one bond fund, and adding the min each month ($100).

Short Term Savings: We currently have a savings account at savingssquare.com for this $. However, if I set up that account at Vanguard, I was thinking that I could just keep the $ there in a money market or a very safe, very liquid investment of some sort. This would consolidate the accounts and might make things simpler. Any thoughts on this?

Emergency: This is kept in the savingssquare account, but I could conceivably put it in that Vanguard account in a money market or very liquid, very safe investment.

Does this seem like a logical set-up? I would like to keep things simple, but at the same time have some structure to what we are doing. Also, I don't really have a good idea about which investment vehicles are the best for the Long Term Savings and the Short Term Savings. If anyone has any advice, I would appreciate it greatly.

Thanks!

You have the right idea
you need cash for immediate emergencies, then want a better return on money you might need in 5-10-15-20+ years.

My suggestion would be either
a) a tax managed balanced fund
b) a muni bond fund
c) a non volatile (or less volatile) mutual fund

we opted for c) and use a mutual fund called permanent portfolio (PRPFX)
we have plans to add b) closer to retirement

In my opinion the 10k you are keeping in cash is enough, however its possible you may come up with an emergency which is larger than 10k. Think new roof, new HVAC or some expensive house repair where insurance might not foot bill up front. This is why I suggest conservative with the 5k you pull out of current savings account.

Once you have "critical mass" in the mid term/taxable account, you will probably look to add another investment.

Critical mass- for every person, based on risk tolerance and other, it will vary.

For someone which owns their own business, might be 2-3 years expenses.
For someone young without a specific need for the money, might be the same amount which is in emergency fund.
For someone close to retirement, it might be 5-9 years expenses in laddered bonds.
In some tax situations, the tax circumstance might dictate what you hold. Muni bonds, stock options or other.

[Alex_Adviser]

A regular savings account doesn't earn interest, an MMA can be either a checking or savings account that does earn interest, and sometimes starts off at .00325 per month, then drops down to .001 after 3 months.

And at most physical banks like a local one, u have to open it with a minimum of 5K. --but that doesn't mean u can't start off with a regular savings account and change up or an online MMA.

With CD's you basically loan the bank a specific amount over 6 mos, 1 yr or 4yrs with a set interest rate. If you withdraw your CD early you'll be hit with penalties. But with an MMA you can withdraw and deposit any amount you like, and what you earn depends on how restrained you are.

Savings bonds are pretty much like CD's, except they're over a longer period of time and basically, the longer it is, the less it's worth because the cost of living goes up every year. Some say bonds are the safest and the interest rate is usually higher.

I would go with a MMA, which i've had before, and you can watch your interest grow, the downside is, for most you have 2 maintain a minimum balance, usually the opening amount. the upside is, that interest gets compounded and in most cases, the rate you earn goes up when you hit milestones like, 10K, 20K and so on. You just have to remember to get the rate changed up. Know .00325 doesn't sound like much, but 5k x .00325 is about $16, and that's monthly, and more than what you started off with.

Hope this helps.

[ehendu13]

One last question...

I think my wife and I have figured out how we are going to divide the savings:

*9k into short term savings
3k of this is designated for emergency savings, as in "we need this right away"

*6k into long term savings
this will be split into two funds at Vanguard: 3k into a medium term savings that could be easily cashed out in times of emergency. I am thinking some sort of bond fund that wouldn't have big time tax implications if we had to tap into it. the other 3k will go into a stock fund that will be directed more towards long term growth. it could also be tapped in case of emergency, but the idea would be to leave this one alone.

So my question is, do you guys have any recommendations for the vanguard funds that suit these goals? I am leaning towards the small cap value mutual fund for the stock fund, but I am stumped on the bond fund. Any ideas?

Thanks again for all your help!

[TBH]

I wouldn't be comfortable with only $10K in easily accessible cash accounts, but that's just me.

Like others have said, I combine my emergency fund savings with my short term savings (there's a floor below which I will not go except in true emergency, so it doesn't get drained too much by things like vacations). That money is in ING direct. The only long term savings I have is for my son's college education, so that's all in 529s. If I think of some other long term savings goal I'll set up a separate account. I do have a small taxable brokerage account at Fidelity that could be used to grow long term savings at some point.

I like the idea of saving separately for long term goals, but I have such a hard time keeping my emergency fund fully funded, and I'm still not saving as much as I'd like to for retirement. It's hard to imagine feeling so satisfied with my savings in those two areas that I would start regularly putting money aside for other long term goals.