Mid-term savings methods
Experiments in Finance received a question and has opened it up for group conversation on the myriad different ways that it could be answered. All the related posts will be posted on Experiments in Finance.
The Question:
I like to setup my finances on a “purpose” basis. I create a separate account for each specific saving target. I have 401ks or IRAs devoted to long-term savings. A checking account (and a small savings account at the same bank) to handle day-to-day expenses. Some CDs as a safety net in case I lose my job. A separate savings account for spur-of-the-moment spending.
This keeps things tidy and reduces the tempation for my spur-of-the-moment spending to hamper something important (like next weeks groceries).
This works great for short-term or long-term savings. But not so well for mid-term savings. Things that are maybe 3-7 years out. (Like buying a new car or saving for home remodelling.) I can’t figure out what the best vehicle is for carrying this out. I can take more risk (and want better return) than savings accounts and CDs, but it’s not so long that I want too much stock exposure.
It just doesn’t seem like there’s a good way to create a single account to handle this sort of time-horizon.
Maybe the answer is on your site somewhere and I haven’t been able to find it. Any suggestions?
My suggestions:
It sounds like you have your current accounts under pretty good control. Depending on the rates you are receiving from your bank, you may want to look into a high-yield savings account. These accounts are currently paying in excess of 5%. Doing so will increase your yield on your short-term savings and could become a part of your mid-term savings.
There probably is no “one account” solution to your mid-term question. If you’re comfortable with some risk, you could invest a portion of that money into the stock market. The downside to that is that there will most likely be fees and tax ramifications when you sell those stocks to use the money and there is risk. 3-7 years isn’t the best time frame for keeping the average gain in stocks. A nice mix of CD’s and high-yield savings could bring you into the 5-6% yield range pretty easily. The addition of some stocks and bonds could even bring that higher, but again there could be fees and tax problems upon selling.
ADDED: It might also be beneficial to look into treasury bonds(a.k.a Savings Bonds) which are currently paying in the 1.5 to 3.5% range. Again, not as good as a high-yield savings, but higher than what your bank is probably paying you.
If you’re interested in high-yield savings accounts, be sure to check out HSBC.com, emigrantdirect.com, ingdirect.com and virtualbank.com as they seem to be the front runners at the moment. All currently have savings accounts in the 4.35% to 5.05% range.
Best of luck with your saving! You sound like you’re on the right track. Keep it up!
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Carl said,
Wrote on July 3, 2006 @ 8:55 am
Why not lump the the long term items together for investing and just rbreak it bown in Excel. You could invest in Short Term CDs, Start a Ladder of them. You would not have many long term items all come at he same time as only 1 CD would be close to being available. So it would be hard to remodel and buy a car during the same period, but a portion of the savings would always be availble in the near term and when it gets closer to purchasing a mojor item you can move the money to a savings account.
thatedeguy said,
Wrote on July 3, 2006 @ 10:30 am
That actually isn’t a bad idea Carl. If you decided you didn’t need the money, you could throw them right back into the CD and keep on earning the interest.
A viable option!