|
|
|
|
Financial Life Advisor
What to do with Underperforming Cash
I enjoy your blog and wanted to ask for your advice. I am currently 30 years old and will receive an advanced professional degree in the coming months. My wife is a practicing attorney in the Dallas area. Our current investments include Roth IRAs, stock holdings, and simple savings. We are anxiously waiting to buy a home while I look for career opportunities. In the meantime, we are holding a large amount of money in an ING Orange Savings (currently 1.3% APR) for the down payment. It might be anywhere from 4 months to 1 year before we purchase a home. Can you suggest some types of liquid financial vehicles that will improve the ROI, or are we doing the right thing? I would hate to miss out on an opportunity to increase our returns.
E.C. from Dallas E, it sounds like you and your wife are on the right track. It is very advantageous to purchase a home with a large down payment and cash reserves. If you have the means, now is an excellent time to purchase a home, and you will most likely qualify for the new expanded and extended Homebuyer’s Credit. In addition to the potential of an $8,000 tax credit, we currently find ourselves in one of the lowest interest rate environments in modern history. That was not really your question, but it is related to my answer, and you may have been unaware of this information.
Your specific question relates to what to do with the large chunk of cash you have sitting idle for a home purchase. It is very frustrating to earn little to no interest on your money. The good news is that currently there is no inflation. It can be gratifying to receive 10% interest, but if everything costs 10% more, you get to pay taxes and have made no progress. So even though money market and savings accounts are earning little to no interest, the silver lining is that inflation has been almost non-existent.
The only way to increase the return on your savings account is to either tie it up for a longer period of time (such as a CD) or to increase the risk (such as stocks). If you find the house of your dreams and are ready to spend that cash which is tied up, you could face penalties for accessing it early. If you invest it in a riskier investment which has a higher yield, you could find out that your down payment is not as big as you thought.
In your situation, I would recommend you sitting tight. In the current investment environment, a 1.3% is actually a pretty good interest rate for a straight savings account. If you can put a home under contract by April 30th, 2010, you most likely would qualify for up to an $8,000 tax credit. With mortgage rates below 5%, you can also lock in very favorable financing right now. Keep up the good work, and best wishes on your house hunt.
Posted by Ben Gurwitz on 3rd December, 2009 | Comments | Trackbacks
Tags: Financial Planning, Investments, Dec 09
The trackback URL for this page is http://www.fladvisors.com/trackback?post=16626285 TrackbacksThere are no trackbacks for this post There are no comments for this post Post a CommentHTML is not allowed in comments, http://... will be automatically linked.
|
|
|
|
