I have been thinking of investing in real estate for past few years and keeping some cash in saving accounts. Now I realize that I will probably never jump of any real estate opportunity. So I am planning to move all cash in to discover 0.9% saving account, or something like that. I am hoping to get some advise on some low risk - better return investment options that will yield more returns that saving accounts.
Current situation is: I have $650K in cash in different saving accounts (half of which came from stock sale few weeks back). About $50K in stocks investment. Combined salary is about $220K/year. Max out 401K every year - currently about $200K total in both retirement account. No loan except $500K mortgage at 3.5% interest rate. I live in CA, 40 year old, have one kid that will go to collage in 4 years. I am planning to pay for it, but no 529 or any other collage saving plan setup yet.
First though that comes to mind is, paying off my mortgage will save me hundreds of thousands dollars in mortgage interest over next 25 years. Another option is to invest in saving accounts and earn 1%, or CDs that will yield slightly more. Any other low risk option to consider? Stock market investment seem high risk. I visited couple of investment experts in different banks, I did not like any, or their plans/ideas. May be I have trust issues with strangers.
I currently have no investment strategy. I just pay all my bills from my checking account and move remaining to saving account at end of month. Withdraw from saving account for big expenses. This is how I end up having cash in savings account, and no solid investment plan. Going forward, I am thinking of investing a few hundred dollars in dividend paying stable stocks and low overhead S&P 500 mutual funds every month.
I visited couple of investment experts in different banks, I did not like any, or their plans/ideas. May be I have trust issues with strangers. i'm your buddy friend! OP is beating a dead and buried horse.
WesternDigital said: I have $650K in cash in different saving accounts (half of which came from stock sale few weeks back). About $50K in stocks investment. Combined salary is about $220K/year. Max out 401K every year - currently about $200K total in both retirement account. No loan except $500K mortgage at 3.5% interest rate. I live in CA, 40 year old, have one kid that will go to collage in 4 years. I am planning to pay for it, but no 529 or any other collage saving plan setup yet.
First though that comes to mind is, paying off my mortgage will save me hundreds of thousands dollars in mortgage interest over next 25 years. Another option is to invest in saving accounts and earn 1%, or CDs that will yield slightly more.
You will be hard pressed to find better savings account or CD options that beat paying down your mortgage even net of the tax deduction. Also, given your upcoming college costs, if there's any chance of financial aid, you might want to look cash poor by paying down your mortgage. That may look better for aid prospects than a big investment portfolio and a big mortgage.
Let me suggest at the end of this post how to better execute your plan, but before I do I want to warn you about the risks you're taking.
Right now, your savings is being eaten away every year to inflation, right now about 2.7% (Page 1). If you earn 1%, that means you are actually losing 1.7% every year. Your inability to take any risk will guarantee lost purchasing power every year, and the losses will compound such that you could lose half the value of your savings by the time you retire.
If you're scared of short term turbulence, invest a $1000/month in a low cost SP500 index mutual fund, but for the sake of you and your family, you must accept some risk, or you will be slowly destroying your savings. I'll send you a PM shortly....
--------- Warnings aside, if you REALLY MUST have FDIC government bank insurance, in case the banks fail, set up a revocable living trust, and add 4 beneficiaries a $10 bequest. FDIC will treat each person as a separate depositor, and boost insurance to $1.25 million per bank account titled in the trust's name.
1.) Pay off mortgage (at a low rate like 3.5%, I don't normally recommend this, since you lose the tax break & inflation protection, and can usually beat that with investing; but for you, it's better than 0.9% at a bank)
2.) Invest in a conservative (but not 100% risk-free, as there is no such thing) allocation of index funds, like 25% stocks, 75% bonds. I've seen studies that 20/80 allocations are even safer than 100% bonds. This should help protect what you are now losing to inflation.
Treffen said: Pay off your mortgage. That's pretty much the same as a risk free return of 3.5%
Then invest the freed up payment into a decent mutual fund. . If you want OP to vest in a MF,then he should not pay off his mortgage, and invest the payoff amount into mortgage. As any MF will have higher return than 3.5%
king0fSpades said: Market has gone up too much too quick. You must wait now and don't get in blindly. There will be an opportunity soon. Great minds think alike,
I said the same thing when Trump got elected and again when Brexit Vote And after the Obama rallies And then Flint water supply was contaminated And then Zika broke out And then when oil plummeted And then when oil skyrocketed. And then Fukushima was worse then expected
Off topic, but I have several expired put options for sale..
Put your money in savings accounts = basically no risk of loss of principal = HUGE risk of loss of buying power over time due to inflation
Put your money in stocks = relatively high risk of short term loss of principal = low risk of loss of buying power over time (think ten years or more)
Balance these sorts of things together for your best "sleep at night" situation.
Two suggestions: 1. Read Bogleheads.com. Read, read, read 2. Work yourself towards investing a reasonable amount every month into stocks via index ETFs or mutual funds. Don't look at the balance. Just keep putting the money away and retire in safety and comfort some years down the road.
WesternDigital said: I agree Tom, inflation is lowering value of my saving. That is one big reason why I am looking in to other low risk options. And thanks for your informative PM. Don’t let people worry you saying inflation will eat up more than your interest earned in the 1% savings accounts. The inflation rate is for a market basket of goods so it doesn’t affect everybody equally. Housing is a large part of it, but if you already own your home, that part of the inflation equation doesn’t even apply to you like it would for renters. Many things like electronics and tech actually cost less now than 5 or 10 years ago. So your $600K will earn $6,000 a year at 1%. If you are making 220K a year, just add $10K or $12K from your earnings into savings and that will remove inflation from the equation. You goal is to preserve your savings for the future, not gamble it on stocks or other investments that could drop in value at any time. Soon as you get greedy looking for better returns, you get burned. BTW, there are a few 1.25% savings accounts now.
Investing in index funds over the long haul isn't greedy and inflation is a real risk. The older you are or if you are very unhealthy, the less inflation is an issue. Defining risk only by stock price changes isn't a good strategy.
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