Here's an email I recently received from a reader:
My wife and I just sold our house and are walking away with about $26,000. We are not yet ready to buy our next house for a variety of reasons, and are currently in an apartment.
I would like some input on the best place to park the money while we decide our next move. I am extremely comfortable not having access to the money for 3 months and am relatively comfortable not having access to it for 6 months. Anything beyond that I feel like the money needs to be liquid and accessible for a new home.
What are your thoughts for him?
put it in a 3 month cd for now. when that's up reevaluate your options.
Posted by: Carrie | June 30, 2009 at 07:32 PM
Unfortunately, I don't think any answers you get here will get you much more than a ~3% guaranteed annual return on your $26K.
But the bigger question is--what (if any) other debt do you have, and how much of the $26K will you *really* need to put towards your home in a few months? Parting with just a few thousand dollars to retire some 10%+ credit card debt (if you have any of that floating around) will yield far more benefit than the best place to safely invest your $26K for a few months.
Posted by: MelMoitzen | June 30, 2009 at 07:50 PM
I'd day trade with it. :)
Posted by: MonkeyMonk | June 30, 2009 at 08:28 PM
high interest checking - about 4% depending on the bank with very little work (10 debit card purchases, one direct deposit, etc) each month
http://www.highyieldcheckingdeals.com/
Posted by: anna | June 30, 2009 at 08:39 PM
If I were you, I'd invest it. I'd even trade on a few well-researched penny stocks before I'd put it into a house. Find yourself a nice cheap rental, hunker down and save more, make more money, live frugally, pour all your heart and soul into saving and investing. Then, in about 3 years, go out and find yourself your dream home and put at least 25% down on it. It's time America got back to reality when it comes to "instant gratification" and the ideal that purchasing a house is a good investment right now. Oh! And to the previous poster, MelMoitzen's point, pay off all possible debt and enjoy living debt free for a few years. There are some great little ideas on this website and I especially like FreeMoneyFinance's blog in regards to sizing yourself the right amount of mortgage. Check here: http://www.freemoneyfinance.com/2005/10/mnd_buy_a_house.html and also here: http://www.freemoneyfinance.com/2006/02/my_formula_for_.html
Posted by: FindingFrugal | June 30, 2009 at 08:45 PM
I'd put it in Ally Bank's no penalty CD. Currently paying only 2.15% but you can close it anytime if you need to do other stuff with your money.
Posted by: thebaglady | June 30, 2009 at 08:54 PM
Send me an email. I've got a "safe" place for you to give it off. :-D
The options already noted seem OK.
Posted by: Josh Stein | June 30, 2009 at 10:38 PM
Bankrate.com and find the moneymarket/CD w/ FDIC insurance that offers you the best APY and convenience....
Posted by: chynalemay | June 30, 2009 at 10:49 PM
A 6-month CD yields an average of 1.38% today. That means if you invested in the CD, you'd have an extra $178 when you cashed out. The past one-year return on the Vanguard Prime Money Market mutual fund was 1.81%, which would equate to a $234 return for you over the 6 months, assuming the Vanguard fund met its latest 1 year return. You may give up a possible $56 by going with the bank's CD, but you will have a guaranteed return, and full backing from the federal government that your $26K will not lose value.
3-6 months is absolutely too short for stocks. If you had 6 years, maybe. Good luck, and enjoy the new house when you get it.
Posted by: Dan Holt: Laid Off | July 01, 2009 at 02:47 AM
Put it in Smarty Pig, 2.75% right now. You can always terminate your savings "goal" and withdraw it (partial withdrawals not allowed). One downfall is that interest only posts quarterly. I am not 100% certain on this, but I believe the money needs to be in the account on the last day of the quarter to be credited with the interest. I do not think they will credit you for what you have already earned in that quarter. If you have to cash out 2 months into a quarter, that could be a significant drag on your ROI.
The Ally Bank no penalty CD is also an interesting option, and no worries about not getting the interest credited. Higher return than a money market as well. You cannot withdrawal your money for the first 6 day, but based on your facts that should not be an issue.
Posted by: Andy | July 01, 2009 at 08:40 AM
A good choice in my opinion would be to park the $26,000 in the no-load mutual fund SMUAX
This fund is Wells Fargo Ultra Short-Term Municipal Bond fund.
It has a zero transaction fee upon purchase at all brokerages.
If you buy it at Fidelity there is a $75 transaction fee if you sell it before 6 months. Other brokerages have different transaction fees so check first.
Over the last 6 months this fund has increased at an annual rate of 8.7%.
The worst drawdown, i.e. worst possible loss in the last 6 months was 0.21%.
The interest is also exempt from federal taxes. A portion of the increase was a capital gain which is taxable.
Bottom line - You could earn $1,131 with a possible worst loss of -$54.60 based upon the last 6 mo. performance. This far exceeds what you could earn in any money market fund or 6month CD.
Of course there is no guarantee that the next 6 mo. will be just like the last 6 mo. but the fund has very low volatility. The last 6 months was good for municipal bonds, the preceding 6 months not nearly as good.
Posted by: Old Limey | July 01, 2009 at 09:09 PM