Best vehicle to put money for a possible large expense in an unknown time?

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dred pirate
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Joined: Tue Nov 27, 2018 10:46 am

Best vehicle to put money for a possible large expense in an unknown time?

Post by dred pirate »

So, long story short, At some point we would like either purchase a new single family home (we currently live in a townhome) but we want to avoid the current housing market craziness. If that doesn't come to fruition, we likely would want to do some significant renovations to our current place (kitchen, bathroom, etc). We love our area and neighborhood, and would be happy spending many years here, but just sort of want our "own place" at some point.

We currently have a 300k equity in our current home (200k loan/500k value). Basically I am asking, what is the best place to put money that you may or may not use for several years- knowing our ability to make big decisions like this (ha ha) I wouldn't be surprised if nothing happens for a long time. (5+ years).

So where should we put money for this unknown timeline and expense? I know there isn't any perfect answer. We have already maxed out our ibonds for 2021-2022.
a. Spouse and I could gift each other 10k for 2023.
b. Taxable accounts. Then which type of mutual fund?
1. S&P 500
2. total bond
3. others?
c. high yield savings? - interest rate is so small, I don't want to put anything of signfiicance beyond an e-fund into this.
d. just put into our retirement accounts (we each have a 403b, roth ira, and I have 457 - so lots of space). Then obtain a HELOC for any renovations, and if a new home purchase utilize equity, and do some sort of bridge loan if needed (or sell current taxable holdings/roth ira contributions and pay them back after our house closes). Don't need to discuss what exactly to do since this part is still theoretical.

Cheers

DP
Lionel Hutz
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Joined: Sat Jan 30, 2021 12:18 pm

Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by Lionel Hutz »

General wisdom is not to have anything in stocks if you need the money within ~7-10 years.

Bonds can be volatile within anywhere from 2-5 years for short to mid term bonds .

When one’s timeline is uncertain the choice is more difficult. HY savings may be the best move despite the pain of relatively low rates, though that should slowly start to improve.

CD may be of use if you can get a better rate than HY savings and can commit to at least the term of the CD
mhalley
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by mhalley »

With rising interest rates and need to keep the money safe I would go with cd ladder.
lazyinvestor30
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Joined: Mon Apr 12, 2021 7:58 am

Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by lazyinvestor30 »

I am very much interested in the response here as I am in an extremely similar situation.

So far this is what I came up with. Estimate that amount of money, say 100k, then make it a 60/40 portfolio with 40% in I bonds and rest in VT. Then hope for the best I guess. In a 5 year timeframe it’s unlikely to loose a large part of that money especially if you dca into this!

I am sure there are many reasonable strategies that there is no right answer. You pick something reasonable and hope things work out your way.
Casey Ryback
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by Casey Ryback »

Curious — why would you and your spouse gift 10k to each other?
Casey Ryback
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Joined: Tue Nov 04, 2014 5:48 am

Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by Casey Ryback »

Curious — why would you and your spouse gift 10k to each other?
Cofdrinkr
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by Cofdrinkr »

Casey Ryback wrote: Sun May 22, 2022 7:28 pm Curious — why would you and your spouse gift 10k to each other?
I think they have both already purchased $10k each in iBonds for 2022 and want to lock in the May interest rate. They could also purchase iBonds in their trust(s) which would add another $10-20k.
BackToSchoolDad
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by BackToSchoolDad »

I would maximize any tax advantaged space you have first after getting I bonds. I also think using a HELOC is reasonable.

If you just want a separate pot of money available (I don't blame you I do too) and the timeline is truly indefinite, I like to use a conservative balanced fund in those situations. Something like iShares core allocation conservative ETF AOK or Vanguard Lifestrategy Income VASIX.

These are 30/70 and 20/80 respectively and will do a decent job of preserving principal while still providing growth. If you're more risk tolerant you could step up to one of the 40/60 allocation funds.
Casey Ryback
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by Casey Ryback »

Cofdrinkr wrote: Sun May 22, 2022 7:45 pm
Casey Ryback wrote: Sun May 22, 2022 7:28 pm Curious — why would you and your spouse gift 10k to each other?
I think they have both already purchased $10k each in iBonds for 2022 and want to lock in the May interest rate. They could also purchase iBonds in their trust(s) which would add another $10-20k.

So you are saying that they could each buy 10k for themselves, 10k each in revocable trusts, AND they could buy 10k for each other? So $60k total?
tashnewbie
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by tashnewbie »

Casey Ryback wrote: Sun May 22, 2022 8:33 pm
Cofdrinkr wrote: Sun May 22, 2022 7:45 pm
Casey Ryback wrote: Sun May 22, 2022 7:28 pm Curious — why would you and your spouse gift 10k to each other?
I think they have both already purchased $10k each in iBonds for 2022 and want to lock in the May interest rate. They could also purchase iBonds in their trust(s) which would add another $10-20k.

So you are saying that they could each buy 10k for themselves, 10k each in revocable trusts, AND they could buy 10k for each other? So $60k total?
Yes. The gifts would have to be delivered in 2023+, and those gifts would be in lieu of, not addition to, the standard $10k/year purchase limit. You're temporarily frontloading the purchases. There's an extensive thread about this (use the Google search bar to look for "front load I bonds" or check out the I Bonds mega thread).
tashnewbie
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by tashnewbie »

dred pirate wrote: Thu May 19, 2022 8:16 am Then obtain a HELOC for any renovations, and if a new home purchase utilize equity, and do some sort of bridge loan if needed (or sell current taxable holdings/roth ira contributions and pay them back after our house closes). Don't need to discuss what exactly to do since this part is still theoretical.
You didn't say whether the equity in your current home would be sufficient for DP on the new home. I assume it would.

In an ideal world, when/if you decide to buy a SFH, your local market would be such that you could time the selling and buying of the homes and use the sale proceeds as DP on the new one. To smooth timing issues, you could explore various options like a bridge loan (I don't have any personal experience with any of those options).

Of course we don't live in an ideal world, so it wouldn't be unreasonable to have a contingency plan.

I would probably frontload 2023 I bonds (after maxing 2 tax-deferred 403bs and Roth IRAs). Until your plans solidify and rates start looking better, I would probably chase bank bonuses or look for a juicy rate on a rewards checking account (e.g., Evansville Teachers Federal CU has 3.3% on up to $20k, with certain requirements such as # of debit card purchases/month and direct deposit). If you have more time flexibility and could delay the purchase, then you could afford to take more risk and invest more in stock funds.
GAAP
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by GAAP »

For savings in taxable space, you could also consider a tax-managed balanced fund like VTMFX. In theory, that would give you the performance of a balanced equity/fixed-income allocation but at potentially lower tax cost.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
hi_there
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by hi_there »

I'd just put it in some ratio of stocks and bonds based on your risk tolerance. You can afford some risk. If the stock market drops, houses should also be correlated with that to some extent.
runninginvestor
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by runninginvestor »

hi_there wrote: Tue May 24, 2022 8:51 pm I'd just put it in some ratio of stocks and bonds based on your risk tolerance. You can afford some risk. If the stock market drops, houses should also be correlated with that to some extent.
That's what we do. We keep around $15k in a bank for the "oh crap we need money now or we have to write a check" and a 70/30 AA in our taxable between VTSAX & VUSFX that automatically invests each month. We are in a similar boat of we may or may not buy in the next 2-5 years and we are comfortable with these fluctuations.

VUSFX has a duration of 1 year current sec yield of ~2%
We used to use VSGDX (Vanguard Short-Term Federal Fund Admiral Shares) with a duration of ~2 years/yield ~2.4%but we dropped the duration earlier this year as it became more clear the fed was going to start raising rates.

OP you may also eventually get to a point like we have where have where the bond portion is 20% DP. We've been putting a little more towards the equity side after this happened. Rural Midwest so we are only talking about houses in the $300-$400,000 range so the bond portion isn't huge like some high cost of living areas would be.
jjj_22
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Re: Best vehicle to put money for a possible large expense in an unknown time?

Post by jjj_22 »

I am both picky about my living situation and generally indecisive so I was in a similar situation to you before I bought my home.

From the time I started looking to when I actually found a place I liked and made and offer and had that offer accepted was about three years. Since I wasn't in a rush, and it sounds like you're not either, I kept enough in cash to be able to come up with earnest money on short notice, and just left the rest in the taxable part of my portfolio at my regular asset allocation. I figured if my portfolio went south, that would just impact my decision process, i.e. my price point would float and I'd let the universe decide what I could afford when the time came, because, again, no rush.

It was easy and worked out fine.
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