What should I do with the $7,000 in my checking account to help it grow for me instead of it accruing no interest?
I am 26 years old and only recently entered the working world. I have around $7,000 in my checking account that I would like to use to start saving for a down payment on a house or other non-retirement goals. At the moment my only investment is my employer-sponsored 401(k), to which I currently commit 15 percent of my annual income. What should I do with the $7,000 to help it grow for me instead of sitting in a bank (essentially accruing no interest)?
If you have the goal of buying a place in the next couple of years you should consider holding it in cash to build up enough for a downpayment. The market is too unpredictable in the short-term and it's hard to say whether you'd have more or less when it came time for your downpayment. If it's farther down the road then you could consider investing it.
For higher interest rates, check out high-yield savings accounts at Marcus, Ally bank, Synchrony, or some of the other online banks. They offer much higher rates than traditional brick and mortar banks while still being FDIC insured. If you're going to be holding cash for a period of time, might as well earn the highest interest rates possible without exposing yourself to market risk.
As I mentioned, if you have a longer time horizon than 2-3 years, you can then consider investing the funds.
The goals that you are discussing are short-term goals and would be best served with
- something safe with low risk - (where you wouldn't lose your $7000 or interest earned) – This is called “preservation of capital”
- liquidity - something you could have access to easily without penalty fees
Interest rates are slowly inching up and you can find 6 month Certificate of Deposits (CD's) at some bank for 2% and 2.25% for 1 year. You may consider using 6 month CD's, and rolling them into new CD’s once the 6 months is up/the CD matures so that you can take advantage of rising interest rates and get a higher rate on the new CD. This strategy will earn you interest, is safe and has liquidity.
If you need access to the funds in the near future, I would keep this money in cash and be contributing to on a monthly basis. I would put it in a high-yield savings account. These will pay anywhere from 1.5-1.7%. Much much better than what your savings account is probably currently earning. Here's a good resource: best high-yield online savings accounts for 2018. If your liquidity needs are long-term, you could invest it. Some investment options for you:
- Max out an IRA ($5,500 for 2018). Depending on your income, you'd want to contribute to either a Roth or Traditional.
- Contribute to an HSA (Health Savings Account) as part of a high-deductible health plan your employer may offer. You can invest the funds in HSA's, they're portable, they receive pre-tax contributions, and they can be taken out tax-free if used for qualified medical expenses. After age 65, it turns into a retirement account where you can withdraw the funds and only pay ordinary income tax on it. If you are young and healthy, you can max out an HSA ($3450/yr for single), invest the funds, and just pay any medical expenses out of pocket.
- Put the funds in a taxable standard brokerage account. Here you can invest as you wish, just make sure you pay attention to tax implications since any gains realized in a taxable account you must pay taxes on in the same year they were realized.
- Up your 401(k) contributions even more. If you've got the extra cash flow, increase your 401(k) contributions. If positive cash flow is currently, say, 10% of your take-home annual income, you could, realistically, raise your 401(k) contributions another 2 or 3% with minimal impact.
Lots of options to consider. I'd recommend sitting down with a financial planner to get you on the right path!
Hello, I think what you are doing with your employer 401(k), by contributing 15% of your compensation, is great. Targeting 15% or more is ideal for building a sound retirement portfolio. Hopefully, they provide a match, or even better, have a Roth option. Just make sure your 401(k) is allocated properly, with a nice mix of growth and stability. Since you are relatively young, you should have a sizeable portion in growth (U.S. and foreign equities, among other areas).
With respect to your savings, I would strongly recommend you consider establishing an online savings account with an online bank such as Ally Bank, American Express or some other FDI-insured bank. Many of them offer yields of 1.50% or higher these days. There are a number of them to review, and you can use this site for due diligence:
I've always found Nerdwallet to be helpful. You can open an online saving account with no minimum and link it to your primary checking account where you can transfer into and out of anytime you like.
Caveat: I would keep enough in your checking account to pay bills though, and not transfer everything to an online savings account. You should earmark a specific dollar amount each month toward your down payment or other goals. I view savings accounts as monies for emergencies, but you could certainly carve out a portion for a future down payment on a house.
Hope this helps you out! Good luck!
This $7,000 can be the foundation of your "Emergency Fund" I recommend the emergency fund should have an amount equal to 6 months of living expenses. You will need this in order to accomplish a lifetime goal of financial independence. I suggest putting the emergency fund in a money market account that pays interest or a savings account or Certificate of Deposit (CD). With interest rates increasing you will start to see banks begin paying higher interest on Money market accounts, savings accounts and CD's. Shop online for an online bank, right now they usually pay more. The emergency fund should not be an investment account but just a true savings for short-term needs (5 years or less). Good luck, you are doing things right already.
I would encourage you seek out a “Fee only” independent Registered Investment Adviser (RIA) from the XY Planning Network. RIA’s are fiduciaries and will have your best interest at heart. Find one who is a Certified Financial Planner professional ™ (CFP®). You can find advisers at the following websites:
National Association of Personal Financial Advisors - https://www.napfa.org/financial-planning/how-to-find-an-advisor
Financial Planners Association - http://www.plannersearch.org/
XY Planning Network - https://www.xyplanningnetwork.com/ (they specialize in working with millinials)