Beyond the piggy bank: Where should we stash savings?

So, Savers, say the time for saving has come. Your budget is on track with a monthly surplus. Your debt is paid off (or you have a good plan for paying the rest off). Your retirement contributions are taken care of with automatic withholding or transfers. Now you want to save every extra penny toward a different goal: a replacement car. A tour of Europe. A house down payment. An adoption.

Where do you put the money? There are so many options. You can leave it in your checking account if you have the discipline to not spend it. You can put it in a savings account. You can withdraw it in cash and stash it in your sock drawer. There are CDs, mutual funds, gold bars … so many places to stash your savings. So which do you choose?

That’s an issue my family is facing — or will pretty soon. We’re saving for a house down payment and a potential international move. We have a little money set aside, but I decided we needed to get at least one more student loan out of the way before we really started saving. But that loan should be gone by the end of this year, and then our budget surplus will start going toward our down payment fund again.

This is a short-term goal, meaning we’ll be spending this money soon. We hope to have determined where we’re going to live by the end of 2016. So the risk vs. return question seems especially difficult. When it’s my retirement money, which I know I won’t need for 30-odd years (and I know will be losing value if I don’t give it a chance to grow), I have no problem opting for the aggressive (i.e., stock-heavy, higher-risk) option. Over the years, chances are good that money will grow despite fluctuations. But I don’t want to save diligently for three years only to find myself in a dip when the time comes to buy a house, so we have to either wait to move or take a loss on our investment.

However, savings rates are just miserable. Absolutely safe places to stash money (savings, CDs) are paying 1% at best in savings accounts, maybe 2% if you’re willing to tie it up in a 3-year CD. What money we have right now is sitting in an online savings account with a 1% interest rate.

And that was going to be my plan, until a blogger friend of mine (who recently started a new, more public blog) facing the same problem got a bit of advice: put the money in a blue-chip dividend stock fund. From what I understand, companies such as Vanguard have funds that invest in the types of big companies that pay out quarterly dividends. You reinvest the dividends in the same fund, so theoretically the stocks grow in value AND you get dividends.

So it sounds pretty interesting. My blogger friend did some calculations of what would have happened if she’d invested the money at various times, and in some cases she would have lost some money, but in other scenarios she would have made quite a profit. It’s a risk, but maybe not as big of a risk as, say, playing the stock market yourself. It’s a fund, so they pick the stocks for you.

I’m tempted. I’m also thinking, though, that even if we do this, we’ll keep at least some of the money in our piddly savings account. Maybe 50/50?

As you can see, this is one area where I don’t feel strongly and don’t have a firm recommendation for myself, let alone anyone else. So what would you do? If you’re saving for a goal, where are you stashing your savings?

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Grant Cochrane / FreeDigitalPhotos.net

2 thoughts on “Beyond the piggy bank: Where should we stash savings?

  1. Dan

    This post addresses a REALLY good question. Savings accounts and CDs don’t even keep up with inflation these days so they don’t seem like great options. I tend to think like your blogger friend and invest the money in the market. For money that I think I might want in the near future, I go with a more conservative (Bond ETF) allocation. I hate to sound like a sales rep for Betterment, but they are really helpful for the kind of short-term goal setting you described above, and they have no transaction/withdrawal fees so I use them in place of a savings account.

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  2. Rosie the Budgeter Post author

    Yeah, I’m leaning toward putting 25% of our down payment money in stocks and keeping 75% in savings. I like being conservative with the short-term stuff so even if the market tanks, we’ll have SOME down payment money left!

    My blogger friend (on her more personal blog, http://creditcardfree.savingadvice.com) sparked a great deal of conversation on her posts about this topic. There was a lot of talk about bonds. I don’t understand all the investment options well enough to speak confidently yet, but some people were saying bonds can be a weird investment because when interest rates go up, bond values go down. So I think the takeaway is to combine those with other investments to balance out the risk of that.

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