Cash Savings sitting in my bank account
New York, NY · Member since 2020 · 21 posts · 8 votes
Hello Bigger Pockets folks
I am new to real estate and plan to invest in the market a year from now (when I am financially better on paper). I am currently working on my education and my finances. However, in the meantime, I would like to use my savings that are parked (in high yield savings accounts) possibly to invest in index funds, because the interest rates that I am getting are not enough.
Considering that I never had an investment account like IRAs, 401k, etc. Would investing in Index Funds be a good idea without any of these accounts? Are there other options that would allow me to earn at a minimum 5 % return back? And is it smart to invest in stocks without any tax-deferred accounts?
Thank You In Advance for any advice
Maximo, I have found that by assigning the right purpose to what you are saving for helps create the appropriate framework for what things you might end up saving/investing into. For example, if I say "These funds need to be for a rainy day in case I need them," then it may be much easier to determine how you'd like to allocate them, since...in that scenario, liquidity and access would be significantly important, then often liquid banking instruments that may not pay a great rate of return seems more appropriate because the point is access and not necessarily ROI. If, however, you say "I want these funds to help me retire," then since that entails a much larger and longer term purpose, the potential vehicles (instruments and/or specific investments) would be different. While a lot of people on this thread have provided several great suggestions, I would hesitate to add something to the mix because advice such as "investing in index funds periodically overtime" may be a good idea, or it may not be, but in a vacuum it's hard to say. For what it's worth, I'd encourage you to work on putting some form of a plan together that helps identify all of these considerations and helps create some better definition and purpose (with or without a professional depending on how confident you feel about it). The most financially successful people I know and have as clients are not the ones that have made the most money, they are the ones that have made the most of their money! Doing that involves a plan and a strategy
You should definitely jump on a call with @Brian J Haney!
@Maximo Jacobo - You're certainly asking all of the right questions! For someone like yourself that's being smart and looking at things holistically, there can be several things to consider. Message me if you'd like to have a brief call to discuss!
There are no guaranteed returns. Any return is possible but involves trade offs.
If you are saving for a purchase, it is normally best to keep it in a low risk account to keep you on track for said planned purchase.
Some people like to keep their cash reserves in index funds. That is arguably a little more risky, but it works for some people.
IRAs, 401ks, Roths, etc all have their uses in a tax planning conversation, but may be more effort than its worth for your purpose here, to make a purchase.
For short term cash reserves (less than 1 year) the rate you get hardly matters and will almost never impact your purchase decision. Your savings rate will normally be a more impactful number to boost than a savings yield.
@Daniel McNulty
Thank you for your advice
I will keep that in mind. I do not plan to hold my savings for more than a year. It makes sense that the return I could get would hardly make any difference.
Investing in index funds, in general, is a great way to put your money to work without much knowledge of the stock market. You've heard it before, "historically the stock market goes up X% per year yada yada." On average, you'll come out way ahead.
If you don't have any exposure to the stock market right now (i.e. no 401k, IRA, personal brokerage account, etc.), I think it makes sense to put some of your money into the market using a personal brokerage account (I use TD Ameritrade and Robinhood, but they are pretty much all the same, especially if you're looking at index funds). $SPY (S&P 500) and $QQQ (NASDAQ) are two popular index funds you may consider, but there are probably thousands more.
Of course there are risks and you need to consider that. Remember that you don't have to (and shouldn't) put ALL your savings in the market at one time. One strategy might be to put just 10% into an index fund upfront, and then going forward you put 50% of additional savings in.
Personally, I think the stock market is overvalued at the moment and I'm selling more than I'm buying, but that's because I put an additional chunk of my savings into the market in March through April. With that said, I'm not willing to take everything out and miss future opportunities.
Good luck!
@Jason Pedersen
Thank you for the advice
I have read in many places the benefits of investing in index funds. Also, I read somewhere that a good strategy to invest in index funds is setting up recurring monthly purchases to offset the risk of buying when the market is too overvalued.
Thank you for taking the time to the response I liked the idea to start investing 10 percent of my savings
Maximo, I have found that by assigning the right purpose to what you are saving for helps create the appropriate framework for what things you might end up saving/investing into. For example, if I say "These funds need to be for a rainy day in case I need them," then it may be much easier to determine how you'd like to allocate them, since...in that scenario, liquidity and access would be significantly important, then often liquid banking instruments that may not pay a great rate of return seems more appropriate because the point is access and not necessarily ROI. If, however, you say "I want these funds to help me retire," then since that entails a much larger and longer term purpose, the potential vehicles (instruments and/or specific investments) would be different. While a lot of people on this thread have provided several great suggestions, I would hesitate to add something to the mix because advice such as "investing in index funds periodically overtime" may be a good idea, or it may not be, but in a vacuum it's hard to say. For what it's worth, I'd encourage you to work on putting some form of a plan together that helps identify all of these considerations and helps create some better definition and purpose (with or without a professional depending on how confident you feel about it). The most financially successful people I know and have as clients are not the ones that have made the most money, they are the ones that have made the most of their money! Doing that involves a plan and a strategy