Question: Hello, My husband and I are hoping to buy our first home in about 8-12 months, and we are trying to figure out how best to invest our extra cash in order to make a down-payment.
We expect that we’ll be making a 20% down-payment of about $100,000 when we buy. We’ve currently got about $25,000 in cash to invest. In addition, we’ll invest everything from our salaries after living expenses — we’re a lawyer and a graduate student.
Here’s our question: What’s the appropriate investment vehicle? We need a high-yield, low-risk product that won’t smack us with serious tax penalties. We’re thinking a short-term bond fund or a CD? Or should we simply park the money in our high-yield checking account, which gets 4% interest? What say you? Cheers, Elizabeth, Washington D.C
Answer: Bravo. I like your conservative financial strategy of putting the money in a low risk product. Since you’ll need the money soon, you’re right to seek an investment that preserves the value of your $25,000 in savings while making some interest on it.
I have two votes: First, the high-yielding checking account you have that is paying 4% is just dandy in today’s market. Plus, your money is fully protected by the Federal Deposit Insurance Corporation (FDIC). There is no risk of you losing the money to bank mismanagement or a disastrous fallout from the current credit crunch.
Second, you could park the cash in a money market mutual fund at a brand-name mutual fund company. You’ll earn a higher rate of interest on your money than you would in most bank savings account, and if short-term interest rates go up, you’ll participate in the higher rate. The money is easily accessible, too. Most money market mutual funds, for example, offer limited check writing.
However, in the current troubled economic and financial environment I would favor a money market mutual fund made up primarily of U.S. Treasury bills and short-term government agency debt. It’s the most conservative choice (and you’ll pay for the increased safety through a slightly lower interest rate) but this way you to avoid the risk of any unwelcome subprime debt showing up in the mutual fund. The federal government and its agencies won’t default on their debts.
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