The Personal Finance Podcast - Where To Put Your Short Term Cash (Emergency Fund and House Down Payments!)

Episode Date: September 1, 2021

69. Where To Put Your Short Term Cash (Emergency Fund and House Down Payments!)  We launched a Youtube Channel! Check it out here. Master Money on YouTube. Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me. You can also ask questions on TikTok @mastermoneyco Sponsors Thank you to Mint Mobile for sponsoring the show! Check them out at mintmobile.com/PFP Thanks to Policygenius for their support! Get free life insurance quotes at Policygenius.com Thanks to our sponsor Manscaped (Manscaped.com) for sponsoring this episode of the podcast. Use code PFP20 at checkout for 20% off + Free Shipping! Want to Support the Show? Follow on Spotify or Follow and Leave a 5-Star Review on Apple Podcasts! Today We Discuss:  Should you Invest your short-term savings?  What a CD ladder is.  Money Market Accounts vs High Yield Savings.  Plus much more!  More Episodes You Will Love:  The Stairway to Wealth (Where to Put Your Money In Order!) How to Optimize Your Bank Accounts How to Become a Roth IRA Millionaire How to Become a 401(k) Millionaire Savings Rate Episode! Why Index Funds Are King (Plus My Favorite Index Funds!) The Fastest Way to pay off Debt  How to Run the Numbers on a rental Property  How to Spend Money on Things That Bring You Value (Live Your Best Life!) Check out all the Stuff I Recommend!  M1 Finance Open a Roth IRA Personal Capital Free Wealth Management + Budget App and Fee analyzer!  CIT BANK (Best Savings Account) Best Personal Finance Books  The Simple Path to Wealth - J L Collins  The Millionaire Next Door - Thomas Stanley I Will Teach You To Be Rich - Ramit Sethi  Rich Dad Poor Dad - Robert Kiyosaki ** Some links may be affiliate links and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Check us out on social fam!  Twitter Dollar After Dollar Instagram www.thepersonalfinancepodcast.com www.dollarafterdollar.com Learn more about your ad choices. Visit megaphone.fm/adchoices

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savings. founder of dollar after dollar.com. And today on the personal finance podcast, we're going to talk about where to keep your short-term savings. If you have any questions, hit me up on Instagram at Master Money Co. And follow us on Spotify, Apple Podcast, or whatever podcast player you love listening to this podcast to it. If you want to help out the show, leave a five-star rating and review on Apple podcast.

So today, we're going to talk about where to keep your short-term savings. And this actually happened because what we did is we put a poll up on our Instagram, Master Money Co, and asked you guys, would you like to do a choose-your-own podcast adventure? And we put a poll up to see what do you guys want to hear this week? And we gave four options. And this is the episode that you guys voted on because I want to give you guys some choice as well. We're not going to do this every single week, but I want to give you guys some choices.

Well, I want to give you guys some input so that I can be serving you. Because that's what I'm here for. I want you guys to learn as much as possible about building wealth. Now, if you've noticed, our handle has changed. It used to be dollar, AFTR dollar, and now it's Master Money Co.

Now, let me explain to you guys what Master Money is going to be. Because coming up in the next week or so, we're going to be launching a YouTube channel under Master Money. And we're also going to be launching a website within the next month or two that's going to be the hub for all types of stuff for you guys.

We want to be the place where you guys can get free courses. We're going to have premium courses. We're going to have coaching where you can have access directly to me. We're looking to add newsletters. We're going to have all our recommendations at mastermoney.com. So we're going to be launching mastermoney.com. If you go there right now, there's just a coming soon page. But we're going to be launching it within the next couple of months.

Because what I want to do is give as many people as possible access to the best resources for building wealth because like I said, I truly believe anybody can build well. I truly believe that. Even if you take small amounts of money every single month and start putting it towards your emergency fund and start investing small amounts of money turns into much larger amounts of money. And having that financial security for people

helps them sleep better at night. It reduces stress. It reduces anxiety. This can be life-changing for you. So for me, giving as many people as possible access to as much information as possible about building wealth is the only responsible thing to do. So that's why we're launching master money. That's what master money is there for. Now the podcast name, the personal finance podcast, that's not changing. And dollar after dollar will still be there as the blog.

But master money is going to be the hub about teaching people how to build wealth. Now where should you keep your short term saving? This is one of the bigger questions that I get all the time. A lot of people are maybe saving for a house. Or you want to know where to keep your emergency fund. Well, when you're thinking about short-term savings, there's a number of factors you want to have in place. The first thing you want is you want your savings to be safe. Basically, you want it to be there when you need it to be there. You want it to be accessible. So you want to be able to easily get to it when you need to get to it. And you want to keep it away from temptation. Those are the three factors you truly want for your short-term savings because you're not doing the short-term savings to truly grow it

to a significant amount. What you're trying to do with your short-term savings is have a place to park some money so that you can achieve a specific goal that you have. So this could be for anything like a home remodel. It could be for a house down payment. Maybe you're working up to buying your first house and you want to save your house down payment in a specific account. Maybe it's for short term college savings. You're working and trying to save up money so you don't have as big of a student loan debt or you don't have any student loan debt at all. Or you're saving up for your kids college as well. And you want to make sure that you have that money put aside so that your kids don't have much debt burden at all, or if any.

Or maybe you're trying to buy a car and it's for your car down payment. Or you're trying to buy a car in cash and it's your cash payment. Or it's for your emergency fund, which is the biggest one that we talk about here all the time. Because with your emergency fund, every single person listening to this podcast needs to have some sort of an emergency fund. Every single person listening needs to have an emergency fund. Why? Because it protects you from life.

And we've talked about it a number of times. But what it is, it's a big pile of cash that you set aside. so that if you lose your job or something happens to your house or your car breaks down, you have the money already there so that you don't have to worry about that situation. You don't have to go in debt. You don't have to scramble to find the money. The money's already there. And it's your fund that allows you to protect yourself against life because emergencies are going to happen.

It's not if they're going to happen. It's when they're going to happen. So you have to have an emergency fund to ensure that you're protected against life because it's going to happen. So how long an emergency fund should you have? Typically, it's between three to six months is the starter range to have an emergency fund. If you're just starting out and you're just trying to get by, just build up a one-month emergency fund, meaning one month of expenses that you have to spend every single month, add up how much you spend every month and try to save up one month of expenses.

Then build it up from there. Try to get to at least three months. And in the three months range, that's for folks who have a steady job in a stable industry. You're pretty healthy. Nobody relies on your income. and you could quickly find a job if you lost your job. That's who should be in the three-month range. Then you can go to six months if your income is unpredictable

or you and your family have health issues. You rely on your income, and other people, including your parents or your children, rely on your income as well. And you work in an unstable industry because it would be difficult to find a new job if you work in an unstable industry. So that's when you would want to have a longer time frame

for your emergency fund, six months or longer, if possible. So what I like to do with an emergency fund, If you're struggling to build it up, what I like to do is get to a certain point. Maybe you can only get to one month. And then each and every year keep adding to it to start to build it up slowly. Because over time, that emergency fund is going to build up. Are you going to need to use it? Absolutely.

You're going to need to use it probably every single year. Something's going to happen. But at least you're working towards building it up and putting extra cash towards it so that you can protect yourself. Because people who protect themselves from bad situations, people who financially protect themselves are the ones who truly build wealth. because guess what? You never go backwards if you have a protection plan like this.

If you have something in place that actually protects you against life because life's going to happen, you never go backwards. So that's why you have to have the emergency fund in place. That's why it's so important. So any of these short-term savings that we just talked about, we're going to talk about where you should put it because I get this question all the time. And it's extremely important to know where to put it

because you want that money there, you want it accessible, and you want it in a place where you're not going to touch it and be tempted to touch it and use it on something else. So if you're interested in that, let's get into it. So the first thing I want to talk about is where you should not put this money. Because like we said, we want it safe, we want it accessible, and we want it away from temptation. But where you should not put this money is in a few places.

One of which is, and this may be a shock to some of you, but you should not be investing this money. Why? Because here's what happens. Let's say, for example, that you put your emergency fund in investments in 2007. Then the year 2008 rolls around, and we have the great reception. And your emergency fund was sitting invested and we had the Great Recession. Well, during the Great Recession, everybody's accounts dropped at least 50%. So let's say you had $10,000 saved up in an emergency fund, just for simple math.

And the Great Recession happened, and now it drops to $5,000. But at the same time, you also lose your job because when a recession happens, a lot of times what happens as well is that people start to lose their job. And the majority of the population who has never been laid off gets laid off. So now you actually need this money and it's cutting up. half because there was a dip in the market. This is not a situation that you want to get yourself into. And so not investing this money, your short term savings, because what you need this money for is what you're saving it for. You don't need it to grow significantly. Yes, it would be much better

to invest this money. It would be much more efficient to invest this money. Absolutely. But this is something that you need in the short term. This is something that you have to have available and it needs to be the full amount when you need it because you built this up to a certain extent so that you could have the full amount when needed now when could you invest it one situation you can invest it if you built up a very bulky emergency fund so maybe for example you built up a one year emergency fund and you truly only need six months could you invest six months of that emergency fund just to see if you can get some more growth out of it absolutely but at the same time you have to plan ahead and say what if this gets cut in half do i need to worry about it

Now, for you new investors, when the market takes a dip, that's okay. Don't panic. Because what you need to do is actually buy more. It's buy low, sell high because over time the market goes in one direction, historically, it's gone up. But it does ebb and flow, so it goes up and it goes down. So if you lose your job and the market's in a down time frame, that's why we don't invest this money. So it's extremely important to understand this. Because people who invest their emergency fund, especially funds they truly need quickly,

They're putting themselves at risk. So truly, the only time you could be investing this is if you have excess cash in your emergency fund, then you can absolutely invest it beyond where you need to be. So if you need to be at six months, anything beyond six months. If you have eight months, you can invest two months of it. But that's the only time. So you don't want to keep your savings in a brokerage account unless you're just letting it sit there in cash with interest. You don't want to keep it in a 401k or a Roth IRA, any retirement account,

because you're going to have to pay penalties to take that money out. Now, there is a caveat with the Roth IRA, and this is one thing I want to talk about, because this is another reason why I love the Roth IRA. Is that your contributions to a Roth IRA after five years can be withdrawn penalty free. So this is a great perk to a Roth IRA because if you got in a really bad situation, if you truly got in a situation where you're like out of money and you're facing foreclosure or bankruptcy or whatever else, you could actually use your contributions in a Roth IRA. Now, don't hear me say this and think, oh, I'm going to start touching my contributions in a Roth IRA. This is if you're in dire need. You should not touch your contributions to any retirement account ever because you need to not disrupt compound interest unnecessarily. But if you truly need it, it's a built-in emergency fund into your retirement account.

If you absolutely need it and you had no other option. So that's one additional perk when you're looking at retirement accounts to the Roth IRA. So if you need this money for short-term savings, if you need it to buy your house or you need it to buy your car, don't invest the money because you don't want to get to the point where you're stepping up to buy your house and all of a sudden the market takes a dip and it's cut in half and now you can't buy your dream home. Now, where should we keep the money? Let's get into it. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in.

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that reduces temptation. So specifically for these short-term savings accounts, I like to separate them from my checking account. And we've talked about this on the episode where we talk about optimizing our bank accounts. And I'll leave a link to it in the show notes if you haven't heard that episode. But we talk about this,

separating the accounts that you're saving from your checking account because you don't want easy access to those accounts. You want it accessible, but you don't want super easy access where you could pull it out immediately. So there are three places that I would look where you could keep your emergency fund.

The first one is a high-yield savings account. Now, if you don't know what a high-yield savings account is, it's a savings account that actually offers 20 to 25 times higher interest rates than what a traditional savings account offers. So if you get a savings account at your brick-and-mortar bank and you walk in there, usually, especially right now, you're earning almost zero interest on that money.

Typically, it is about 0% interest. But if you go to a high-yield savings, account. You can earn 1% to 2% to 3%. Right now it's extremely low, but you can earn a much higher interest rate on your money. Now what does this mean? That just means that every single month your money is going to actually earn interest for you. Now you need to have this in place because inflation, especially right now inflation is really high, but inflation is eating away at your money every single month. So this is why we invest our money because anything outside of these short-term savings, any excess cash should be invested. You're absolutely.

should be. But in these short-term savings, we need to try to combat inflation in some way, shape, or form. So you need the highest interest rate you possibly can get. So a high-yield savings account is a great option. Typically, I like to open a high-yield savings account on the online banks, because online banks usually have higher interest rate. Now, you can ask your specific bank that you're at. If you like your bank, ask them, what's your high-yield savings account interest rate? And then look online and you could compare them to other banks. Typically, for me, for my high yield savings accounts, I use Capital One

and I use CIT Bank. But if there's other banks out there that you like more, Ally is great. Synchrony is great. Marcus by Goldman Sachs is great. There's so many options out there that have high interest rates. So looking for the best high yield savings account

is going to tremendously help you because at least you get some sort of interest. Now there's a couple of factors that you can weigh in when you're looking at your high yield savings account and you want to make sure that there's zero fees with all of these banking options, make sure there's zero fees.

Because if your bank offers fees, there's way better options out there. There's way better options out there. You don't need to be banking at a place that makes you pay a monthly cost just for having your savings account there because that is taking away the entire purpose of what you're saving your money for.

You might as well just hoard it in cash at that point. They're taking a percentage away every single month. So make sure there's no fees. Make sure you can get the highest interest rate for you. Make sure there's no minimum balance requirements or any other account. Banks are competing for your business and there's a better bank out there if they're charging you fees.

Even if the interest rate is higher, those fees are eating away that entire interest rate. So don't be fooled by a higher interest rate with a bank that has fees. The second place to keep it is a money market account. And a money market account is a savings account with some checking features. That's the only differential between a high-yield savings account

and a money market account. So it typically comes with checks or a debit card and allows a limited number of transactions every single month. And traditionally, the reason why I love money market accounts is they offer higher interest rates than regular savings accounts as well. As I'm recording this podcast in 2021, as of late,

they have been about the same as traditional high yield savings account. So they're running pretty close together here. Same thing goes for the money market account. Make sure there's no fees. Make sure there's no minimum balance requirements. And make sure you compare your options before picking. And if you decide you want to go with a money market account,

just look for one with the higher interest rate. The reason why a money market account is actually nice to have is because if you get an emergency situation, you can just write a check or use a debit card if you had to. If you're typically tempted, if you have a big pile of cash and you're tempted to spend it, you know who you are. If you're tempted to spend it, then this may not be the best option for you because it's easily accessible. Like if your friends are going to go hang out and you're checking accounts running low,

you're like, well, I can just grab for my emergency fund and my money market account real quick. Whereas if you're in a high yield savings account, you've got to wait three days for that bad boy to transfer. So your friends can't wait three days while you wait for your money to transfer from an account to account. That's why you have to check your personality and say, which one am I? Because I want to make sure that this money's accessible, but I also want to make sure I'm not going to touch it. So which personality do you have? Are you fine saving money and you never had issues of touching big piles of cash and using it for not what it was intended for? Or are you a good saver?

So that's the biggest difference between a money market account and a high yield savings account is the access to your money. Because the money market accounts come with a checkbooks or a debit card. and high-yield savings account typically don't. But money market accounts typically have transaction limits. So if you don't have a large emergency fund as well, then you want to look at the high-yield savings account because the money market account is going to have a minimum balance that you have to maintain the entire time.

Now, the third option is a certificate of deposit or a CD. Now, we have a very specific way that we talk about CDs here because CDs tie your money up. And what you do is you typically will give a bank, X amount of dollars, whatever the minimum amount is in a CD, and they keep it for a certain period of time. And if you pull the money out before that certain period of time, you're going to have to pay a penalty on that money. But they'll give you X amount of interest for allowing them to hold your money in a CD. Now, back in the day, CDs used to make fantastic interest.

You can make three, four, five, six, seven percent interest on a CD. Now, CDs make about the same amount as a high-yield savings account, which is why this would be the third option. But the way you would do it with a CD because you're saying, hey, this isn't accessible, it's tying my money up. Why would I put it in a CD? What you would do is do something called a CD ladder. In a CD ladder is where you stagger the maturity dates of CDs. The maturity dates just mean when you're actually allowed to take the money out of a CD. But you're going to stagger the maturity dates so that that money can be utilized when you need it. So what do I mean by that? So first you would open up a CD. You'd open up your initial CD. Because what a CD ladder involves is dividing your investment.

evenly into several CDs of different term links. So let's say, for example, you had $10,000 that you had saved up and you want to spread your money out. So you'd put $2,000 in a six-month CD, you'd put $2,000 in a seven-month CD, you'd put $2,000 in an eight-month CD, $2,000 in a nine-month CD, and $2,000 in a 10-month. What that's doing is it's allowing CDs to start maturing one each month, and then you're going to repeat the process. Because if this is for your emergency fund specifically, all of a sudden, these CDs are maturing when you need them each month. So for example, if you lose your job and you know you need X amount every single month to live off of, where you can put that amount into each month CD and it will mature over time, but you're

at least reaping the benefits of interest. Now, if you're in a time frame listening to this podcast where interest rates are higher, this is a great option. If you're in a time frame list in this podcast like right now where interest rates are exactly the same as a high yield savings account, you're much better off going with the high-yield savings account than you would doing a CD ladder. But interest rates will change as they constantly do. And when they do and the interest rate is higher than the inflation rate, a CD is the best option for you when you stagger it this way, because your money will come due and you'll be able to actually cycle through it.

Now, this is a lot more work than it would be just putting in a high-ield savings account as well. So there's pros and cons to each side. And I'm all for simplicity because simplicity is the number one thing I think we need to be doing with our money. But if you're trying to fully optimize and make sure that you're getting the best optimization, then a CD might be a great option. Now, local credit unions typically will have higher interest rates than like national banks will on CDs. So look at your local banks if you're looking into this option to see if they have higher interest rates. Some of them may be 2, 3% at the time I'm recording this, which would be a great rate at this time in point. But you don't want it for a long period of time.

You want them for short periods of time and you stagger them so that they mature each and every month so that that money is available for. for you when needed. Now, if you're going to buy a car or a house, this probably isn't the best option for you. This CD ladder is probably a great option if you're going to be utilizing it for your emergency fund. But if you're going to buy a car or a house or you're saving up for a remodel

or you're saving up for something of that nature, then I would go ahead and put that money towards a high-yield savings account. Now, what about short-term college savings? This is perfect for that as well. If it's within two to three years that you're going to be utilizing the money for college, then this is a great option.

as well. If not, then we're going to have an episode talking about 529 plans, and that's what I would be looking at if you're not doing short-term savings for college. For example, maybe one of your kids is 16 and about to go to college in two years, then that would be the option for you, or you're saving up for your own college. Then having it in these short-term savings would be perfect for you. But in the long run, if it's a longer period of time, you have a toddler or something like that, then a 529 plan is by far the best place to put your short-term savings for college. And because it's a long period of time, what that means is that you can absolutely invest that money. If you have a toddler and you're looking to save for college, you can absolutely invest that

money. We'll talk about that in that episode. So make sure you're following this podcast so you can see when that episode comes out. Now, one other option you can mention would be you could look at savings bonds to save your short-term cash, but that is not as accessible as everything else we just talked about. So I think the best three options, again, are the high-yield savings the money market account, or a CD ladder if interest rates are high enough. Those are the three best options because what you don't want to happen is the market to take a dip and you have this money invested and all of a sudden you can't utilize this money. I can't stress that enough.

Now is it the most efficient way? Absolutely not. Investing is the most efficient way to utilize your money. But it's the best way to preserve your wealth to ensure that that money is available to you when you need it. If you have any questions about this episode, hit me up on Instagram at Master Money Co. That's Master Money CO. And follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast.

If you want to help out the show, leave a five-star rating and review on Apple Podcasts. So many of you guys have been leaving reviews on Apple Podcasts. It truly helps out the show. I can't thank you guys enough. You are helping more people find out that they can actually, too, build wealth. because that's the mission of this podcast is to teach as many people as possible how to build wealth.

Thank you guys so much for listening. I appreciate each and every one of you guys for listening and we'll see you on the next episode. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode and share this episode with a friend. And don't forget to leave a rating and review on iTunes as well

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