Dave Says Column

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Short term planning

Dear Dave,
My husband and I are completely debt-free, and we’re saving up for our first house. We currently have about $90,000 in savings, and we’d like to buy a home with cash in the next few years. Where should we put our money, so it will work for us while we save more?
Aimee

Dear Aimee,
It’s a great feeling when you don’t have any debt hanging over your head, isn’t it? With the path you’re on now, just imagine how incredible it will be in a few years to have a new home and still be debt-free!

If I were in your shoes, and maybe looking at a three- to five-year window, I’d just park the cash in a good money market account. You won’t make a lot off it, but your money will be safe. Besides, all you’re looking for is a wise place to stash it for a little while.

When it comes to long-term investing I’m a big fan of growth stock mutual funds. The problem with that in your situation would be the volatility of the market. By the time you’ve saved up more money, and spent time deciding on a house, the market may be down.

It sounds like you two are doing a fantastic job with your finances. Congratulations!
—Dave

Keep your emergency fund simple

Dear Dave,
One of my friends suggested that I put my emergency fund money into bonds. What do you think of this idea?
Renee

Dear Renee,
Never put your emergency fund into things where volatility and risk are a concern. An emergency fund isn’t an investment; it’s three to six months of expenses set aside to help protect you from the unexpected things life will throw at you. My advice is to keep your emergency fund in something simple—like a money market account where there’s no penalty for early withdrawal and check writing privileges for easy access.

Bond values and prices go down when long-term interest rates rise. Right now, long-term interest rates—a good example would be mortgage rates—are ticking up. So, as this happens, the value of bonds goes down.

We’re not looking to make money with an emergency fund, Renee. Think of it as a type of insurance. Just let it sit there, safe and sound, until it’s needed!
—Dave