A close family member called me the other day to catch up. He is in the process of moving from the DC metro area to California. He listed his house in preparation for the move. Lucky for him, their primary residence increased in value substantially over the last five years. Within a week he had multiple offers that pushed price over asking.
As we talked, he mentioned his company is paying him a monthly stipend to rent a property for the first 9 months. He already visited San Clemente and found rental for the first year to get acclimated to the new area.
I think this is a great idea. When we relocated, we had to find a house within seven days. Talk about stressful. Trying to learn a new location, research the schools and find a house that met most of our criteria. Taking a year is a much better approach.
He also has a rental property in downtown Baltimore. Previously this was his bachelor pad for five years and then he converted it to a rental property. He intends to keep this property as a rental.
His money from the sale of his house will get deposited into his central Bank of America Savings account. I looked at the savings account options that BAC offers. I am not sure which type of account he has, but they difference in annual percentage yield is minimal. They offer a regular savings account that yields .01% and a money market option that yields .03%. This is abysmal.
He asked me for a recommendation for where to stash his short term cash that he will need to tap next year for a down payment.
Risk Free Short Term Investments
I recommended that he stick with risk free investments. These are investments that will provide a small return in exchange for a very good chance of preserving the original investment from monetary loss. He liked this idea, but each one may have a catch. Here are three ideas I provided:
Certificate of Deposit
He currently banks with Bank of America. I did a quick check on CD Rates at his bank. They are offering a 12 month CD with an annual percentage yield of .07%. I have to say, this kind of return does not get the blood boiling.
I also checked on Bankrate.com and Ally Bank is offering an eleven month CD paying 1.5%. Sallie Mae has a similar duration CD for the same rate. Either of these provide a much better return.
The challenge with a CD, is that his cash will be locked up for the term of the CD. He can access it, but he will incur early withdrawal penalties. For either of these investments, his money will be locked up for eleven or twelve months. This may be a high price to pay if he finds a house he needs to move on immediately.
High Yield Savings Account
There are online high yield savings accounts he could open. One example is Synchrony Bank. They are offering 1.2% APY. The challenge with this bank is that they have no ATM network and only one branch location. If funds need to be transferred quickly this might be a challenge. However, he does most of his banking online already so it shouldn’t be too much of an inconvenience for him.
Since buying bonds or notes are beyond his duration for holding, he could buy treasury bills. I told him he could buy directly on TreasuryDirect.gov. I showed him the following security terms and interest rates. He wasn’t sure how to proceed with this one. I told him if he chooses to buy the treasury bills, he can go to his commercial bank or find an investment professional (he doesn’t have one) to help him buy the treasury bills.
Knowing this family member, he would never get any of this done for such a small return on his money. We are only talking about 1%. He didn’t tell me exactly how much cash he had, but I have to venture it is in the hundreds of thousands of dollars. Lets assume three hundred thousand dollars. This would be a great down payment on a house in the San Clemente area.
1% on three hundred thousand dollar investment will give him about $3,000 after a year. I am rounding here because I don’t know his tax situation or the exact yield he will get. It will take a few hours of his time to set up any of these options. Lets assume it will take four hours of his time to get this set up. So, he will generate $750 per hour of his time to invest his money. Would you do it or would you let it sit in Bank of America earning .01%?
If he was open to a possible risk of his principal, I suggested a couple other options.
Municipal Bond Fund
He is a high earner and this would be a decent way to generate a tax free return. MUB is AMT free and distributed $2.3932 per share in 2016. Currently it provides a 2.2% yield.
California Municipal Bond Funds
I provided two municipal bond funds specific to California. PWZ and CMF hold California municipal bonds. Residents get the added benefit of not having to pay federal or state income taxes. However they have slightly lower yields than MUB. Basically it is a wash in his situation.
I wasn’t going to recommend any other riskier options. I want him to find the house of his dreams (at least for what he can afford in the area.) My objective for him was:
- Minimal chance at loss of principal.
- Easy to sell if he finds a house (liquidity)
- Limited duration – the investment cannot have a duration more that a year
What am I missing? How would you invest short term funds?