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Revisiting Cash Savings for 2014

January 5, 2014

I’ve (finally!) had some time to sit down and examine our personal finances for the year.  I generally agree with Leigh, who said she was done optimizing (although she backpedaled immediately!) and don’t like to worry so much about money anymore.  However, we’ve had some major changes in our life, and it is time to re-optimize.

We have a fair amount of cash sitting around at about .75%, and we intend to continue to grow that number in hopes of amassing a 20% downpayment (and associated move-in costs) on a home that will likely be at least $600k.  We are starting to familiarize ourselves with different areas and figure out what we need to be able to afford.

Our cash-flow should be enough to cover any likely emergencies, limiting our need to have cash on hand.  We currently have approximately $75k in cash savings (not including approximately $15k in our checking accounts for spending or future transfers in savings).  My plan is to dump all of this in a CD, which we intend to break after 12 months and could leave there as long as 2 years.

I did some quick CD rate comparisons using bank rate and a reader recommendation of Ally bank.  Here is how the two compared:

Screen Shot 2014-01-05 at 10.18.48 AM

 

The 4-year PenFed CD is the best option.  (Ally recently changed their penalties for 5 year loans.)  Let me know if you have another suggestion that can beat the APYs for 1 year and/or 18 months.  Also let me know if you think my calculations see off.  I used the spreadsheet from this post to compute the effective APY.

With that, I took a look at what we’d gain by being smarter with our money (and going through the hassle of opening another account).

Assumptions:

  • $75k deposited early this year
  • PenFed 4 year CD broken early with 180 day penalty, 2.22% APY
  • Compared to current .75 APY savings rate in high-yeild account

Results:

  • Additional interest over 1 year: (1.13% APY) $289
  • Additional interest earned over 18 months (1.5% APY):  $850
  • Additional interest earned over 2 years (1.68% APY) :  $1,427

I’m assuming once you decided to break a CD, you can get your money in about a week.  Does that sound correct?

I previously estimated we’d be able to save about $4,500 in cash each month, though I’m quite sure that was an optimistic assumption.  I should have a real number after January.  With that, I’m comfortable locking up $75k right now.  I’m not sure how to handle the amount coming in, but I’ll initially put it in savings then perhaps start a second CD at the 6 month mark.

The only thing I think I’m “missing” is the fact that I still haven’t paid of my student loan of about $12k.  On one hand, the rate is likely lower than our mortgage will be.  On the other hand, it is obviously higher than the rate on our CDs.  Anyone have any suggestions on how to think about that?

I’m going to come up with some 2014 goals, but I might wait until the end of January to figure out the exact numbers I’m targeting.

Happy New Year!

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6 Comments leave one →
  1. January 5, 2014 12:16 pm

    I would still say I’m no longer worrying about money and once I go back to work (tomorrow!) I probably won’t optimize out of boredom as much.

    I broke some CDs for my down payment. I just called someone at Ally and it took a day longer than getting money out of the savings account did. If I were you, I would probably keep the student loan for now just because it would be $12k less you would have for a down payment. The interest on the CD for only a year doesn’t look that valuable, but for two years it sure does!

    Setting aside $4,500/month in cash sounds pretty sweet :)

    • January 5, 2014 6:42 pm

      Thanks for the tip on CDs & timing. It only gets a better APY if we wait longer to break it!

  2. January 5, 2014 6:17 pm

    RE: the student loan vs. downpayment… if there’s a chance that 12K will make the difference between a jumbo-loan and a regular loan, keep it for the downpayment. (Of course, we paid off our student loans long before getting a house downpayment.)

    And there’s also the question of when the student loans are going to be paid off… if they’re all due before you’re planning on buying the house, you might as well pay them off now. I guess the relevant number is how much of your loans will be left when you are ready to buy the house rather than how much is in there now. And how much money will that be saving/risking etc. Given that it’s only a year… probably not much.

    Given the housing market in your area, it may be a longer than a year before you actually make an offer on a house. (Most of my friends who live out there have had to wait and pounce, and many of them are still looking.) Some of our friends say the market is overheated right now and it’ll drop again because it’s been doing that for the decade+ they’ve been there and it feels like previous bubbles to them. But they have a house (that they bought during the low point of the recession).

    We have 53K in savings right now earning .2% APY. I really need to get that down closer to 31K (which is our emergency fund + private school tuition) now that DH has a job. 11K is going to go into a Roth as soon as we get a handle on our tax situation (we’re planning on doing that the first weekend in February). We have a lot of deferred maintenance coming up (DH made a phone call last week, but it’s too cold for the a/c people to determine if there really is a leak or not! He’s planning on calling the roofers next week.). After all that, I’m not sure if we’re going to prepay mortgage, add more to our taxable stocks, or do some of the “want” items on our spending list. It’s hard to make decisions on the full amount of potential excess right now because DH has only been employed for a month, and it’s not like he’s in a job with tenure (though I suppose I can always undo excess retirement saving etc. and we can live off my salary again). That uncertainty makes investing/mortgage paydown attractive. But it would be nice to finally redo the kitchen or buy a piano etc.

    • January 5, 2014 6:42 pm

      I totally agree about the timeline. We want to start looking around casually this summer to get an idea of what & where we like. We don’t plan to buy for 1 year, but it could certainly be 2 (or more?) years from now. This is why there is uncertainty over when we’d break the CD. I have no idea what to think about the bubbles, and I’ll try to get smarter about it as we get more serious. I wish I was ready to buy during the recession, but we just weren’t there yet!

      Good point about the jumbo loan vs student loan – I doubt such a small amount will make a difference even over 2 years, but I think I’ll leave it alone for the time being.

      Why only .2% interest? I guess it doesn’t make a ton of difference once you are down to $30k or so.

      I vote for a piano! :)

      • January 5, 2014 6:49 pm

        Because that’s what our credit union gives. Which is a lot more than what Wells Fargo gives, or our previous (once high-interest) online bank, Etrade. I stopped chasing online savings once the difference in interest rates dropped to such a small amount.

        Usually I don’t have quite so much money in savings (so usually there’s not much money to be made by chasing interest rates anyway) — we were aiming to have 52K by the end of the school year so we could have summer spending + emergency fund + tuitions for next year. So we put a little extra away each month from my paycheck and were going to hit that goal in April or May. But then DH got a job (and it took a month for my retirement to start deducting again and DH’s retirement hasn’t started deducting yet) and we hit 53K after a month and a half. (But we no longer need that much money for the summer because we’ll still have income.)

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  1. Optimizing my cash (again) | Stacking Pennies

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