Dedicated savers plan for short-term spending
HI HELAINE: My husband and I are in our early 30s. We're not financially hurting — our only debt is a mortgage and car loan. I handle the savings and investment for our household. We're both contributing to our 401(k)s (I'm at 12 percent, and he's at 8 percent prior to match) and also putting 12.5 percent of our after-tax earnings into savings, stocks and our daughter's 529 account.
I've just received a significant raise, and we're looking at an additional $1,000 a month. Normal advice is to put it into retirement or our daughter's college account, but we're looking at some big changes down the road, which include a second child (birth, medical bills, additional child care payment and college fund) and selling our current home and buying another one in the next three years, so we can have more room for our family
and live closer to our jobs. I'm feeling leery about the stock market, given everything that is going on in the world, so where should we park this additional money till we need it? — FLUSH, BUT IN FLUX
DEAR FLUSH, BUT IN
FLUX: Congratulations on the raise! Your instincts are right on the money, but not for the reasons you think.
One should always continue investing in the stock market. You'll do better year in and year out if you invest the money and leave it in place, rather than yanking it in and out based on your “feeling” about the state of the world. I'm assuming you are taking this advice with your retirement accounts.
However, funds outside your retirement accounts that you believe you will need within a five-year period should not be invested in the stock market. The reason is basic: Stock markets go up and stock markets go down. If you need to pull money out in a relatively short time frame, you are risking doing so during a stock slump. In a worst-case scenario, you could end up losing a not-insignificant sum. Not good!
I don't believe you are a worrywart about your possible need for those funds. If you go ahead and have that second child, I can promise you your expenses will increase, even if you don't ultimately move. It's not just medical and child care bills, either. Children do eat food and need clothes. If you take an airplane to go on a vacation, you'll spend more on airfare. You can expect to buy double the birthday party gifts too.
I can go on, but you are no doubt getting the idea. Put the money aside now, and you'll be better equipped to deal with the additional bills when the time comes. There aren't any options that will earn you what I'm sure you would like to earn on the money, but your best bet would be to put it in a high-interest money market fund or a bank CD.
Helaine Olen is an expert on money and society and a regular contributor to The Washington Post’s “Post Partisan” blog. To ask Helaine a question, email her at askhelaine@gmail.com.