I am a independent contractor - no benefits a typical employee would get like healthcare/401k. That also means my income spikes up and down. It’s common in my industry to go 6-9 months with no income in between gig’s.
Because I cannot depend on a steady stream of income, and I am the sole supporter for my family of 4, I keep an emergency fund that is larger than most keep - about 12 months worth of living expenses. Historically I have kept that money in a nice/safe Money Market (currently earning a paltry 1.25%). I would like to move a good chunk of this money to something that can do better than that without too much risk, and stay fairly liquid. My initial thought was to move about 50-75% of it into a nice proven mutual fund like a Vanguard index, keeping the rest in the money market. I would be very happy earning around 5% in a conservative growth/income type investment. Thoughts?
My requirements/goals:
Beat money market rates by at least double - let’s say a minimum of 3% return
Low risk
Low maintenance - I don’t have time to monitor it and chase for reallocating
Need to be able to make small draws over time, let’s say 10% of the total per year
Can be 100% liquidated in 3-5 business days (this rules out CDs)
So really it’s 2 questions…
Where to invest? Investment bonds?
How much of the total emergency fund to allocate to it, vs. the money market?
Potential solution?
30% money market (draws would come from this first)
50% investment bonds
20% conservative mutual fund
I’m sorry to say but the Fed had it in for savers like you / us. Currently, a big diversified etf of junk bonds like HYG or JNK has a yield in the 4.5-5% range. With junk bonds, you’re likely to see defaults and not so much in the way of capital appreciation.
An investment grade bond etf, which might reasonable be classified as conservative, has a 3-3.25% yield currently and more interest rate risk.
These days, if you’re looking for fixed income, you either have to go for high yield and do a lot of due diligence to find good ones that are unlikely to default, or you just hunt for CD deals at CUs and try to find slightly better than the equivalent treasury rates that way.
PRDGX has yielded me some good returns over the last year that I’ve held it. I currently have a position in it. Do some research on it though, because it’s certainly not conservative. However, gains.
@xerty thanks, that was very helpful. I would be happy with anything over 3% actually because it’s better than what I am getting now! Junk bonds are out, too risky, and CDs are not liquid enough due to the penalties (see my updated requirements in the OP). I like the idea of investment bonds, but don’t have time to chase/monitor. Maybe I should look at a good income mutual fund that is very heavy on investment bonds and has a good track record?
@scripta I revised my original post and added some more detail to my requirements to clarify. I think 3-5% is more realistic… really I am just trying to beat money market rates without adding too much risk.
Yes I know you don’t have to be self-employed for an IRA - when I worked for companies, I had both 401k and IRAs. What I meant is since I don’t have 401k anymore, it puts more pressure on me to contribute further to the existing IRAs I have (which I am not doing today).
Anyone have thoughts on this Income fund? Wellesley VWINX
Personally, I would keep the money in an Ally no penalty CD.
Yes, you are not getting a great rate. But what you are describing is insurance and not investment. You are self insuring for a job loss. If there is some kind of disaster that caused a recession, the stock market tanks just when your contact gets cancelled. Or maybe bonds are down when you are out of work. I’d take the performance hit rather than introduce risk to your reserve so I would only accept FDIC (or similar) insured accounts for consideration.
I have a similar fund and feel the pain of low interest and this is how I justify it to myself and not drive myself crazy looking at the returns.
I’m not much of an equities kind of guy but depending on your location have you considered getting into some real estate? There are parts of the country where rents to price are pretty reasonable and if you live in one of those areas making some investments can do better than 5-7%.
Of course I know that you might want those funds to be more liquid since you’re using them to support your family. However sometimes a bit of extra rental income can offer some stability during downturns. Just something to consider.
Thanks drof, yes I have thought about rental properties, but we are not talking that kind of money. Unfortunately I would need about double what I have now to have enough to put a deposit down a decent rental property in my area. Now if I can put what I have now in some aggressive stocks, plus stockpile more money over the next year or so (assuming I have income during that time), that would put me in that neighborhood to be able to do that. The risks of course are major repairs increasing operating expenses above average and running vacant.
I looked at Ally but the minimum deposit to get the 1.5% is $25,000. While I could do that, it’s a larger percentage allocation than I would like to put towards a CD. I am currently getting 1.25 on my MM with no minimum balance, so a quarter point increase does not really excite me.
A slow but steady fund like the Vanguard GNMA Fund (VFIIX) appears very stable and produces about a 2% return.
Maybe this allocation?
33% in MM @ 1.25
33% in VFIX @ 2.0
33% in VWINX @ 6.0
Draw on the MM until it depletes (about 3 years best case, 1 year worst case), but don’t re-balance at any time.
I don’t know your specifics but if you don’t own a home right now, an FHA loan with 3.5% down is good option. I generally suggest a 3-4 unit property with that kind of loan to get the greatest leverage. Make sure the numbers pan out so the other 3 units cover the mortgage so you end up living for free. In qualifying for those loans, they do consider that potential rental income. Good luck.
Of course, because real risk free interest rates are negative, so if you want to keep up, you have to take some sort of risk (credit, interest rate / duration, equity, liquidity, etc). Risk free rates at a good bank are around 1.4% or so, while inflation is running around 2%. Plus, you get to pay tax on the interest so maybe you keep 1%, but lose 2% after tax money to inflation for a net -1%.
Ref: Gremin on Kasasa: I am somewhat “skillful” at Reward Checking Accounts (RCAs); still keeping several hundred $Ks in multiple liquid RCAs, earning high-rate interest (for many years now). Of course the rate can drop at any time but one of the highest rate RCA is about 4% APY and it has been that way for 10 years already. However, for example, NavyArmy CCU Liberty Checking with a 3.5% APY just dropped to 3% last week after many years.
RCAs are Simple and profitable, with a little skill (e.g., gaining eligibility) and a little extra effort (e.g., numerous debit card transactions per month).
My way would be to take your existing stock portfolio, hold it at IB where you can get 1.5-2% margin rates, and borrow money at those rates to earn 3-4%, an extra 2% on “free” money. If you keep your margin low, say 20% or less of your holdings’ value, the risks are quite low and you can always repatriate the cash back to the brokerage if market starts dropping. If you watch your risks carefully, you could do it for considerably more than 20% too, but then you’ll proabably run out of RCA capacity before you run out of borrowed money. Did I mention I am a big fan of cheap borrowed money?
