If you plan to buy a home in the next 3-5 years, what percentage of your monthly savings would you allocate to a high-yield savings account (HYSA) versus investing? My investments have performed well over the last two years, with a 40% gain, but I want them to continue growing. I’m also concerned about the potential need to sell them, especially considering the taxes involved.
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It all comes down to goals and risk tolerance, brother.
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As others have mentioned, consider your risk tolerance.
If you are okay with slow growth or minor losses (unlikely with a solid S&P 500 fund/ETF over 3-5 years), consider putting about 60% in something like FXAIX and hold it for at least a year to qualify for capital gains tax. For the remaining funds, use a money market fund or invest in 3-6 month CDs.
If you are risk-averse and prefer having cash readily available due to concerns about a recession, keep most of your money in a HYSA or money market fund. Avoid CDs if you might need access to the cash. However, if you don’t need immediate access but aren’t comfortable with stock market volatility, CDs can be a good option.
The main point is to diversify and not put all your eggs in one basket. Even if you are cautious, you can still allocate a portion to the stock market and CDs if you have a solid emergency fund saved up for 3-6 months.
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As others have mentioned, it really comes down to your risk tolerance. Right now, with HYSA rates still offering over 5%, I have half of my savings in HYSA. At 51, if I were 30, I’d probably only keep 20% in HYSA and invest the rest in the market. Once HYSA rates drop to 1-3%, I’d increase my stock allocation to over 80% if I were younger. However, at my age, I will likely cap my market exposure at 65% and focus more on bonds and T-Bills for safer investments. Unless there is a significant market pullback of 25% or more, in which case I might move most of my HYSA funds back into the market for about five years before transitioning back to safer, lower-return investments.
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Which HYSA still gives more than 5% that you are using? The APY that Wealthfront, which I use, was reduced to 4.5%.
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I don’t think approaching this with a set percentage is a good idea. You would be better off prioritizing what you want to do and front loading it.
Over the long run, a savings account is a far worse investment than a house or a reputable index fund.
If your financial circumstances doesn’t allow you to invest in real estate, either start saving money quickly and enter the home market, or front-load your stock purchases to give them more time to appreciate.
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Goals and risk tolerance. Depends on those.
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Keep 3-6 months’ worth of your total bills in a HYSA or money market for liquidity.
Don’t sell anything that’s making 40% just to avoid borrowing at 6-7%, you are losing over 30% on your money by doing that.
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Check out the “All Weather Portfolio.” It might suit your 5-year timeline.