Where to park money? A viewer inherited $500,000 and wanted to know. They (wisely) didn't want to take some time to decide exactly what to do with the money in the long term. But they wanted to know--where should they park the cash now?
Where to park money is a question that applies when you're saving for any goal. It's not just about investing inherited money. It can be--where to park money to buy a house, or where to park money to buy a car.
First, it's good when you got an inheritance to wait to invest the money.
Second, put it somewhere safe. You can underestimate that the stock market can go down and stay down for a long time. The most important thing is that your money is there when you want it--not that it has made a lot of money.
Regular banks are paying very low interest right now. That can seem bad when you're comparing it to how much the stock market can make. However it looks great compared to how much the stock market can lose.
Another good option is online banks that pay higher interest. Bridget and John have both recommended both Capital One 360 and Ally in the past.
It feels like earning 1% might not be much, can’t we do something better? When markets go up, 1% doesn't sound like much, but when market goes down, 1% is going to be looking great.
There is an appeal to making money work for you, but you've got to make money work for you based on the time frame before you'll want to access the cash.
If it is $500K and you're putting it in a bank, make sure to be mindful of the FDIC limits. The rules are pretty specific, but you might need two accounts.
Also, if you know it will be 6 months to a year before you need the money, you could check out CDs. These are both safe and pay more interest than regular banks. CDs do have penalties if you withdraw the money early, so make sure that the term of the CD isn't longer than you are willing to tie the cash up.
If you have a bit a longer time frame, Bridget and John discuss the pros and cons of short term bond funds.
Finally, they talk about investing in a total stock market index fund if you aren't going to want to use the money for 20 years.
00:00 Intro
00:31 Where to park money?
01:00 Sudden money—best thing to do
01:30 How human nature plays in
02:13 What time frame matters?
03:00 Adding nuance to banking
04:00 CDs
05:37 Longer term money—where to park
Here's Bridget's firm website: https://www.sullivanmermel.com
Here's John's firm website: https://trinfin.com
For advisors around the US: https://www.acplanners.org/home
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TRANSCRIPT:
John: I just received an inheritance of half a million dollars. What should I do with it in the next three to six months, while I decide what to do with it a long-term? That's the question we're going to talk about in today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. John, before we start talking about where to park the money, let's remind people to subscribe. That helps us with YouTube, and we really appreciate it. John, what are your thoughts? What do you tell people when they want to—what we're going to call—park their money?
John: Let me be clear. I didn't inherit half a million dollars, but this was a question we got from somebody recently. Hey, we got this money. What do we do? We want to have a long-term plan, but right now it's in the bank earning 0.01%. So, what should we do with it? And one of the things that I talk about with clients, and I know you do too, is when you have sudden money, inheritance or other things, usually the best thing to do is nothing.
At first, it feels like we should do something and be thoughtful and make a good long-term decision. If you lose three or six months of interest 20 years from now, that's not going to make a material difference in your life but making a bad decision about what to do with it can make a material difference. So, what's important?
And we were talking a little bit before we hit record on how it's human nature for us to assign complexity to things that are really important. I got a half a million dollars. It's a really big deal. This must be really complicated. And I guess at the end of the day, number one is to do nothing, and the other thing is just keeping it in the bank. That simple answer, where you buy some time, is that it doesn't have to be complicated necessarily. What do you tell people?
Bridget: I really like your approach to this. You can be thinking, “I'm going to miss the stock market going up,” but you forget, “But I’m also going to miss the stock market going down.” So, when you said, “I don't want to do anything with this money for less than five years or ten years,” I agree and think safe is where you want your money to be. The most important thing about the money is that it's there. So, I like to invest in safety. Just keep it in the bank.
John: That was a great comment. I want to pull it out. If you’re going to need it sometime sooner, as in five years, then you should keep it in the bank. And if you think about this, if that inheritance for this person was a down payment on a house or some other thing, and we can't have it go down 30%, safety trumps the return that you could get on it.
Bridget: That’s right.
John: I mean, that's really significant.
Bridget: I want to add a little more nuance to your leave-it-in-the-bank suggestion. So first of all, if it's $500,000, you want to be mindful of the FDIC rules, so that it's fully insured. And so, you might need to break it up into two different accounts.
John: That's great.
Bridget: That is the first thing. The second thing is that I often recommend Internet banks that pay higher interest. Again, you want to make sure they're FDIC insured. Two common ones—I don't get anything for this, and I hope it's okay for me to say this—are ING Direct and Ally. We use both of these, and they pay higher interest than what the big banks are paying.
So, it's more than 0.01%, but it's still, at least these days, pretty low. But it might approach 1%, which is better than, again, nothing or the lower interest of a lot of the regular banks. So those would be the two things that I would add to what you're saying, John. The other thing is, oh, wait, I'm going to add another one. If you know that you have a time frame, six months or a year, don't be afraid to look at a CD. That's fine.
John: Yeah.
Bridget: And again, you might want to break it into parts if it is over $250,000, because that is the FDIC insurance limit. And so having it fully insured is great.
John: One of the things I just wanted to add—and you brought it up earlier—is that when we're earning that 1%, we often think, “Oh, we're earning 1% on half a million dollars, but we're not getting any return for this. Can't we do something better?” And one of the things is that, well, if the markets go up, you go, “Jeez, I could have had this return,” but if the markets go down, zero is a great return on your investment when the alternatives are -10% or -20% or -30%.
And so sometimes we go, “We got this cash, and it's not doing anything.” And we think, “Oh, no.” The point is that not doing anything doesn't feel so good when things are going up in other parts of the financial world. Doing nothing, however, feels really good when things are going bad. It's a balance of things. It's important to remember that zero can be a great return, depending on what the alternatives are.
Bridget: And safe is good. We like safe. You want some money that's safe. I think that people get overly excited about the razzle-dazzle when that's happening. But the party ends, and you don't want to have your $500,000 in the market when the party ends.
John: And then the other thing that you brought up, which I love, is, hey, if it's short-term, five years or less, we need safety. If you know that this money is long-term, for example, if I'm 42, and I love the work I do, and I'm not planning to retire for at least ten more years. I don't need the money. We're in the house we want. This is long-term money, but I still want to take some time and make a good decision.
And again, listen, if I keep it in the bank for six months and I don't earn any interest on it in 20 years, that's not going to make a difference. If I make a bad decision with it and get it locked into something I don't like, it could be very detrimental, so safety is best. But I don't think there's anything wrong with saying, “Why don't we buy a short-term bond fund?” Probably you can get 1% or 2% or 3%, but it might go down. But again, if this is my long-term money, it goes down 5%. That's not a big deal.
And most of the time I'm going to get some better returns for it. So, it sort of depends on (What is it?) ah yes, your mileage may vary. Don't put too much value or emphasis on what you earn in the next six months. Think about that long-term. And at the same time, if you’re never going to touch this, it's not unreasonable to even put it in a total stock market fund and go, “Okay, I don't need to pick the individual decision I'm going to make, but I could invest it for some short period of time in something that's very diversified if I know that this is my 20-year money,
Bridget: Right. 20-year money, but there's a big difference between your 20-year money and six-month money, right?
John: Right. And I think people underestimate how far down the markets can go and how long they can stay down. But we're talking about five years as short-term. People often think of five months, not five years, but five years is still short-term…
Bridget: …from an investment standpoint.
John: That's right.
Bridget: Cool! With that, we should wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago. And this is John Scherer. He's got a fee-only practice in Middleton, Wisconsin. And I want to remind people to subscribe. It helps our channel. Thanks for that.
John: That's right. And if you like what you hear on our show, Bridget and I are both members of the Alliance of Comprehensive Planners. It's a nationwide group of tax focused fee-only financial advisors, and you can learn more at acplanners.org. Check that out to find an adviser in your area. And with that. Until next time.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.