One of the difficulties of being a saver in a low interest rate environment is the fact that you don’t receive a good yield for the money in your account. In many cases, the money you are saving for use during emergencies or for short term goals like travel or a down payment on a home isn’t meant to provide you with a good yield. The priorities for such money are usually liquidity, accessibility and safety.
However, if you can stomach the risk involved, you can increase your chance of a higher yield by keeping money for such goals in a taxable investment account.
Better Returns Until the Money is Needed
I actually use taxable investment accounts for my savings goals. I contribute regularly to an account that serves as my emergency fund, as well as to an account that I recently started as a travel fund. These accounts offer the potential for much better returns than what I see when I contribute to the “regular” savings account with a much lower return. (The money contributed to the “regular” account is meant for paying quarterly taxes, so I like it to be readily available with the capital not at risk in any way.)
This allows my money to grow at a better rate until it is used. In the case of the emergency fund, I like that it has the potential to keep growing for years. I continue to add money to it each month, and it grows through investment returns as well. With my travel fund, I expect to use the money a little more regularly, but I will keep replenishing the account with automatic contributions. Once again, I have the potential realize better returns on the money, boosting the amount I have available to use for travel down the road.
The flip side, though, is the risk. With recent volatility in the stock market, it’s easy to see how it can be nerve-wracking to keep money for your goals in an investment account. I try to limit some of the risk by using index funds and ETFs, as well as by using a slightly larger allocation of bond funds than I use in my retirement account.
Tax Deductible Spending
Another reason I like this arrangement is due to the potential for tax deductible spending. The last time I had to use the money in my emergency fund, I had to sell some of my shares at a loss. Because of how much I had in the account, it didn’t significantly deplete my fund, so it didn’t bother me. In fact, I was able to get the capital I needed to for the emergency, and then, because of the loss, I was able to gain a tax deduction for the investment loss. I haven’t used my travel fund yet, but if I have to sell at a loss, I will have another tax deduction. The prospect of being able to cover my costs, and get a tax deduction to boot, helps reduce some of the potential pain involved in selling at a loss.
This method isn’t for everyone; you should carefully consider your risk tolerance and your financial situation before employing such a strategy.
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