QUESTION: Eileen in Los Angeles and her husband are completely debt-free after selling a house. They have $250,000 in equity due to that sale. They would like to wait about a year to purchase another home. They’d like to know what to do with those funds while they’re waiting.
ANSWER: It wouldn’t hurt to knock some college savings out. Of course, make sure you have an emergency fund stored somewhere in addition to this. Then just park that money in something really boring like a CD for a year. It’s not going to make you any money.
The problem is there are two things you can do. You can put the money at risk where the market may go down and you lose some of it and you might make some money, or you can just not take any risk but not lose any money. On the short term for a one-year window, I’m going to go with the no-risk scenario if I’m in your shoes.
You can check with your mutual fund broker. If you don’t have one, just go to our ELP, and they’ll help you set it up. It’s a formula, but it’s built in to a financial calculator. It’s not something you can spit out on the air that’ll work for you. You do need to know what college you’re thinking of them attending or what type of college and generally what that’s running now and if you can even find studies of what it’s expected to be running in the future. Then that gives you your target, and then it’s pretty easy to back into, okay, I’m going to assume the stock market and my mutual fund averages 10%. Then I need to put this lump sum in. If I’m going to assume it averages 12%, then I need to put this lump sum in. I use 12%, but people get mad at me for doing that. I don’t have any trouble getting 12% on my money, but apparently a lot of other people do.