I'm 34 and No Longer Want to Own a Home. Is It 'Bad' to Just Throw All of Those Savings Into a Brokerage Account?
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Financial goals ebb and flow throughout life, which means something you were once saving for may no longer be a priority. If that happens, a new question arises: What should you do with the money?
That’s the case for a 34-year-old who recently posted about their dilemma in the subreddit r/personalfinance. "Renting is significantly cheaper than buying in my area," the user wrote. "It just doesn’t make sense economically and all of the maintenance my family/friends have had to do on homes sounds way too stressful."
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The user has an emergency fund, and they’re already planning to max out their 401(k) and individual retirement account (IRA). Now, they’re wondering what they should do with the house fund they have saved — and the money they were expecting to add to it this year — and whether it’s "bad" to throw all those savings into a brokerage account.
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Expert advice: Consider your goals
It’s important to ensure you have an emergency fund to cover at least three to six months' worth of expenses should the unexpected happen, and to regularly save in tax-advantaged retirement accounts. Because this Reddit user is already doing both, it’s time to consider what’s next. They’re correct to look beyond a traditional bank account, since the interest that the money would earn likely wouldn’t keep up with inflation, and it wouldn’t be taking advantage of the power of the financial markets. You can earn much higher returns in the stock market.
"Stocks can provide the biggest potential for growth, especially over the long term," Vanguard explains on its website. Cash and cash alternatives "seek to provide stability, but their potential for growth is limited."
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Because of this, the user is right that it probably makes sense to invest their money via a brokerage account. But it may not make sense to throw it all in the brokerage at once. As Vanguard points out, it’s important to consider when you will actually need the money. Does the user have other short-term goals they want to pursue, such as buying a new car, going on vacation or adopting a pet? If so, they may want to keep some of the cash in a liquid account like a high-yield savings account so they can access the money within a few years. Putting that cash in the stock market means taking on the risk that they'll have to sell during a market downturn and lock in losses.
As for the large sum they’re ready to invest, they need to decide if they want to invest it via lump-sum investing or dollar-cost averaging.
"The primary advantage of lump-sum investing is the potential for higher returns over time, as the entire amount benefits from compound interest from the start," according to Vanguard. But entering the market at a high point can lead to losses. On the other hand, dollar-cost averaging, which involves investing a set amount of money at regular intervals, "can reduce the impact of market volatility by smoothing out the purchase price over time." But it can mean lower returns over the long term compared to lump-sum investing, especially if prices are rising.
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"It's crucial to consider your investment horizon and risk tolerance when deciding between dollar-cost averaging and investing all at once," Vanguard’s site explains. "For example, if you're a young investor with a long-term horizon and a higher risk tolerance, lump-sum investing might be more suitable. Conversely, if you're nearing retirement and prefer a more conservative approach, dollar-cost averaging can provide a safer and more stable path to achieving your financial goals."