MichaelS56 (Minnesota)
Posts: 858
Posts: 858
Posted:
Presently, our Association invests the Replacement Reserve money into staggered CD"S. What do you invest your Replacement Reserve money into?
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Investing Replacement Reserve money
Started by MichaelS56 • 5 replies • 401 views
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MarkM19 (Texas)
Posts: 1,459
Posts: 1,459
Posted:
Michael,
It sounds to me from what you have written that your board is doing just what they should be doing. CDs that are laddered is the perfect way to Manage these Funds. Your board was not hired to be investors of the HOA funds. Of course, CD rates are very low and if it was your money, I could give you many ideas of how an individual should invest personal assets.
These funds are there to repair or replace fixed assets. It is not a retirement account that anyone will live on at some distant point.
It sounds to me from what you have written that your board is doing just what they should be doing. CDs that are laddered is the perfect way to Manage these Funds. Your board was not hired to be investors of the HOA funds. Of course, CD rates are very low and if it was your money, I could give you many ideas of how an individual should invest personal assets.
These funds are there to repair or replace fixed assets. It is not a retirement account that anyone will live on at some distant point.
CathyA3 (Ohio)
Posts: 6,299
Posts: 6,299
Posted:
This is fine. Your main goal for your reserve funds is preservation of principle, which will limit you to things like:
* money market accounts (not money market funds, they're different since they can "break the buck").
* CDs (not brokered CDs, they can lose principle).
* short-term Treasuries such as notes and bills. You may be OK buying bonds if you hold them to maturity, but nobody can guarantee the future and you may be forced to redeem the bond early.
Nowadays you also need to be careful with normal CDs sold by banks, since some "creative" institutions have started to impose early-redemption penalties in the form of loss of principle. Normally the penalty is loss of some accumulated interest. Read the fine print.
You may be able to get better interest rates at credit unions. Deposits up to $250,000 at federally insured credit unions are protected (similar to FDIC insurance offered by banks). Some financial institutions also offer additional insurance to protect deposits up to $500,000.
If your reserves exceed the insurance limits, some banks offer a program known as CDARS. It allows you the convenience of keeping all of the deposits in one place, but the offering bank will actually be spreading them around to other banks to remain within the FDIC limits.
The rule of thumb in investing is that there is always a tradeoff between safety and return. If you find an investment that offers a rate of return that is out of line with the norms, be very suspicious.
* money market accounts (not money market funds, they're different since they can "break the buck").
* CDs (not brokered CDs, they can lose principle).
* short-term Treasuries such as notes and bills. You may be OK buying bonds if you hold them to maturity, but nobody can guarantee the future and you may be forced to redeem the bond early.
Nowadays you also need to be careful with normal CDs sold by banks, since some "creative" institutions have started to impose early-redemption penalties in the form of loss of principle. Normally the penalty is loss of some accumulated interest. Read the fine print.
You may be able to get better interest rates at credit unions. Deposits up to $250,000 at federally insured credit unions are protected (similar to FDIC insurance offered by banks). Some financial institutions also offer additional insurance to protect deposits up to $500,000.
If your reserves exceed the insurance limits, some banks offer a program known as CDARS. It allows you the convenience of keeping all of the deposits in one place, but the offering bank will actually be spreading them around to other banks to remain within the FDIC limits.
The rule of thumb in investing is that there is always a tradeoff between safety and return. If you find an investment that offers a rate of return that is out of line with the norms, be very suspicious.
HenryS7 (Pennsylvania)
Posts: 336
Posts: 336
Posted:
Our reserves are invested in a bank's savings account that pays a whopping 0.01% interest. We have had homeowners inquire if we receive interest off the reserve account and are able to say with a straight face that, yes, we do receive interest from the money. We just don't volunteer how much interest we receive.
LetA (Nevada)
Posts: 2,679
Posts: 2,679
Posted:
Cathy, How about savings bonds?
CathyA3 (Ohio)
Posts: 6,299
Posts: 6,299
Posted:
Quote:
Posted By LetA on 12/12/2021 1:04 PM
Cathy, How about savings bonds?
Cathy, How about savings bonds?
I assume you mean Series EE Savings Bonds.
They're also appropriate and act much like CDs. There are a few hoops to jump through - for example, you have to buy them online through Treasury Direct, you're limited to $10,000 in purchases in a calendar year, and there are early-redemption penalties if you hold them less than 5 years.
The interest rate also isn't great, currently 0.10% for bonds issued November 2021 – April 2022. That's because the US Treasury is the ultimate in safety - they don't have to pay high interest rates to get people to invest their money with them.
Another thing to consider now is that bonds and longer-term CDs are usually less attractive during periods of rising interest rates and inflation. You'll want to keep to the shorter maturities.
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