Parking money for a few months or a year

Question

We are planning to get our kitchen remodeled, so we've allowed a big balance to accumulate in our bank account. We're not making very rapid progress on soliciting quotes on the remodel, due to our own procrastination, and it's hard to say how soon the whole thing will actually happen. What is the most sensible thing to do with a pile of money like this when we may need to spend it after some indeterminate time, which may be 3 months or 12 months? We're in the US. If we put it in an index fund, it seems like it could be a situation where we lose either way: if the S&P goes up, we pay short-term capital gains, but if it goes down, we also lose money.

We don't really care about variability, because we have other funds we could liquidate if needed in order to pay for the remodel. (It would just be a hassle and trigger long-term capital gains taxes). For the sake of this question, let's say that we just want to maximize our expected return.

Answer 1

Since you have emphasized that you don't mind about variability, and that you have other funds you could liquidate, then I think a solution is to do with this money the same thing that you are already doing with those other funds.

Then when you need the money, if the market has gone up sell the lots that were part of your original "other funds", which presumably have aged enough to qualify for long term gains rates, and let the newly purchased shares take their place.

Answer 2

It is worth noting first that interest and short-term dividends/capital gains are all taxed at the same rate. So all the investments below I mention (even savings accounts) will be taxed at the same rate. Also, even short-term capital losses can often be harvested to reduce your tax rate in many countries.

While it is worth paying attention to the taxes when investing in the short term the more important factor is how much risk that you can take or want to take with the money. Most equity portfolios like the S&P index give a much higher risk that there will be much less in the account when you need to buy. You generally have a higher expected return with equity but as you mention that return is very random over such a short period.

Over such a short variable period many people will invest in short term bond-index funds or just keep the fund in a high-yielding savings account. With the savings account your money is guaranteed. Short term bond funds will have generally higher yields but a small chance you may lose money in the short term.

Some people can trade short-term bond indices for free with their broker but if you can't be sure to include the trading costs when thinking about which investment to use as with how low yields are currently the fees may eat up any advantage you gain.