Help with saving for a home down payment

[wibineezer]

Hello all!  I stumbled across this website today while browsing the internet to figure out if/how my wife and I want to sell a car and get a cheaper one.  After looking around the website for a while and absorbing some of the advice, I decided to register and seek help from you all on house savings strategy.

To be brief (which I am not good at), my wife and I want to buy a larger home in three years for our growing family.  From our brief internet house browsing we have discovered that we are going to be buying a home that will cost about $300k.  We currently have two car payments, a mortgage, and some student loan debt.  We are fortunate that my father is going to pay off our student loan debt, so we will pay him back but save the 4k or so in interest.  We currently have about $20k saved and just sitting in our savings account.  My question is, would be we better suited to pay off one of the cars which will cost us just over $13k to do, or invest it somewhere for three years?  That car payment is $330 a month for another 43 months and we will save about $500 in interest by doing that, which I know is not a lot.  With that option we would sell that car and buy a more fuel efficient car, and hopefully save $2-3k in getting a cheaper car.  My concern with investing it is the obvious one that we would pull it out in three years which doesn't seem long enough to me to ride out any up and down in the market.  Any advice on what to do with this $20k would be greatly appreciated.  Our goal is to have $75k saved in three years for a 20% down payment and a little extra.

[MDM]

wibineezer, welcome to the forums.

Not quite enough info (e.g., income, expenses, risk tolerance) to give specific advice.

Perhaps the best thing the two of you can do is get together and develop a cash flow projection for the next ~5 years.  To do this you will need to know/estimate:
  - income
  - taxes
  - spending
  - investment choices
  - investment returns

Then, depending on how much you would like to disclose, see http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/ and http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#msg274228 (and other posts in that thread).  You are likely to get good feedback if you do post a reader case study.

Also consider www.cfiresim.com, the Lifetime Planner function in Quicken, or anything similar you may know.

Good luck!

[kudy]

What is the interest rate on the 13k car loan?

If you're pretty comfortable with reducing your savings down to 7k, it may be worth paying off the loan, and then building back up the savings over the next 3 years (diverting the previous car payment of $330/month into savings is $11,880 - nearly the 13 you'd spend paying it off!).

Additionally, if your plan works out, you'll recuperate a few thousand in equity from the sale of the car...

As long as you're confident you won't need the 13k over the next 3 years, then it seems like a good plan to me. If you decide to keep the cash buffer, my latest blog post outlines my current method of beating inflation with my 10k savings - you and your wife could each open the same accounts I am using, and earn 4.35% on the 20k.