Author Topic: Where to Place House Down Payment Savings in Investment Order?  (Read 1110 times)

haflander

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Hi all. I'm just starting my MMM journey and not yet ready to start saving for a house. However, I wanted to hear about where others think that a DP should be placed in the hierarchy of the investment order. For the sake of simplicity, let's primarily consider a first-time buyer purchasing a house they plan to live in (not rent to others) for a long time. Generally speaking, this would apply to most millennials like myself, who have not yet purchased a house. Side note, I just read that 33% of those 25-29 live with their parents. Sad!

Below is the investment order and MDM's preceding statement regarding DPs.

Quote
It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra. 

Full thread:
https://forum.mrmoneymustache.com/investor-alley/investment-order/

Personally, I would think that saving for a house should be between 2 and 3. Maybe between 3 and 4 if your employer offers an HSA and you know you will have high health costs in the near future. The only things I'd consider as more important than DP savings (for a 20-something such as myself) are funding an E/FU fund to whatever # you feel comfortable, maxing 401k to employer match, and paying off stupid debt.

undercover

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #1 on: April 13, 2018, 04:15:42 PM »
I would say it depends on the amount youíll be saving by not renting. So youíd calculate total cost of rent and subtract tote cost of owning over the duration you plan on staying in either scenario and annualize the savings.

So basically determine your rate of return based on the savings. Then plug that into the list. You contribute your dollars in order of where youíll get the highest rate of return. In general, that list holds true as to where youíll get the best bang for your buck. Plug your housing ďreturnĒ where it belongs (you canít know this without calculating it). I would also not calculate appreciation at all since this is something way beyond your control. Your housing ďreturnsĒ should only be viewed insofar as the amount you save. Obviously if you were going to buy a house thatís much more expensive overall than a comparable rental, then financially it should be the last thing you do. People of course do things for reasons other than financial though.
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Raenia

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #2 on: April 13, 2018, 04:17:48 PM »
I'm currently saving for a down payment (28, first time buyer), and I placed it between 5 and 6.  I will be maxing my 401k and Roth IRA for the year, and the extra will go toward the down payment.  My partner places it between 4 and 5, but only because he doesn't make enough to max his 403b and also have after-tax savings.  He is also maxing his Roth IRA, and an HSA with the family limit.  However, you could also say we're placing it at 8, since we're not able to do the mega backdoor Roth, and have no debts.

daverobev

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #3 on: April 13, 2018, 05:28:00 PM »
I don't think a downpayment is an investment. Buying a house is not an investment, it - like rent - is an expense.

You accumulate cash -> invest to have your portfolio throw off enough in gains to pay for your expenses.

I mean, I get that money is money, but you can choose a holiday or to put money into the house fund or into the brokerage. Those are choices. Choosing to own a house rather than rent (or live in a van or on a boat) is a lifestyle choice that your investments must support. It is a completely parallel thing.
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SwitchActiveDWG

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #4 on: April 14, 2018, 05:49:41 AM »
Iíll second the thought that saving for a down payment is not an investment but rather an accumulation for an expense. Where expenses fit in the order depends on their level of importance in the specific case as well as the time horizon.

Define those two variables and it could range anywhere from #1 to #9.

jlcnuke

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #5 on: April 15, 2018, 07:51:00 AM »
Iíll second the thought that saving for a down payment is not an investment but rather an accumulation for an expense. Where expenses fit in the order depends on their level of importance in the specific case as well as the time horizon.

Define those two variables and it could range anywhere from #1 to #9.

+1

Where do you put saving money to go to the movies on the investment priority list? You don't, because it's not an investment.
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Raenia

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #6 on: April 15, 2018, 08:18:41 AM »
Iíll second the thought that saving for a down payment is not an investment but rather an accumulation for an expense. Where expenses fit in the order depends on their level of importance in the specific case as well as the time horizon.

Define those two variables and it could range anywhere from #1 to #9.

+1

Where do you put saving money to go to the movies on the investment priority list? You don't, because it's not an investment.

The only reason I don't consider it that way is expenses happen before any savings.  Counting it as an expense causes it to be prioritized before maxing your IRA, or even getting your company 401k match.  I don't think anyone should start accumulating for a house down payment until they're at least at 4 or 5 on the investment order, except in the uncommon case where PITI+maintenance will be significant savings vs renting.

jlcnuke

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #7 on: April 15, 2018, 08:41:05 AM »
I’ll second the thought that saving for a down payment is not an investment but rather an accumulation for an expense. Where expenses fit in the order depends on their level of importance in the specific case as well as the time horizon.

Define those two variables and it could range anywhere from #1 to #9.

+1

Where do you put saving money to go to the movies on the investment priority list? You don't, because it's not an investment.

The only reason I don't consider it that way is expenses happen before any savings.  Counting it as an expense causes it to be prioritized before maxing your IRA, or even getting your company 401k match.  I don't think anyone should start accumulating for a house down payment until they're at least at 4 or 5 on the investment order, except in the uncommon case where PITI+maintenance will be significant savings vs renting.
Do you prioritize buying snack food, going to a fast food restaurant, etc. over investing? Fixed expenses should be prioritize over savings. Voluntary expenses, such as saving for a down payment or other discretionary spending should be done after paying mandatory expenses and contributing to your planned saving.

1. Pay your bills.
2. Pay yourself (savings/investments).
3. Pay for your wants.
4. See what's left over and put it to whatever you prefer.


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« Last Edit: April 15, 2018, 08:42:56 AM by jlcnuke »
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Ynari

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #8 on: April 15, 2018, 09:00:09 AM »
In FIRE, investing is often used as a form of deferred consumption. While it is useful to think about home buying in terms of consumption (so you don't get stuck in the mentality that a more expensive house = a better investment), it also has characteristics of deferred consumption: put money in now and get "in-kind" or reduced-cost housing later.

The problem with an in-kind return is that it's hard to figure out how profitable it is. (If you invested in a farm and got a return in food, how do you quantify that? It's not as simple as estimating a value of corn and calculating the return, because would you know how to re-sell food if you got too much? If you want a different kind of food, what's the exchange rate? Etc.) I'd probably calculate out the minimum I'd reasonably expect to pay on rent, and compare the present value of that series over 30+ years with the house to see what the "return" is. I'd compare the return with the other investment vehicles and order it accordingly.

Raenia

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #9 on: April 15, 2018, 12:06:21 PM »
Iíll second the thought that saving for a down payment is not an investment but rather an accumulation for an expense. Where expenses fit in the order depends on their level of importance in the specific case as well as the time horizon.

Define those two variables and it could range anywhere from #1 to #9.

+1

Where do you put saving money to go to the movies on the investment priority list? You don't, because it's not an investment.

The only reason I don't consider it that way is expenses happen before any savings.  Counting it as an expense causes it to be prioritized before maxing your IRA, or even getting your company 401k match.  I don't think anyone should start accumulating for a house down payment until they're at least at 4 or 5 on the investment order, except in the uncommon case where PITI+maintenance will be significant savings vs renting.
Do you prioritize buying snack food, going to a fast food restaurant, etc. over investing? Fixed expenses should be prioritize over savings. Voluntary expenses, such as saving for a down payment or other discretionary spending should be done after paying mandatory expenses and contributing to your planned saving.

1. Pay your bills.
2. Pay yourself (savings/investments).
3. Pay for your wants.
4. See what's left over and put it to whatever you prefer.


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It would be nice if it worked that way in practice, but for most people it doesn't.  Saving is what happens after spending is done.  So while I don't buy snack food or buy fast food, I do have a budget item for "Entertainment" so that I can see a movie, or go out with friends, or whatever else.  Most people have an "Eating Out" or "Entertainment" or "Fun Money" category of planned spending.

But that's not really the point of this thread.  The point is, when is it appropriate to accumulate funds for a house down payment?  To me, setting it as an expense, or as a monthly budget line-item, would place it at the top of the list, before other savings.  That's why I chose a location along the "Investment Order" to say, this is the point at which I'm putting enough toward retirement, so it is now appropriate to put extra funds toward a house.  Your answer doesn't help OP make a decision of how and when to build a down payment.

Where do you put saving money to go to the movies on the investment priority list? You don't, because it's not an investment.

jlcnuke

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #10 on: April 15, 2018, 12:23:07 PM »
For pretty much everyone, including the OP, that's how he SHOULD think about his money.  It's a really simple thing to do too. OP knows their bills. OP, one would hope, knows how much they want to save/invest. OP, and anyone else, puts those things as the first priority in their budget, then fills out categories like "entertainment" and "save for a down payment" and "put $20 on red at the roulette table" into their budget with what's left over.

Where should OP put saving for a down payment in their investment priorities? Nowhere (as I said already), it goes in with the rest of their spending after paying their bills and actual investments, into their "discretionary" spending part of their budget (along with going out to eat or to the movies or taking a vacation or buying that collectible Rolex you're "sure" will be worth more someday etc etc). It's a "want" and thus gets funded after needs. That did answer the question, it's just not the answer the OP (or apparently you) were looking for.
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McStache

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #11 on: April 15, 2018, 01:44:17 PM »
For me, as someone who does not budget in the true sense of the word, I'm putting house down payment saving between 7 and 8.  I don't have budgeted amounts for spending or saving - I spend what I need/want to (which is generally a very small amount) and then the rest goes to investments per the investment order.  So for someone like me where there isn't a budgeted saving amount, the advice to save for a downpayment with money leftover beyond the budgeted savings amount doesn't fit in to how my money management works. 

It may also be worth nothing that I have over 5 years of expenses in taxable investments already, and I wouldn't be comfortable saving for a downpayment if that weren't the case.

Ynari

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #12 on: April 15, 2018, 07:19:54 PM »
For pretty much everyone, including the OP, that's how he SHOULD think about his money.  It's a really simple thing to do too. OP knows their bills. OP, one would hope, knows how much they want to save/invest. OP, and anyone else, puts those things as the first priority in their budget, then fills out categories like "entertainment" and "save for a down payment" and "put $20 on red at the roulette table" into their budget with what's left over.

Where should OP put saving for a down payment in their investment priorities? Nowhere (as I said already), it goes in with the rest of their spending after paying their bills and actual investments, into their "discretionary" spending part of their budget (along with going out to eat or to the movies or taking a vacation or buying that collectible Rolex you're "sure" will be worth more someday etc etc). It's a "want" and thus gets funded after needs. That did answer the question, it's just not the answer the OP (or apparently you) were looking for.

It's really weird that you consider having a roof over your head a "want". 

This is more akin to looking at a bill (say, electricity), identifying an option that would reduce your monthly bill but require an up-front payment (say, solar panels) and then calculating how much it would cost/save you over a period of time. If it'd save you a lot, prioritize it over lower-earning investments. If it'd cost you, either don't do it at all or prioritize it to your own values.

Unless electricity is a "want" for you, too?

jlcnuke

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #13 on: April 15, 2018, 07:21:34 PM »
For pretty much everyone, including the OP, that's how he SHOULD think about his money.  It's a really simple thing to do too. OP knows their bills. OP, one would hope, knows how much they want to save/invest. OP, and anyone else, puts those things as the first priority in their budget, then fills out categories like "entertainment" and "save for a down payment" and "put $20 on red at the roulette table" into their budget with what's left over.

Where should OP put saving for a down payment in their investment priorities? Nowhere (as I said already), it goes in with the rest of their spending after paying their bills and actual investments, into their "discretionary" spending part of their budget (along with going out to eat or to the movies or taking a vacation or buying that collectible Rolex you're "sure" will be worth more someday etc etc). It's a "want" and thus gets funded after needs. That did answer the question, it's just not the answer the OP (or apparently you) were looking for.

It's really weird that you consider having a roof over your head a "want". 

This is more akin to looking at a bill (say, electricity), identifying an option that would reduce your monthly bill but require an up-front payment (say, solar panels) and then calculating how much it would cost/save you over a period of time. If it'd save you a lot, prioritize it over lower-earning investments. If it'd cost you, either don't do it at all or prioritize it to your own values.

Unless electricity is a "want" for you, too?
Having a roof over your head is a need. Buying your own home is a want. If you can't understand the difference, you have a long way to go.

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haflander

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Re: Where to Place House Down Payment Savings in Investment Order?
« Reply #14 on: April 17, 2018, 09:32:46 AM »
Thanks all. Sorry for the delay...I try to stay offline over the weekends and had a lot of work yesterday. That doesn't seem to be the case today though, so MMM forum day for me!

I appreciate all of the thoughts and opinions and what others are doing. What I'm doing now sounds most similar to what McStache outlined, paying for everything (not really budgeting) and then pushing all of the rest to saving/investment. My priority right now is my E/FU fund (secondary priority is stupid car debt), which I finally moved to get 1.6% interest.

I'm not committing to anything right now, that would be pointless as priorities and salary and life experience change. I think what would be best for me to do now is to take the investment order one step at a time and consider whether a house DP is really more important and beneficial than the current/next thing on that list.

Oh, and to answer the post by undercover, I'll get into my situation a bit. I'm currently renting a 1 bedroom for ~900 and would expect that expense to be anywhere between 500 (if living with a SO in the future) and 1000 in the next 5 years. Housing is very expensive here. Condos (not including extra $ for HOA) and townhomes run about 180-200. So, obviously buying is much more expensive than renting after factoring in all of the other fees and taxes and maintenance costs. However, the other consideration is that I want to be here for a long time, maybe my whole life. So even though renting may always be cheaper, I do want to have a house someday. I've thought a lot about how the next correction/recession would affect housing prices. If real estate was affected then my buying power would obviously increase. Then again, a recession may not affecting housing at all.