Where to Place House Down Payment Savings in Investment Order?

[haflander]

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.

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]

I would say it depends on the amount you’ll be saving by not renting. So you’d 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 you’ll get the highest rate of return. In general, that list holds true as to where you’ll get the best bang for your buck. Plug your housing “return” where it belongs (you can’t know this without calculating it). I would also not calculate appreciation at all since this is something way beyond your control. Your housing “returns” should only be viewed insofar as the amount you save. Obviously if you were going to buy a house that’s 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.

[Raenia]

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]

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.

[SwitchActiveDWG]

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.

[jlcnuke]

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.

[Raenia]

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.

[jlcnuke]

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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[Ynari]

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]

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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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]

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.

[McStache]

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]

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]

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]

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.

[haflander]

Resurrecting my old thread because I've accomplished some big saving/debt goals recently. Also wanted to see if there were more thoughts on this from others.

What I've been doing the past year is a mix of what several mentioned upthread. Investment Order 1-5 has been accomplished. This is with the huge caveat that I'm limited to contributing 15% max of my salary to my 401k. So I can only place 10.5k there.

0. Establish an emergency fund to your satisfaction done, a quite healthy 17.5k
1. Contribute to your 401k up to any company match see 5
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. done, killed SLs and car loan in the past yearish
3. Max HSA | ineligible :( but I do still have old ones
4. Max Traditional IRA or Roth (or backdoor Roth) in the process of setting up account and auto contribution
5. Max 401k in the process of setting up account and auto contribution     
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. done, 100% debt free     
8. Invest in a taxable account and/or fund a 529 with any extra.

As you can see, I really prioritized attacking debt and building the EF/FU fund. On top of that, my situation has changed. I'm now living in sin with the gf, enabling big savings in rent and utilities. In 2019 I'm averaging 778 total for these.

I only became eligible for the 401k in February, and wanted to finish the debt and EF before starting an IRA. As a result, I now have much more cash available to put toward retirement and house savings. Yesterday I dug into my spending to determine how much I would have remaining after sending ~16k (1342/mo) to retirement funds. Call it a snapshot of 2019 spending...already calculated what I've spent on entertainment and miscellaneous things. Curiously, the # I determined I'd have left over was exactly 1413.01, pretty close to the retirement savings #. This is how much extra cash flow I should have after all pretax deductions, health insurance and taxes, retirement saving, and all normal expenses. That # could change slightly if I haven't calculated taxes correctly, which is a real likelihood.

1.4k to save for house DP/engagement ring/wedding/honeymoon. Maybe I'll call it the Our Future Fund, Idk. I'm posting here because I want to get thoughts on this. Effectively I've split priorities roughly 50/50 vs saving for retirement and...Other. This seems like a good split and compromise to me. I felt some peace after hearing the great Bogle himself say that buying a house is a lifestyle choice...it is not an investment. Therefore, it should not be viewed under the same rationale and ideologies that investments should. Of course, this is assuming you'll be in the area >10 years and are comfortable with the idea of home ownership and maintenance.

All in all, it feels pretty good to come back to this thread a year later and see real improvement. That said, I want to keep this going to accomplish bigger and better goals. It's the how and the exact prioritization that I'm trying to determine at this point.

[dizzy]

Hey, really like this thread.  OP, where ya at on things?  I feel like I'm in a similar place, although different circumstances- I'm self-employed.  I have an opportunity to qualify for some grants- will have $6k from that in May 2020 that can be used towards first time homeowner within 2 yrs of then.

0. Establish an emergency fund to your satisfaction done- 3 months' expenses.
1. Contribute to your 401k up to any company match N/A- I'm self employed tho, unsure what income this year will be, will set up solo401k this year. 
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. N/A
3. Max HSA in progress
4. Max Traditional IRA or Roth (or backdoor Roth) unsure about this.
5. Max 401k see #1 
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. N/A   
8. Invest in a taxable account and/or fund a 529 with any extra.

Besides the mortgage M word there's another big M word in the picture, tho my bf has not proposed (but we have talked a lot about it, it's basically a matter of when now, he said "there will be no doubts" when he does it.  He's very given to grand romantic gestures and surprises).  We both agreed that we wouldn't want to spend a lot of money on a W, somewhere in $5kish range.  I'd like to save $3k towards it, and I think this takes priority for me after down payment.  I feel like saving for down payment is more complicated since it's a bit more of open ended question about how much to save.  I feel like it could be useful to have like, save X percentage towards 401k...save x towards down payment. 

I just get so confused because if I max solo IRA, trad IRA, and HSA, based on last yr's income it would be $1000 more than I even make...so I don't understand where to fit in any savings at all based on the traditional hierarchy.

[haflander]

Wow, nice blast from the past. It's cool to hear from someone in a very similar place, but waiting on the bf to pop the question, ha!

EF: not adding to this anymore. Interest has grown this to 18k.
401k: employer has stupid rule that the max is 15% of salary, so I'm limited to contributing ~1k per month. Current 401k is at 9k (in addition to old 401k accounts that I transferred to Vanguard)
RWHH: new account I'm funding for ring, wedding, honeymoon, and house DP. aka our love fund, currently at 9k.
Debt: still 100% debt-free.
Investing: 3k*

The last year...we lived together and split things for a while, allowing me to really ramp up savings. However, gf quit her job and didn't start working again until recently. For about 6 months now, I paid all of the bills, so my SR took a big hit. The good news is that we'll soon be splitting things again, maybe in the next month or month after. I put off thoughts of rings and engagement until she had a better vision of the future and her career and how we/I fit into all that. On a positive note, she passed a big certification/test that allows her to finally be qualified and look for Big Girl jobs. So now I'm feeling more comfortable with thinking about getting engaged. She needs to look at rings and figure out what she wants, it's not going to be a big surprise. Marriage expenses are also a consideration, but I'm taking things one step at a time, and the next is buying a ring with cash.

So now we're waiting to see what kinda job she'll get, as far as thinking about buying a house. I'm guessing she's about 6 months away from starting a salary job. Depending on that, we can decide whether we want to look for a house when the next lease ends (11/20) or if we don't have enough saved, maybe sign another 1-year lease after that. Complicating things even more is that even though I'm employed and making plenty of $, I'm also looking to change jobs for a more secure future for self/family/insurance. My plan is once she gets a salary job, reevaluate the numbers. If it's possible to buy a house late this year, turn off all retirement savings and save for house DP. If it's not possible, even without her help and splitting bills again, then wait until late 2021.

*I found a new investing platform online recently. I've put about 3k into it over the past 6 weeks or so. Interest is an average of 5% in an average of ONLY 4 MONTHS, coming out to about 20% annualized. The plan is to either immediately reinvest the returns or transfer them to the Love Fund, depending on how they perform and what new opportunities are available. I haven't been paid back yet, but scheduled to get some returns starting in February. If you're interested in too-good-to-be-true numbers, PM me.

[Kem]

Congrats on the progress you've made thus far :)

Assuming your crystal ball is not too cloudy and you do dig in roots, with today's current low rates I would in your shoes consider buying a home on a 30 year fixed in a bit of disrepair but do NOT expand your lifestyle (or ‘need’ for additional rooms – or the need for luxury finishing).  Instead, rent each additional bedroom as you fix the place up.  Done well, you may not only subsidize your living costs – you might even pocket a bit of funds.  Make certain to depreciate what you can in the process!  In 2 years repeat (either selling the first home if it has appreciated enough to cover the roughly 8% your going to lose in the transaction, or keep it as a per room rental if the cashflow is at least a little positive).   

After well over a decade of marriage, want to know where my pre-frugal platinum wedding ring sits?  In my dresser.  My wife’s diamond studded ring?  In my dresser.  She instead wears a simple $20 band and I forgo that particular annoyance.  Maybe instead of a save for it ring… give each other a silicon band and a round lot of VTI in a shared taxable account.  You’ll spend the same either way. 

In regards to a wedding fund… just keep in mind that you are throwing a party of a couple of hours.  How much does this really need to be?  A day in the park under the gazebo with some high school violinists and a potluck spread will likely have fonder memories than dropping the equivalent of a that hoped-for home’s down-payment ten years down the road.   

Repeat the house rental ramp up for a few iterations, an if you  still want a traditional American wedding party, then throw your Renups with a cashflow covered cash-out refi of the rentals… or maybe even from the cashflow itself.

[Dicey]

Too soon to buy a house. Keep saving, keep dreaming. Wait for the next dip, or maybe the one after that.

[ysette9]

If you want cheaper rings I’d recommend silicone, not silicon. ... ;-)

Though if you work in any kind of manufacturing area where adhesive bonding operations take place, no silicone either for contamination concerns.

But i digress. I love the wedding and engagement rings my husband gave to me. But if something happens to my diamond ring I am pretty sure I’d take the insurance money and not replace it. My wedding ring I would replace, but it is quite a bit less expensive. But do what you think is right for you.