Author Topic: Advice on home savings for a newb  (Read 1857 times)

thefrugaltwo

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Advice on home savings for a newb
« on: May 06, 2013, 11:45:36 AM »
Hello Everyone!

I am a total newb to super saving. If it were high school, you would throw me into a locker or give me a swirlee. Seriously though, I was always pretty reasonable with spending, just didn't really "get it" until now. I've just started saving 50% of my take home pay, so each month I'm saving $1,300 (I also have an additional one time $14,000 from a now dead relative). I live in nyc (please don't tell me to move, I can't right now as my partner is still in school), and I'm 26 years old. Basically what I would like to do is be in a confident position to purchase a house in the next 4-6 years (when I say house I mean a $150,000 ish home, obviously not where I live now).

I would like to take this time to add that what I have going for me is discipline, but I went to art school, so math is kind of terrifying to me, and I just want to make sure I have an ok plan. I currently work for a university, so I have access to a Roth IRA, I'm planning on maxing that out each year. In addition I would like to save the rest of my income (except for $5,000 which I would like access to as an emergency fund) into an index fund (I have just begun researching all this, so bear with me through my lack of specificity).

By my math (please don't make fun of me if this is wrong, well maybe a little jeering is ok) I will have about $40,000 in my IRA (my max is $5,000 a month), and $80,000 in an index fund.

So here are my questions:

1. Does this savings breakdown make sense?
2. At the time of home purchase, would I just take the down payment money out of my index fund? Is that common? Where do people usually save down payment money?
3. What should I do with the $14,000? I was not expecting it at all so I never thought about what to do, it may sound a bit silly to some of you veteran mustaches but that is the most money I've ever seen in my life and I really don't want to mess it up!

Any/all advice would be greatly appreciated.

ScubaAZ

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Re: Advice on home savings for a newb
« Reply #1 on: May 07, 2013, 12:15:06 PM »
I am also a newb, but a couple thoughts jump out at me:

1.  I think you mean $5,000 a year in your IRA?
2.  If you want the money in the short term for a down payment, I'm not sure an index fund is your best bet.  You might earn higher returns, but you also could lose a big chunk if the market goes south.  I would figure out what you'd like to have as a down payment, and keep that cash separate in maybe a money market or CDs.  You say you're thinking a $150k house.  If you want 20% down, put $30k in something fairly liquid and safe.  I would probably start this off with the $14k you weren't expecting.  Invest the rest in an index fund, or whatever you decide your investment strategy is.
3.  I am also not a math whiz, but when I multiply your $1,300 a month in savings by 6 years, I get $93,600 (which is still pretty good!).  In other words, I'm not sure how you're getting to the $120k that you list below.  I'm not calculating returns, so maybe that is what makes up the difference?

Good luck to you!  This is fun, isn't it?!

matchewed

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Re: Advice on home savings for a newb
« Reply #2 on: May 07, 2013, 12:26:48 PM »
FYI max Roth IRA contributions are 5500 for 2013.

So your breakdown would be 5500 times X (x being the number of years until your goal). That would be at 458.33 a month to fund that. Minus your 1300 will give you 841.67 per month (10100.04 annually) for saving on a house. Multiply your annual by X to get your future savings for down payment. My assumption is your 1300 is total savings and you're trying to divide that up.

Ditto on the investing the money. Index funds while safer than individual stocks but are still fairly risky. If you can be flexible on your timeline that is okay, not recommended but okay. Recommended would be a savings account for short term cash needs.

If you have goals like this I would put the 14k into the down payment savings. It's a leg up on your goal so why not?