Author Topic: Best ways to invest 'short term' while saving for a mortgage down payment  (Read 6048 times)

SteveTweede

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Hello all,

I just paid off all my college loans (yay!), and have no car payments, credit card balance, or debt of any kind.  I haven't started saving for retirement at all yet, and my job doesn't offer a 401k or other retirement option until I've been there a year (I started approx. 3 months ago).  I do, however, have a healthy four months' expenses between checking and savings, which I am comfortable with as an emergency fund.

I'm taking home approximately $2,400/month and will have about $1,200 a month to invest.  I will get a bonus at the end of the year ranging from $5,000 to $15,000, depending on how well I meet certain goals over the year.

I want to start saving for retirement, but honestly I am more excited about the prospect of owning a house. I am planning on relocating to a lower cost of living area, and I would estimate that my ideal house would cost about $90,000.  20% down payment would be $18,000, and I know closing costs can add extra thousands. 

If I can save $1,200 a month with a $5,000 annual bonus, I should be able to cover a 20% down payment in about a year.  The question is, how should I invest that money so that I can easily withdraw it within 5 years?  From what I've gathered, investing all of it in the stock market is too risky since I will need the money relatively soon.  Would it make sense to invest along the lines of a conservative 80/20 bond to stock ratio, invest in money markets, or some other strategy?  What would YOU do?

Note:  I'm sure some (if not all) of you will advise me to begin saving for retirement.  Rest assured, I plan to open a Vanguard Target Retirement fund ASAP and save simultaneously for a mortgage down payment and begin funding my retirement.

SteveTweede

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Thanks for the response.

I'm not sure what the interest rate on that account is, but it could very well be 5 years before I actually take the plunge into a mortgage, so I'd like to match inflation at the very least.  I definitely need to look into a better banking situation - my savings account pays me about 2 pennies interest  monthly on my over $2,000 balance.

Mazzinator

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I would suggest putting the downpayment savings on hold until you need it. No sense having that money sit still for 4 years. Because it will take you a year to save it but won't need for 5, then for the next 4 years i'd save for retirement, then save for the DP the last year. Make sense?

SteveTweede

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I would suggest putting the downpayment savings on hold until you need it. No sense having that money sit still for 4 years. Because it will take you a year to save it but won't need for 5, then for the next 4 years i'd save for retirement, then save for the DP the last year. Make sense?

This absolutely makes sense if I had a more definite timeline for moving and/or leaving my job.  I'm a little concerned that I won't be able to stomach my current job for more than 2 years, and a decent wage is hard to come by in my current area (heavily tourism/service sector).  Maybe I should be rethinking priorities? 

It's much more motivating for me to think about working for a year at my current position as the key to home ownership than as a drop in the bucket towards retirement.

Tcorn

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I used this website to find banks for my cash.
http://www.depositaccounts.com/checking/reward-checking-accounts.html

Most are smaller banks so you'll have to look what's available in your area. Generally they require direct deposit, e statements, and a certain number (10-16) of debit card transactions each month to earn "high" interest. I buy bananas separately at the self check out and knock that out in one day. I get a little over 2% right now.

I've actually opened several accounts in the DFW area and have had good luck with all of them. It won't make you rich but at least it's better than .8%


Travis

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Quote
Note:  I'm sure some (if not all) of you will advise me to begin saving for retirement.  Rest assured, I plan to open a Vanguard Target Retirement fund ASAP and save simultaneously for a mortgage down payment and begin funding my retirement.

There's a good reason for that.  Compound interest is your best friend at this stage of the game.  That drop in the bucket becomes a full bucket the sooner you get started.  The part that confuses me is you're concerned that you might not have your job in 2 years, but you want to buy a house?  For precisely that reason alone I would say hold off on the home purchase until you know you've got steady satisfying employment.  If your ideal home only requires a $20k down payment and you can save that in a year then hold off until you're sure about your job situation and save up that specific year for the down payment.

Milspecstache

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When I knew I was 4-5 years out I put money into CD's.  That eliminated some of the temptation to spend it and got me a better return as compared to regular savings accounts.

madmax

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When I knew I was 4-5 years out I put money into CD's.  That eliminated some of the temptation to spend it and got me a better return as compared to regular savings accounts.

+1

Look at http://www.bogleheads.org/wiki/Laddering_bonds_or_CDs

George_PA

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SteveTweede, you could put it in a high savings account (typically these yield about 1% or less per year right now).

Your savings rate appears to be 50% ($2400 income and $1200 being saved).  Rather than worry about investing to get another 1-2% yield in the next 5 years you may want to instead focus your efforts on increasing your savings rate. 

MMM did a blog post about this once, and he made a good point if you look at the math, masterful or skilled savings is more powerful that skilled investing for average people.

« Last Edit: March 13, 2014, 09:50:47 PM by George_PA »

SteveTweede

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To respond to a couple posts at once - if (when) I save my annual bonus, assuming it is the lowest it can be ($5,000), it will put my savings rate over 57%.  Not to pat myself on the back, but I'm pretty happy with that.  There are a couple things I need to do to increase savings, however, such as get on a cheaper cell phone plan (I've seen the post - no need to link).

Travis - I understand compound interest, and plan on opening a Target Retirement fund ASAP.  However, I don't have access to any tax advantaged accounts through work for almost a year.  Once I can open a 401k and get an employer match, I will be contributing the max.  In terms of waiting to buy, I absolutely will not buy a house until I have steady, satisfying employment.  That's largely what makes my timeline so fuzzy.  What I'm talking about is saving to buy a house, not going ahead and doing it before getting my work life in order.

CDs are a great idea!  Thanks Milspecstache!

Thanks for the banking suggestions, Tcorn - I will look into these tonight when I have more time. 

One more note that may help explain my determination to own a house:  I've been with my SO about 5 1/2 years (lived together the last 2 years), and we're both pretty excited to move back towards home (Ohio-Indiana) in two to four years, focus more on careers, and buy a house when we're settled in.  SO has significant education debt, so she will likely not be helping save for a down payment, but we would be splitting a low mortgage payment ~$300-$400/month.  Currently we pay $375/month each in rent.

mlipps

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My husband & I are saving for a home at some point in the fuzzy future. We can't afford to max our 401k's & our Roth & save towards a home & pay for his MBA. So, we're putting the save towards a home on the backburner BUT since we can take the contributions out of our Roth at any time, we have that as a cushion to our home buying depending on how things pan out. This money is invested according to our usual 80/20 asset allocation. The reason for that is that I feel like our goal is very flexible; for us a home is a want, not a need. So, if the market goes down, we will just wait for it to recover to buy a home, so I'm not worried about losing the money in the short term.

And, if my husband gets a big raise when he finishes his MBA (fingers crossed) then we might never need to take that money from our Roth, because we might decide we have enough money to just save up the downpayment & leave the Roth alone. I feel like this plan gives us options while potentially still preserving valuable tax advantaged retirement space.

SteveTweede

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Sounds like you've got it figured out mlipps!  Maybe I should consider a similar strategy