Author Topic: Funds or House Savings? Low-Income, but saving 50%  (Read 4159 times)

thefrugaltwo

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Funds or House Savings? Low-Income, but saving 50%
« on: June 05, 2013, 08:00:28 AM »
Hello everyone,
Since my last questions I have really been reading up on investments and financial independence, and thanks to all of you who I have learned so much from. Here is my current situation/decision, any advice would be appreciated.

I am 26 years old, no debt, no car, I live in a rental apartment.
I make $31,200 after taxes, and am saving $15,600 a year, which I know means I am lower on money earning power than many of you.
Using Mustachianism, thus far, I have saved $17,000.

So my question is this: I really want to invest, and I know which funds I'm interested in. I also really want to save money for a down payment on a house. Am I correct in thinking that the money I put into funds should just live there forever until I can reach FI? If so, does this mean that while I am investing, I should also be separately saving for a house down payment? OR, should I just focus on saving for a house now, so that I can stop paying rent sooner? My goal house (I track real estate as a hobby so I'm realistic) would be between $115k and $160k.

What do you think? Does it make more sense to only save for a house? Or should I take longer to accrue a down payment and begin investing immediately also? Additionally, if I am saving for a house separately, where should I do this? Surely not in a savings account?

Many thanks!

Vitai Slade

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #1 on: June 05, 2013, 09:13:52 AM »
This depends on when you plan to actually start looking for and purchase the house. If you aren't going to be buying for another year or so, you can put the money safely in CDs or a high interest savings/money market account. If you plan to buy within a few months, I'd just keep it in a high interest savings or money market account. If you plan for it to be several years, try putting it in low risk funds. Up to you. I just bought a house a couple months ago and I just left the money in my money market account.

twinge

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #2 on: June 05, 2013, 09:17:39 AM »
Good work on the high savings rate despite low-ish income.

If your timing about when to buy a house is flexible, then you can invest the money in the funds that you see fit for optimal growth.  At some point in the future you decide if you want to invest some of those assets in a house.  If the market tanked, you probably would decide it was not the optimal time to take that money out and hold off on the house until it made better sense.

If your timing were less flexible--say you are committed to purchasing a house in 3 years--then you would need to focus on preserving the capital and invest in low-risk/low yield investments.


matchewed

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #3 on: June 05, 2013, 09:26:46 AM »
+1 for twinge's comment

Also I get from your post that you want to stop paying rent. My question to you is - is rent with roommates more expensive than all the expenses related to buying and maintaining a house. As a person who is also saving up for a house but not the highest earner in the forum I've maintained roommates to keep my expenses low. That way I can afford to save for the future but I'm also maintaining a flexible outlook on the house plan.

At your age I would probably take the longer route with investing the money for a 5+ year time frame in index funds or your chosen style of investing. Life isn't going anywhere soon and you may appreciate that flexibility your investments give you down the road.

hybrid

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #4 on: June 05, 2013, 09:33:34 AM »
Hey, if you are managing to save 50% on your income that should provide inspiration for the rest of us to get our $%^&* in gear!  Good for you!  When your income goes up over time you will already have your frugal ways in place, unlike so many of us who are backing into the lifestyle after years of waste.

samustache

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #5 on: June 05, 2013, 06:19:25 PM »
Quote
stop paying rent sooner?

Owning a home is not always a great deal. In fact historically the returns on a home are about inflation, and a lot of that return is eaten up by the costs of home ownership over time. There are a lot of cities where it makes more sense to invest and rent than to own a house when factoring in tax/maintenance/insurance/interest cost. Yes, you will get equity in the home, but that's basically a low interest savings account vs. investing otherwise. Were I your age and unmarried, I'd find the cheapest apartment over an old lady's garage I could and rack up the returns.

Paul der Krake

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #6 on: June 05, 2013, 06:37:03 PM »
31k net is low-income? Sure there are some seriously high-earning folks around here, but don't sell yourself short. There are people with college degrees who barely clear half of that at your age. Positivism! Yeah!

It would help if you posted some numbers. How much would a house in your area cost you? Are you open to the idea of moving? You should shop around for savings accounts and CD rates. But it basically boils down to how liquid you want to be. Typically, the more liquid, the lower the rate.

thefrugaltwo

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Re: Funds or House Savings? Low-Income, but saving 50%
« Reply #7 on: June 06, 2013, 09:28:23 AM »
Thank you so much everyone!!! You've given me so much to consider, this was really helpful. I guess I grew up just thinking that house=security, but I see now that because my timeline is flexible (my partner and I don't want kids, enjoy apartment living, etc.), I am better off just investing for now and crossing the house bridge when I come to it. Thanks again to everyone, this site has really become my only support system for this lifestyle of badassity and savings. I don't have any fiscally responsible friends or family members that I can ask, you guys have really given me confidence that I can figure this out and do it successfully without having a degree in math or finance. It seems really possible and I love the optimism of this "movement" (are we calling it that? I just did, bam!), I feel like it has trickled into other areas of my life, and I'm so much happier/at ease all around! Have a great day everyone, and thanks for the information, I'm sure I'll be asking more questions soon!




Note: When I mentioned having "low income", I didn't mean in any way that I am impoverished or that I don't realize how much less many people make, I am very lucky. I just meant in the grand scheme of things I'm not in an earning position to, say, retire in seven years like many people with six figure incomes are able to do. Because of that, sometimes the info provided isn't applicable to someone like me who is not able to save as much over the course of a year. I wrote it to ensure that I would receive relevant information to my particular situation.  I just didn't want to come across as negative, I'm very happy and grateful for my standard of living! Plus I'm managing to do this in nyc for the time being!