Author Topic: In what form should I save my "someday" house downpayment?  (Read 2775 times)

bmc

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In what form should I save my "someday" house downpayment?
« on: January 04, 2017, 06:23:21 PM »
My wife and I got married last year and have started saving for a house.  However, we don't know when or where we actually want to buy a house.  We currently live in Washington, DC, which we feel is overpriced, and we want to move to a place that can offer things like mountains and - god forbid - yards.  That said, we currently have a very affordable rental and I am making a very healthy wage at my job.  Here's my basic profile:

Savings Rate:  about 39% of take-home pay, plus 7% deferment into a pretax 401k with very low fees. 
Savings Amount:  About $25k a year in cash, plus the amount that goes into the 401k which I keep about 90% S&P, 5% TIPS, 5% Bonds (AGG)

Last year was the first year that I was able to just start saving like crazy - in previous years my salary was much lower, and I was paying off a lot of high interest student debt.  I still have a lot of student debt but it will be forgiven in another few years if I stay in public sector or non-profit work.

Here's the situation:

Current Savings for House:  $40k in a cash savings account bearing 1.05%
Current non-401k investments: $0
Estimated time that we will buy a house:  1-3 years, possibly longer if the market keeps skyrocketing.
When we will start investing: either now or when we hit $50k, so we have at least a 10% downpayment for a no-PMI mortgage with SOFI.

Question:  Should we just keep the house money safe in a savings account until we buy, or should I not be so cautious and invest part of it?  One year from now I expect to have at least $10-15k in index funds, but I guess I'm getting a little antsy with all this cash that is just sitting there, and not having a lot of certainty as to when we will actually buy a house.  We do, however, want to be ready to pounce when the right opportunity arises.

I've never owned a house, I've never had money before, my parents were constantly broke and never learned to invest, so I have no experience here!  Any advice or experiences would be greatly appreciated!

-bmc





CowboyAndIndian

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Re: In what form should I save my "someday" house downpayment?
« Reply #1 on: January 04, 2017, 06:49:51 PM »
For such short term savings  an high yielding CD is probably the best solution. You cannot invest in the market, as the short term risk of loss is too high.

boarder42

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Re: In what form should I save my "someday" house downpayment?
« Reply #2 on: January 05, 2017, 06:14:36 AM »
if you dont have a horizon i'd dump it into the market personally.  if the market goes down you just wait to buy. 

Gin1984

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Re: In what form should I save my "someday" house downpayment?
« Reply #3 on: January 05, 2017, 06:18:37 AM »
I just want to know why you are just putting 7% in your 401k and why you are investing so conservatively in it.

boarder42

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Re: In what form should I save my "someday" house downpayment?
« Reply #4 on: January 05, 2017, 06:30:46 AM »
i wouldnt call 90% equities conservative.  but in wealth building years i personally tend towards 100% equity and toward more risky investments currently weighted more heavily in the mid caps

Enigma

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Re: In what form should I save my "someday" house downpayment?
« Reply #5 on: January 05, 2017, 06:41:51 AM »
Possibly create a betterment account focused mostly on bonds roughly 4% gain on your money instead of the savings account.
I have withdrawn money from my betterment account and thus far it only appears to take 2-3 business days.

Another option for the savings account is a Vanguard taxable account and then invest in a Vanguard total stock/total bond fund minimum buy in is 10k for each fund.  (0.06% fee)

Also I do recommend maxing out your 401k/Vanguard IRA first before stock piling cash for your "someday" house dwnpmt.

Gin1984

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Re: In what form should I save my "someday" house downpayment?
« Reply #6 on: January 05, 2017, 06:42:54 AM »
i wouldnt call 90% equities conservative.  but in wealth building years i personally tend towards 100% equity and toward more risky investments currently weighted more heavily in the mid caps
The 5% TIPS makes me think conservative.  If it was 10% bonds, I'd go with eh, makes me feel safe.  TIPS in a 401k just scream nervous to me.

stockjohn

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Re: In what form should I save my "someday" house downpayment?
« Reply #7 on: January 05, 2017, 02:29:33 PM »
We were in your position 5 years ago. We were sitting on a $150k down payment for buying a house in the Bay Area. Too much money to leave in savings but purchase date was too uncertain to put in the market. We ended up compromising and keeping half in a high yield savings account 20% in bonds and 30% in stock. The stock was mostly VTI but I also picked a few individual stocks and sector ETFs that I thought were undervalued relative to the market (worked out well for us but not  recommended). We ended up buying a house last year, three years later than we had initially anticipated due to the competitiveness of the market here. We made $15k on the $75k investment and I'm really glad we didn't keep it in cash that whole time. That said the market is higher  now. If you really think you might be moving and purchasing a home within the year I would keep it in cash. If you think there's a decent chance that 2 years turns into 3 you could put $10k in a mix of stocks and bonds for now and add $500 or so each month going forward. This gives you flexibility to change course if your plans change.

mountains_o_mustaches

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Re: In what form should I save my "someday" house downpayment?
« Reply #8 on: January 05, 2017, 06:50:55 PM »
I'd recommend either a CD or a high yield savings account, such as Synchrony.  We did both - initially we put some $$ in a CD and then once that was up and we were closer to purchasing time we transferred that money to our synchrony account so that we could continue to get interest, but also have the funds basically ready to go if we found the house we wanted.  I wouldn't recommend stocks because as other posters have pointed out - you only win in the stock market over the long haul.  Good luck!

frugaliknowit

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Re: In what form should I save my "someday" house downpayment?
« Reply #9 on: January 05, 2017, 07:56:50 PM »
We were in your position 5 years ago. We were sitting on a $150k down payment for buying a house in the Bay Area. Too much money to leave in savings but purchase date was too uncertain to put in the market. We ended up compromising and keeping half in a high yield savings account 20% in bonds and 30% in stock. The stock was mostly VTI but I also picked a few individual stocks and sector ETFs that I thought were undervalued relative to the market (worked out well for us but not  recommended). We ended up buying a house last year, three years later than we had initially anticipated due to the competitiveness of the market here. We made $15k on the $75k investment and I'm really glad we didn't keep it in cash that whole time. That said the market is higher  now. If you really think you might be moving and purchasing a home within the year I would keep it in cash. If you think there's a decent chance that 2 years turns into 3 you could put $10k in a mix of stocks and bonds for now and add $500 or so each month going forward. This gives you flexibility to change course if your plans change.

+1
You could also use a "Balanced Fund".  I use this fund for a contingent car purchase:  https://personal.vanguard.com/us/funds/snapshot?FundId=0103&FundIntExt=INT

Also:  It sounds like you are young.  Why are you allocating bonds in your 401K?  "Pedal to the metal, babby!" (unless you are low risk tolerant and would panic during a bear market:))
« Last Edit: January 06, 2017, 11:24:05 AM by frugaliknowit »

bmc

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Re: In what form should I save my "someday" house downpayment?
« Reply #10 on: January 06, 2017, 10:35:46 AM »
i wouldnt call 90% equities conservative.  but in wealth building years i personally tend towards 100% equity and toward more risky investments currently weighted more heavily in the mid caps
The 5% TIPS makes me think conservative.  If it was 10% bonds, I'd go with eh, makes me feel safe.  TIPS in a 401k just scream nervous to me.


I think you're right honestly, I'm not sure why I added the TIPS in - read an article that they were going up, but that's more of a hedge for preservation and not a wealth building strategy.  The rest of my allocation in 401k actually is more like 35% small cap, 10% emerging market, 45% S&P and then the bonds.  I should probably just reduce the bonds to zero for the next ten years. 

Thanks for all the replies everyone.