Author Topic: Balancing investing with saving for a home  (Read 2146 times)

FrugalBuff

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Balancing investing with saving for a home
« on: October 04, 2015, 09:48:00 PM »
Veteran mustachians please help!

After reading the blog for a few months I see my path to financial independence as straightforward. I will accomplish it by:

1. Crushing student loan debt.
2. Saving as much money as I can to put 20% down on a home (~$80k in my city).
3. Paying off my home as quickly as possible.
4. Investing/saving as much as possible again to reach the amount required for retirement.

Without doing a full-blown case study, my financial situation is pretty simple. I am a 26 year old without a home. I currently have $25,000 in savings, can save $3,000 per month and have $41,000 ($11,000 at 6.55% and the rest at 4.5% interest) in student loan debt.

I've been viewing these 4 steps as a serial process, but I'm realizing quickly that will lead to a long working life. Accomplishing 1. is an obvious first step that I should be focusing all my resources towards. Does anyone have any recommendations for balancing steps 2 and 4? It seems as though most experts recommend a simple saving account when saving for a down payment because you don't want to lose that money in riskier investments, but investing early in life is more effective than investing late in life. What strategies did/do you employ to balance long-term financial goals?

Thanks for the advice.

MDM

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Re: Balancing investing with saving for a home
« Reply #1 on: October 04, 2015, 10:06:32 PM »
FrugalBuff, welcome to the forum.

Given your situation, maximizing your tax-advantaged (e.g., 401k, IRA, HSA) savings, along with immediately paying that 6.55% loan, seems best.

You can afford to pay the minimum on your 4.5% SL debt.  Your actual cost may be less than 4.5% due to the tax deduction you get on SL interest - can't tell for sure w/o income information - but even 4.5% is low enough that market returns could realistically be better.

It's really your choice - along with your consequences - whether to invest aggressively with an eye toward early retirement, vs. investing conservatively with an eye toward early home ownership. 

When (if?) you do buy a house, if you get a low mortgage rate then you will have a similar choice about "earlier retirement" vs. "earlier paid-off mortgage."  The more money you put toward a low interest rate mortgage, the more likely you delay your time to FI.

Good luck!

Urchina

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Re: Balancing investing with saving for a home
« Reply #2 on: October 04, 2015, 10:29:27 PM »
One way to think about saving for a house and retirement and paying off debt at the same time is to figure out what your mortgage, property taxes and utilities on a house would be (add together as a lump sum), subtract your current rent and utilities from that, and then save the difference towards a down payment.

For example, if you estimate that a house will cost you $1500 a month in mortgage, $500 a month in property tax and $250 a month in utilities, and you currently pay $1000/month rent & utilities, save ($1500 + $500 + $250) - $1000 = $1250/month towards a down payment. I'd keep this in a cash savings account or a money  market fund -- you're planning on using it within the next four years or so, so it shouldn't be in equities.

Functionally, you're building your future housing cost into your budget now, so when you do buy a place, your budget will not change much at all (you'll know you can afford the house, because you're already living with that budget). Of course, this system only works when rents are less than the cost of homeownership (not true in all markets).

With your remaining spare cash, I'd:
1. Contribute to your pre-tax retirement accounts (enough for the company match if you can get one) at a level that you feel is acceptable for now (with the plan to up your contribution later when your debt is paid off). You might use the amount that you can contribute to an IRA ($6000/year?) as a benchmark minimum.
2. Pay off those student loans.

After the loans are paid off, you can redirect the money that you were using for loan payments either into your down payment fund, if you haven't purchased a home by then, or into your retirement accounts. You can decide whether or not to prepay your mortgage later, once you have one and your debt is gone.

And, I'll pass along some unsolicited advice we received from our first mortgage broker, when we were getting pre-qualified for a mortgage on our first home: "Don't buy a car. It'll tank your chances for a loan."

Good luck!

cchrissyy

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Re: Balancing investing with saving for a home
« Reply #3 on: October 04, 2015, 10:57:12 PM »
Many retirement plans allow you to make a loan to yourself for the home down payment, at no penalty  (you are charged interest, which you pay to yourself, so, fine, the only negative here is the opportunity cost of keeping the money invested).     So if this is the case for you, you can consider the retirement account a down payment fund and focus all efforts there.

Urchina

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Re: Balancing investing with saving for a home
« Reply #4 on: October 04, 2015, 11:32:52 PM »
Many retirement plans allow you to make a loan to yourself for the home down payment, at no penalty  (you are charged interest, which you pay to yourself, so, fine, the only negative here is the opportunity cost of keeping the money invested).     So if this is the case for you, you can consider the retirement account a down payment fund and focus all efforts there.

The downside of this approach is that you lose out on the power of compound interest during the payback period of the loan, and that can be substantial, especially when you are young (essentially, you're taking your hardest-working money out of the stock market when you can most benefit from it).

I did a quick search of the forums and found this thread, which might be helpful to the OP regarding using retirement accounts to pay for downpayments: http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-borrow-from-my-401k-to-buy-a-house-andor-pay-off-student-loans/msg645263/#msg645263