How to save for downpayment

[bluexmas]

Hi Friends,
My wife and I have spent the last two months becoming mustachian. We're debt free now and trying to figure out what comes next. In addition to much higher contributions to my 403b and an individual IRA for her, we'd like to work on saving monthly toward a possible house downpayment in a few years. Of course we could always stash the money in a regular savings account, but I'm sure there's a better way that might help us earn some interest. With a projected horizon of 2-3 years though, this inexperienced investor is wary of putting that money in index funds or the stock market since the time frame is so short.
I'd appreciate any help or advice you could give.
Thanks!

[onlykelsey]

I would probably not put much, if anything, in the market.  You could look in to CD rates (I think we're expecting an interest rate increase soon) and set up a CD ladder with some money.  You could also open a MM account if you can find a decent rate.  If you're more on the three year side of things and are flexible (ie can wait four years if you need to), you could look in to low-volatility investments.

I say all that, and I think it's the standard advice around here, but what I actually did was keep ~80% of my down payment in the market until just a few months before, while stashing only in cash for the last ~6 months before buying.  Not ideal, but I was flexible on timing and I guess feeling risky.

[Trip]

Agreed that the market isn't the right place for the money if you need it in a few years. I think that with rates today you may be able to get a slightly higher rate on a Money Market Account if you have $10,000+. Nerd Wallet currently shows 1 at 1.10% if you have over $10,000.

If you want to go the savings account route, I use Barclays Online (not an affiliate link) and haven't had any issues with them. You just need to wait a few days for deposits and withdrawals to take place.

[BlueMR2]

My downpayment came out of savings.  I'd put the money aside originally in a CD, but then ended up buying the house 6 months before the CD matured.  Sigh.  Bad timing.  Fortunately I saw it coming far enough ahead and was able to sock away a decent downpayment in the time I had once I realized how it was going to go down.

So, I can't recommend a long term CD as if you have any timing issues it can be a mess.  I also can't recommend short term CDs as my current savings account pays the same interest as all the CDs under 5 years that I've looked at.

[bluexmas]

Thanks for the thoughts. I'm not too familiar with CD's so I'll definitely do some research and see if they might help us. We don't have much of anything saved for that at the moment, so I was looking more for something we could contribute regularly over a period of time to. Would anyone recommend using a Roth for this purpose, since my understanding is that you can pull contributions out of it without a penalty?

[StressLess]

do you have an idea of how long its going to take you to save for a downpayment and also how much you will need?

CD rates are very low right now, you would need a lot of capital to really benefit from them and also quite a bit of time too.

Probably better off staying liquid in high yield online savings accounts

see ally bank or other online banks

[Captain Cactus]

What do you all think about something like Vanguard Short-Term Corporate Bond Index (VSCSX)?  Supposedly it's a relatively lower risk and if you have a timeframe of a few years then you may get higher returns than a CD or savings account. 

[Heckler]

What do you all think about something like Vanguard Short-Term Corporate Bond Index (VSCSX)?  Supposedly it's a relatively lower risk and if you have a timeframe of a few years then you may get higher returns than a CD or savings account.

I just did the math on my VG short term bond index VSB ($CAD) I've held $21,000 of since Jan 2015.

I've made $153 interest on top of the $21k in 16 months, as the price has also declined a bit during that time, should I need to sell before the 2.7 year duration.  I don't recommend bonds funds for goals that are less time than the average duration of the fund.

IMO, You're better off with high interest savings, unless you plan to hold a bond fund long term.

[Ursus Major]

I would look at a longer term CD from a bank that has acceptable penalties for early withdrawal. A 5 year CD at ally.com has a 2% APY for $20k and the penalty is 150 days of interest. Compared to a savings account with 1% APY you'll come out ahead after 12 months.

[Radagast]

Another strange thought: I notice I-bonds are currently at 1.64%. They will never have negative real interest rates, which can't be said for a MM or CD at 1.1% or even 3%. They also won't fluctuate with the market like normal bonds. There is a three-months interest penalty for redeeming them within five years, but none after that.

I thought about this a lot but haven't made a decision. We only recently saved enough in taxable to be worth the effort, and our future is totally up in the air at this point. A more typical stock/bond/other? allocation might be better.

[Ursus Major]

Another strange thought: I notice I-bonds are currently at 1.64%. They will never have negative real interest rates, which can't be said for a MM or CD at 1.1% or even 3%. They also won't fluctuate with the market like normal bonds. There is a three-months interest penalty for redeeming them within five years, but none after that.

I thought about this a lot but haven't made a decision. We only recently saved enough in taxable to be worth the effort, and our future is totally up in the air at this point. A more typical stock/bond/other? allocation might be better.

However the purchase limit per year is $10k IIRC.

[Radagast]

Another strange thought: I notice I-bonds are currently at 1.64%. They will never have negative real interest rates, which can't be said for a MM or CD at 1.1% or even 3%. They also won't fluctuate with the market like normal bonds. There is a three-months interest penalty for redeeming them within five years, but none after that.

I thought about this a lot but haven't made a decision. We only recently saved enough in taxable to be worth the effort, and our future is totally up in the air at this point. A more typical stock/bond/other? allocation might be better.

However the purchase limit per year is $10k IIRC.

True. $10,000 each plus a $5,000 tax return trick could be up to $25,000 per year. Probably not enough for a working couple on this website, but its there.

[JZinCO]

What do you all think about something like Vanguard Short-Term Corporate Bond Index (VSCSX)?  Supposedly it's a relatively lower risk and if you have a timeframe of a few years then you may get higher returns than a CD or savings account.

I just did the math on my VG short term bond index VSB ($CAD) I've held $21,000 of since Jan 2015.

I've made $153 interest on top of the $21k in 16 months, as the price has also declined a bit during that time, should I need to sell before the 2.7 year duration.  I don't recommend bonds funds for goals that are less time than the average duration of the fund.

IMO, You're better off with high interest savings, unless you plan to hold a bond fund long term.

If one is comfortable with using up IRA space, putting $5500/person/yr in the G fund rather than a corp or treasury bond fund is not a terrible way to save while guaranteeing principle. Sure beats CDs and money markets anyway... A additional downside is that only just under $15K per person can be held at one time.

[VaCPA]

We have a large amount in an online savings account for house downpayment. The rate is like .8% or something, not great. If you know your timeline CD is a decent option. We've been kind of hemming and hawing on when to buy so I wanted to keep it very liquid, although now it looks like we're waiting another year. I would think twice about investing it if you can't afford to lose much in the short term especially with the market volatility right now.

[2buttons]

Ally or Barclays are both paying 1%.  I would dump into there.  Bear in mind the transfer time of three days on ally, assume the same on barclays, for when you need the cash. 

[slugline]

Ally or Barclays are both paying 1%.  I would dump into there.  Bear in mind the transfer time of three days on ally, assume the same on barclays, for when you need the cash.

+1    I came really close to needing to re-schedule my house closing because I didn't account for needing time for funds to get out of my cyber bank and into the form of a tangible check from my brick-and-mortar institution.