Investing for a down payment

[Whiskers]

Hi All,

Looking to buy a home in 4 years. Have $40k toward down payment now. Best place to stash this cash for the next 4 years while I build up the funds? Right now sitting in a savings account making nothing.

Thanks

[Frankies Girl]

The common thought on money you will absolutely need to preserve and tap within a 5 year or less period is that it should not be put into the market. That's too short of a time period to avoid being affected by short term market volatility. If you need the entire 40K in 4 years, you might be lucky and see it higher, but if it happens to be a downswing, you might only get much less out instead. If it's in the market for a longer period, you would have likely built up enough of a cushion in growth to be able to pull out the original investment amount, but less than 5 years would be very iffy.

I'd suggest looking into CDs (3 year CDs seem to be paying around 1-1.25%) or high interest savings accounts - there are many that offer around 1% or a bit more out there. I use Ally but there are several decent options.

[Radagast]

4 years is right at the point where 20% stocks 80% bonds has a pretty good shot at being the best option. Of course an interest rate raise near the end could still leave you worse off.

CD's may be the best option. Supposedly if you buy brokered CD's in the secondary market you can get much above market yields, if you spend the time looking.

I (actually we, it is my wife adding most of the impetus) plan to get a house in 5-12 years and I decided to follow a value averaging strategy where I will put the first $30,000 or so in stocks, and then force the stock allocation to increase by exactly 2% plus inflation per quarter, with the rest going to treasury bonds. Hopefully this will result in a relatively stable 15%-30% stocks when it is time to buy, mostly purchased at relatively low prices.

[Dicey]

It's sometimes said that you can't save your way to FI, you also have to focus on increasing earnings. However, with DP money, you don't want to risk market fluctuation, as FG pointed out. So one way to think of it is that you can develop black belt frugality, and add those savings to your existing DP fund. Focus on increasing your earnings and invest the increases into your retirement accounts with the goal of maxing out your accounts. Before you know it, you'll have the house you want and a healthy start on FI. Once you do those things, focus on building up your taxable accounts so you can RE if that's your goal.

ETA: TL;DR version - Save for a down payment, invest for the future.