Author Topic: Savings for a Large Purchase (i.e.Property)  (Read 1464 times)

hellommm

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Savings for a Large Purchase (i.e.Property)
« on: June 15, 2016, 03:18:54 AM »
Dear MMM and Fellow Mustachians,

I would like to save up $50-100k for a 20% down payment on a home within 2-4 years.

I am wondering about whether the house savings should be going into something like VTSAX where I will just have to deal with the risk of fluctuation by the time the home purchase comes plus an increased tax bill for the year we pull out the money, or if it is better to deal with the inflation risk with it being in a savings account earning basically nothing? Of course, if there are any other interesting/creative ideas, I'd love to hear them!

I am currently maxing out my TSP, Traditional IRA, and HSA. My wife is not working right now so I am also maxing out her Traditional IRA as well.

Thank you!
HelloMMM
« Last Edit: June 15, 2016, 03:24:22 AM by hellommm »

MostlyBearded

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Re: Savings for a Large Purchase (i.e.Property)
« Reply #1 on: June 15, 2016, 03:35:00 AM »
Hi HelloMMM,

I would say definitely not, it's way too risky for a short term thing period of 2-4 years. I'm in the UK so I couldn't tell you where you should put it instead... but not there!

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Re: Savings for a Large Purchase (i.e.Property)
« Reply #2 on: June 15, 2016, 07:40:42 AM »
If I were you I would use a high yield 1% savings account such as Ally, because there is zero risk and your time horizon is short.

zombiehunter

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Re: Savings for a Large Purchase (i.e.Property)
« Reply #3 on: June 15, 2016, 08:28:56 AM »
I am planning a similar medium-term savings plan for a home purchase as well, and this is what I've come up with so far: [I'm assuming that you would be investing in a taxable account and have at least a 25% marginal tax rate]

Vangaurd Tax-Exempt Bond ETF (VTEB).  It's relatively new, but similar MUNI bonds have shown about 3-4-5% returns.  The SEC yield on the bond is about 1.5%.  I am not entirely sure, but I believe only the yield portion is tax-exempt, while any appreciation on the ETF itself would be taxable at short-term/long-term capital gains rates.  In any case, 1.5% tax exempt yield + small appreciation taxable at capital gains is much better than a high-yield 1% savings account, which is taxable at ordinary income. 

If you live in a high-tax state such as NY or CA, you can also invest in state-specific MUNI bond ETFs, although you will pay a transaction fee for purchasing them as they are not Vanguard in-house funds.  The advantage here is that the yield is tax-exempt from both federal and state tax (and I am not sure but would assume NYC tax as well).  This does create additional risk if NY or CA goes Puerto Rico or Detroit on you, but that's fairly unlikely given the size and diversity of the economies (each economy is equivalent in size to France and South Korea). 

I have also considered adding some equity ETF to the medium-term portfolio, but it adds risk.  For example, was considering a 20/80 split between VT (Vanguard total world ETF) and VTEB above.  The advantage here would be two-fold: (1) adds equity and allows potential increases in gains, albeit with added risk of loss, (2) the VT ETF holds about 45% international, meaning that there could be a slight tax benefit due to the foreign income tax credit/deduction.  It's probably a small benefit, and probably should not be a primary motivation.  If the risk is acceptable, however, it's an added benefit.