Where to Put Home Down Payment Savings

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Where to Put Home Down Payment Savings

Postby skinsfan » Sat Jan 05, 2013 3:15 pm

I have been reading these forums for a couple years, but this is my first post. I have started saving for down payment on a home and my question is, is it worth investing this money?

My situation: 25 years old. No debt. Emergency fund. Relatively stable employment, with income ~$60k/year. Contribute 10% to roth 401k with 4.5% company match. Currently living in rented apartment.

So I am now taking 12k out of my savings (still leaving a comfortable emergency/sh*t happens fund) and designating it to save for future down payment. I will also be saving $1,000/month for this purpose. My time frame is 4-7 years.

I am looking for opinions on whether I should invest this money or, if not, where to keep it. One idea that I have had is investing this money in a Vanguard LifeStrategy fund like the LifeStrategy Income fund (80% bonds, 20% stocks). Should I be concerned that T-bond interest rates are so low and will likely rise over the next 4-7 years?

Thanks!
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Re: Where to Put Home Down Payment Savings

Postby papito23 » Sat Jan 05, 2013 3:25 pm

skinsfan wrote:I have been reading these forums for a couple years, but this is my first post. I have started saving for down payment on a home and my question is, is it worth investing this money?

My situation: 25 years old. No debt. Emergency fund. Relatively stable employment, with income ~$60k/year. Contribute 10% to roth 401k with 4.5% company match. Currently living in rented apartment.

So I am now taking 12k out of my savings (still leaving a comfortable emergency/sh*t happens fund) and designating it to save for future down payment. I will also be saving $1,000/month for this purpose. My time frame is 4-7 years.

I am looking for opinions on whether I should invest this money or, if not, where to keep it. One idea that I have had is investing this money in a Vanguard LifeStrategy fund like the LifeStrategy Income fund (80% bonds, 20% stocks). Should I be concerned that T-bond interest rates are so low and will likely rise over the next 4-7 years?

Thanks!


I'm in a similar situation, just 3 years ahead of you. I would recommend maxing out I-Bonds first ($10K/year). Hard to beat a guarantee to keep up with inflation (purchasing power) before taxes. Currently yielding more than Total Bond Market.

My long term plan for my family is to have a 80/20 fund like you suggest for ongoing expenses (car, major house repair, land purchase, big vaca) and possibly double as emergency fund. The volatility of that set-up would be very doable for someone with a moderate risk tolerance (50% crash in stocks loses only $1K on $10K saved). Over the long term, the medium bond duration and sprinkling of stocks could help you beat inflation and reduce the opportunity cost of keeping things in low-yielding savings account.
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Re: Where to Put Home Down Payment Savings

Postby NYBoglehead » Sat Jan 05, 2013 3:28 pm

Tough question. Usually the consensus is that money saved for a house down payment shouldn't be in the equity markets, but if the timeline is on the longer range (closer to the 7 years) that is an awful lot of time to have it sit in savings and earn next to nothing. The Vanguard Balanced Index Fund is 60/40 and might be more appropriate for an intermediate timeline. 10 bps for ER once you achieve Admiral Share status as well.

Another way to go if you find that you've cash just sitting around is to max out your 401k and Roth IRA. Maybe you need to dip into some of the cash savings but it's not earning much now and you'll be essentially transferring it to an investment vehicle that can provide some growth. One thing to keep an eye on with the Roth 401k as your pay increases is what your tax rate will be and what you estimate it to be in the future. Since you've got a pension it is entirely possible that your pension will fill the lower brackets in retirement and the Roth is the way to go. Just something to keep an eye on.
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Re: Where to Put Home Down Payment Savings

Postby bdpb » Sat Jan 05, 2013 5:06 pm

At this income, you are in the 25% marginal tax bracket. I would change my Roth 401k contributions to deductible 401k contributions. This will allow you to change your contribution to ~14%.

Then, I would contribute 10.5k of my future house savings to a Roth IRA at 5k/5.5k per year (2012/2013). You can withdraw Roth IRA contributions at any time, tax and penalty free. Until you can completely fill your 401k with deductible contributions continue to put your future house savings in the Roth IRA (at least the first 5.5k).
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Re: Where to Put Home Down Payment Savings

Postby RobInCT » Sat Jan 05, 2013 6:08 pm

I'm in a similar situation, but a couple of years ahead and several years older. I decided to place part of my savings in equities because I was flexible on the timing of the house purchase. If 4 years from now (when I'd like to buy), the market tanks, I'm content to postpone my house purchase a few years. I felt like my timing flexibility gave me more investment flexibility.

At 25, you may similarly feel that you have more timing flexibility. That's one of the benefits of youth. That said, your age can also potentially work against you. Many people between the ages of 25 and 29-32 (i.e. your projected purchase age) undergo a lot of life changes whose timing is difficult to predict or foresee.

For example, do you think you might get married (if not already married) or have kids (or more kids, if you already have them) in the next 7 years? Want to go back to school to pursue an advanced qualification that will help your long-term career prospects? Events like this can change your time horizon and savings priorities. If you think any of these things is reasonably likely to happen to you within your 4-7 year time frame, it might caution in favor of a more conservative savings vehicle. You do not want to get yourself in a situation where you're postponing important life decisions (going back to school, having a child) because the market is down, and your downpayment fund is worth x% less than you contributed to it.

Good luck, and congrats on your early start on investing!
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Re: Where to Put Home Down Payment Savings

Postby mickeyd » Sat Jan 05, 2013 6:55 pm

If I were saving for a home that I intended to purchase in 7 years or so I would probably stash half in a 7 yr CD at a local CU that is paying the hightest rate avaailable. The other half (additions?) would be stashed in the VG short term bond fund.

After about 5 years I would look at moving the STB stash over to a more conservative CU money market type of account.

By the time you need the money it should be 100% in a liquid savings account.
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