Where to put house money?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
joshburs84
Posts: 8
Joined: Sun Apr 28, 2013 11:30 am

Where to put house money?

Post by joshburs84 »

Hello, I have 50k that I have set aside (separate from my investments) for a house that my wife and I plan to buy in approx. 2-3 years. I am comfortable taking some risk with this money and I can stomach around a 10-15% loss of principal. CD's just don't pay enough right now otherwise I'd be happy to use them. What I am thinking is maybe putting 25k into VIPSX (inflation protected securities) and 25k into VFSTX (short term investment grade). My overall goal for this money is to grow it enough to maybe buy a couple new appliances for the house when we do buy it.
I am curious as to what you all would do in my situation, bearing in mind my risk tolerance. Would do you think of my plan? Thanks in advance

Josh
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Where to put house money?

Post by dbr »

I bet most people here would say that it makes no sense to try for an extra percent or something in return, if you can even get that, while risking the loss of many times that amount while being pinned to the wall to extract that money to buy the house. Admittedly there may be more uncertainty in what you find you will have to pay for the house than in how your investment behaves,
User avatar
femur
Posts: 409
Joined: Fri Apr 11, 2008 2:07 pm

Re: Where to put house money?

Post by femur »

dbr wrote:I bet most people here would say that it makes no sense to try for an extra percent or something in return, if you can even get that, while risking the loss of many times that amount while being pinned to the wall to extract that money to buy the house. Admittedly there may be more uncertainty in what you find you will have to pay for the house than in how your investment behaves,
I agree. I think the best solution for this person is a CD or FDIC insured savings account. Ally Bank is a good choice (I am an Ally customer)
User avatar
timboktoo
Posts: 865
Joined: Sun Mar 31, 2013 3:42 pm

Re: Where to put house money?

Post by timboktoo »

Short-term savings goals are tough. It's hard to watch stocks do well for years and not want to take part in the action with money you're setting aside for a short-term goal.

I have a car fund that is in cash. I don't plan to buy another car for 7 years, but with cars you never know, really. It might break down tomorrow. I have thought about investing it so many times. But when I am honest with myself about why I want so badly to earn a higher return with my car fund, the answer isn't that I need a higher return in order to get a car. The reason I want to earn more with that fund is to look smart and to have fun doing it.

I think that says something about my own ego and the level of excitement in my life. The rational side of me knows that it's inappropriate to stretch for a higher return if it puts my savings at risk. And yet that side is at war with my emotions, which are shouting that investing is fun and rewarding and that I can look smart by doing it. And I justify an investing decision like that like crazy. That's when I know I'm making a dumb decision, when I am using my rational mind to think up justifications for my desires, instead of using my rational mind to question the root of my desires.

15% of $50,000 is $7,500. If I told my girlfriend that I just lost $7,500 in savings, she would kill me. If you decide to follow this path, then please make sure that it's the rational side of you that's calling for action. You might find the house you like sooner than you'd expect and a lot sooner than a market can come back and reward you for investing. It's not a life and death situation for sure, but it is one that can bring about discomfort, anxiety and relationship troubles. Make sure you and your wife both understand interest-rate risk.

- Tim
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Where to put house money?

Post by retiredjg »

What I am thinking is maybe putting 25k into VIPSX (inflation protected securities) and 25k into VFSTX (short term investment grade).
Have you considered the tax consequences of using these funds. Not that it would be huge, but why pay any tax at all?

Unless you have a reason you don't want a tax-exempt fund, you should take a look at those before making a final decision.

I know this is not the "right" answer, but my house money is sitting in intermediate term tax-exempt. So far, I'm pleased with the results. Of course, the right answer is cash/money market/ CD, but that is not what you are interested in.
Topic Author
joshburs84
Posts: 8
Joined: Sun Apr 28, 2013 11:30 am

Re: Where to put house money?

Post by joshburs84 »

Thanks for the replies guys, I really appreciate it. CD's and Money Market are out for me, I would rather take on the risk than lock that money away for several years to only make a few hundred dollars. Timboktoo has really given me some insight into my own motives for investing as well as what kind of investor I am and want to be, thanks for that.
I should mention that although this money is earmarked for a house it is very likely/inevitable that by the time we are ready to buy a home my wife and I prob. wont have to withdraw the full sum as our primary savings (after monthly investment contributions) will have grown. If I absolutely relied on this money I wouldn't invest it at all, or at least I would only use CD's.
I have one more question, maybe Retiredjg can answer for me, I looked at the intermediate tax exempt fund (VWITX) and it seems very much in line with my risk tolerance and I do like the tax free benefit. My question is, the dividends seem to be around 3 cents per share, if I had 50k worth of shares at current price that's around $100 per month, If I choose to NOT reinvest the dividends wouldn't the 2400 or so I would have after 2 years possibly cover a good portion of loss if the fund lost value? Am I wrong for thinking this? Thanks again

-Josh
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Where to put house money?

Post by Twins Fan »

So, this isn't really house money and isn't your primary savings? Well, nothing like asking a question that can't be answered, huh? :D

If you take the dividend each month and don't reinvest, sure you have $2400 sitting there that could offset a loss. But, you're missing out on more shares if you reinvest the dividend... meaning more dividend the next month, and more the next month, and so on. If the fund takes a loss while you own it, it takes a loss. But, get as many shares as you can to get the most out of the dividend.
Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Where to put house money?

Post by Professor Emeritus »

from an analytical point of view he wants to buy a security that tracks the price of relevant houses. e.g. a sort of "call option" on a house.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Where to put house money?

Post by grabiner »

I-Bonds track inflation, with the interest exempt from state tax, and the federal tax deferred until you sell. They can be redeemed after one year, although there is a penalty of three months' interest if you redeem them before five years.

The limit is $10K per person per year. If you do it this week, you and your wife can buy $10K each of I-Bonds, and then another $10K next week in 2014, for a total of $40K.
Wiki David Grabiner
User avatar
Ged
Posts: 3945
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Where to put house money?

Post by Ged »

joshburs84 wrote: I have one more question, maybe Retiredjg can answer for me, I looked at the intermediate tax exempt fund (VWITX) and it seems very much in line with my risk tolerance and I do like the tax free benefit. My question is, the dividends seem to be around 3 cents per share, if I had 50k worth of shares at current price that's around $100 per month, If I choose to NOT reinvest the dividends wouldn't the 2400 or so I would have after 2 years possibly cover a good portion of loss if the fund lost value? Am I wrong for thinking this? Thanks again

-Josh
VWITX has a duration of 5.36 years. That's about how long it would take to recoup a value change in the fund.
User avatar
Rainier
Posts: 1733
Joined: Thu Jun 14, 2012 5:59 am

Re: Where to put house money?

Post by Rainier »

I just sold $50k in stock and took some hefty gains to use in a home purchase or renovation in the next few years.

I have to pay tax and lost out on market gains, but I need to have $50k when the time comes. It's earning 85 bps at Ally.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Where to put house money?

Post by grabiner »

joshburs84 wrote: I have one more question, maybe Retiredjg can answer for me, I looked at the intermediate tax exempt fund (VWITX) and it seems very much in line with my risk tolerance and I do like the tax free benefit.
This is not an appropriate fund in a 15% bracket. It is exempt from the 15% federal tax but not the Hawaii state tax. If you do use an intermediate-term Vanguard fund, Intermediate-Term Investment Grade is better in your current tax bracket, as it is probably no more risky and has a higher after-tax yield.

However, I don't like either fund for your situation; it's not a good idea to hold a bond fund longer than its duration. If interest rates rise, the fund price will drop, and you won't hold the fund long enough to recover your losses with benefit from the new higher rate. Limited-Term Tax-Exempt and Short-Term Investment-Grade have lower yields but avoid most of this risk.
My question is, the dividends seem to be around 3 cents per share, if I had 50k worth of shares at current price that's around $100 per month, If I choose to NOT reinvest the dividends wouldn't the 2400 or so I would have after 2 years possibly cover a good portion of loss if the fund lost value?
If you withdraw from any account, whether you choose not to reinvest dividends or spend principal, you won't get the full growth. You can't treat the dividends as available spending money.
Wiki David Grabiner
BanditKing
Posts: 631
Joined: Tue Oct 29, 2013 11:11 pm

Re: Where to put house money?

Post by BanditKing »

If you aren't willing to do CDs or something else equally safe, how about Limited-term or Intermediate-term tax-exempt municipal funds? If one is available for your state, even better.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Where to put house money?

Post by retiredjg »

grabiner wrote:This is not an appropriate fund in a 15% bracket.
I don't understand.

I'd have to agree that conventional thinking says that tax-exempt funds are usually not necessary or a better choice in the 15% bracket. But that is not the same thing as "not appropriate". Also it is not always true, such as in the last year or two. Maybe that has changed - I'll have to look. But your comment of "not appropriate" has me a bit confused.
It is exempt from the 15% federal tax but not the Hawaii state tax.

Where do the 15% and Hawaii come in? Looking at past posts, I'd have to guess NYC and probably 25% (although this part is not entirely clear).
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Where to put house money?

Post by grabiner »

retiredjg wrote:
grabiner wrote:This is not an appropriate fund in a 15% bracket.
I don't understand.

I'd have to agree that conventional thinking says that tax-exempt funds are usually not necessary or a better choice in the 15% bracket. But that is not the same thing as "not appropriate". Also it is not always true, such as in the last year or two. Maybe that has changed - I'll have to look. But your comment of "not appropriate" has me a bit confused.
Municipal bonds are normally priced to break even with corporate bonds of comparable risk in a moderate tax bracket. If a municipal-bond fund has a yield 85% as high as that of a corporate-bond fund, this implies that the market perceives a greater risk in the municipal-bond fund.
It is exempt from the 15% federal tax but not the Hawaii state tax.

Where do the 15% and Hawaii come in? Looking at past posts, I'd have to guess NYC and probably 25% (although this part is not entirely clear).
I followed up on the wrong poster here; I was commenting somewhere else on an investor in Hawaii who was in a 15% federal bracket. If the original poster is in a 25% bracket and in New York City, then a municipal-bond fund makes sense, and a New York municipal-bond fund to avoid the 10% state and city tax makes even more sense.
Wiki David Grabiner
Topic Author
joshburs84
Posts: 8
Joined: Sun Apr 28, 2013 11:30 am

Re: Where to put house money?

Post by joshburs84 »

Thank you all for your replies and insight. After carefully weighing my willingness vs. actual need to take risk I have decided to put 30k into I-Bonds and 20k into a bond fund that I have not determined yet. I-Bonds were something that I knew existed but never looked into them, when grabiner mentioned them I did some research and it looks like a perfect vehicle for a house down payment, cant lose value and it has a fixed interest rate as well as a variable rate that changes with inflation but cannot reduce past zero in periods of deflation, it makes perfect sense for my situation.
For the 20k I could use a bit of guidance on where to put it, I am indeed in NYC and my tax rate is 25%, however NYC municipal bond fund (VNYTX) looks to be a bit too risky for what I'm interested in (vanguard assigns it a risk factor of 3). I like these two funds better, Short Term Investment Grade (VFSTX) and Limited Term Tax Exempt (VMLTX). Both of these funds seem to have relatively low risk and steady, slow growth, am I wrong in thinking that?
I feel like the more I learn about bonds, the more I'm learning about just how little I understand them :shock:
Thank you all again for your advice

Josh
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Where to put house money?

Post by retiredjg »

grabiner wrote: If the original poster is in a 25% bracket and in New York City, then a municipal-bond fund makes sense, and a New York municipal-bond fund to avoid the 10% state and city tax makes even more sense.
Now that makes sense to me. :D

The original poster has not indicated his tax bracket, but did mention in an earlier post a combined income that could easily put them in the 25% bracket. However, there's a new deduction that has recently arrived. :happy And tax-deferred investing is about to start (if I read it right), so it is not impossible for this couple to reach the 15% bracket, but I'm not counting on it.

I too was thinking of the NY tax exempt fund. The trouble with the NY muni bond fund is it has an average duration of 7.4 years and Vanguard lists it at a 3 on the 5 point risk scale. Sort of high risk for a bond fund in my opinion. So I'm thinking I would not put all the money there, but maybe some of it.

Josh, with an average duration of 7.4 years, if interest rates go up 1%, the value of your bond fund will go down about 7.4%. If rates go up another 1%, it happens again. I think we can all see interest rates going up eventually, maybe in the somewhat near future. So this loss of value should be considered a very real possibility.

Just as a side note, I think you are putting the cart before the horse a little. You are looking for a good fund, but you have skipped some of the basic steps you need to go through first (or so it appears). I mean this for both your house money and your retirement money.

Even if you don't post the info, I encourage you to go through all the steps necessary to post your portfolio for review (see link at the bottom of my post). You will learn an incredible amount by doing this. The work is well worth the effort. At that point, you can make much better choices about what investments to use for both the house money and the retirement money.

If you don't know how to figure your tax bracket, compare your taxable income (line 43 on your Form 1040) to this chart . Start with last year's return. When you have it ready, also use this year's return because of the new baby. Then throw in the reductions of taxable income that occurs when you use 401k/403b/etc. and see what happens.

You have already mastered the hardest part of this - the savings part. Now you just need to get headed into the right stuff and this should be pretty easy for you.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Where to put house money?

Post by retiredjg »

Josh, I see you posted while I was typing. I think your new plan is better than your old plan. Either of those funds would be appropriate in my opinion. Vanguard has a bond calculator that might help you decide which one.
Invest4Life2882
Posts: 56
Joined: Sun Dec 15, 2013 4:49 pm

Re: Where to put house money?

Post by Invest4Life2882 »

I have also considered doing this but with a smaller amount. For example, I have around 10k invested in a Roth IRA and would like to contribute up to 22k over the next two years and use this 22k as house money in a few years.

If a person was to have $25k or so in a Roth IRA with the intent to have the possibility to use it for a house what would you recommend? I have been reading about Wellesley and I think that might be a fairly safe investment. I know with that fund it only lost 9.2% in 2008's crash.

I am ok with possibly losing 9% if it means possibly getting 8-9%.
FinancialDave
Posts: 1819
Joined: Thu May 26, 2011 9:36 pm

Re: Where to put house money?

Post by FinancialDave »

joshburs84 wrote:Hello, I have 50k that I have set aside (separate from my investments) for a house that my wife and I plan to buy in approx. 2-3 years. I am comfortable taking some risk with this money and I can stomach around a 10-15% loss of principal. CD's just don't pay enough right now otherwise I'd be happy to use them. What I am thinking is maybe putting 25k into VIPSX (inflation protected securities) and 25k into VFSTX (short term investment grade). My overall goal for this money is to grow it enough to maybe buy a couple new appliances for the house when we do buy it.
I am curious as to what you all would do in my situation, bearing in mind my risk tolerance. Would do you think of my plan? Thanks in advance

Josh
I definitely would not invest in something that has lost almost 9% this year (VIPSX) and could do just as bad next year.

I might be ok with putting say $10k in VTSAX and the other $40k in the CD's that's one way to limit your total loss to something around 10%, but still give you some upside, if the market continues it's march upward. In this climate there is not a single bond I would feel safe in for the next two years. 1% in a savings account will probably do you better.

fd
I love simulated data. It turns the impossible into the possible!
FinancialDave
Posts: 1819
Joined: Thu May 26, 2011 9:36 pm

Re: Where to put house money?

Post by FinancialDave »

Invest4Life2882 wrote:I have also considered doing this but with a smaller amount. For example, I have around 10k invested in a Roth IRA and would like to contribute up to 22k over the next two years and use this 22k as house money in a few years.

If a person was to have $25k or so in a Roth IRA with the intent to have the possibility to use it for a house what would you recommend? I have been reading about Wellesley and I think that might be a fairly safe investment. I know with that fund it only lost 9.2% in 2008's crash.

I am ok with possibly losing 9% if it means possibly getting 8-9%.
Under this criteria, it also sounds like you would be very happy with a safe 1% return from a savings account. Just averaging your thinking -9 to +9, +1 sounds good!

Is $2k really going to improve your house fund all that much? And just why would you be doing this idea inside a Roth, this doesn't make a whole lot of sense to me. Roth's should be used for long term retirement savings not as a house fund - in most cases.



fd
I love simulated data. It turns the impossible into the possible!
Post Reply