5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

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zayd13
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5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by zayd13 » Sun May 31, 2015 2:34 pm

I'm 26.5 years old and plan on putting a down payment on a home by the time I'm around 28-29 years old. I have the full 5k that I'm going to put down right now and want to preserve it somewhere that is safe but will yield more than a typical savings account until it is time for me to call on it.

Would you recommend that I put it in a 2 year CD at 1.35% , or put it in a conservative mutual fund that could generate more profit over two years than just $135? The only thing I'm worried about with a conservative mutual fund is how I'll get taxed on dividends and how the dividends would count towards my AGI during tax time. That's probably not a huge deal since I'm just barely into the 25% tax bracket, but nevertheless, that's why I came here - to hear people's experienced opinions.


Ahead of time here is some information that may help you help me/that people would probably ask me :

-I recently purchased and maxed out a Roth IRA account with 5.5k (81% of that in a Target Date, 19% STAR fund)
-I recently purchased 3k of the VSTMX index fund in a taxable account for long term general wealth building purposes.
-I have 5 months of expenses saved in a regular savings account.
-The only debt I have is ~2.5k on a low interest auto loan. In September that would make it a year that I have been paying down on this loan and I want to continue to pay it into the second year even though I have the cash because I need to keep building my credit history.
-The 5k I speak of is in addition to these items listed above.


Thanks in advance for all of your help and any advice! I'm still young and trying to get the hang of how this stuff works and how to make it work for my life goals.

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Noobvestor
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Re: 5k for a home down payment in 2 years: should I do a CD or a conservative mutual fund (i.e., VGCSX)?

Post by Noobvestor » Sun May 31, 2015 2:53 pm

I'm pretty sure the ticker you listed isn't an actual fund. I'm also pretty sure that no fund is conservative enough to make sense for a two-year investment. Just look at the fund's history and see what the maximum drop was - if it's a bond fund it might only be 5-10%, a stock fund probably 30-60%, but either way do you want cash you need to potentially drop that much right before you need it? Go with the CD.
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Re: 5k for a home down payment in 2 years: should I do a CD or a conservative mutual fund (i.e., VGCSX)?

Post by ruralavalon » Sun May 31, 2015 3:03 pm

Noobvestor wrote:I'm pretty sure the ticker you listed isn't an actual fund. I'm also pretty sure that no fund is conservative enough to make sense for a two-year investment. Just look at the fund's history and see what the maximum drop was - if it's a bond fund it might only be 5-10%, a stock fund probably 30-60%, but either way do you want cash you need to potentially drop that much right before you need it? Go with the CD.

+ 1. Stick with the 2 year CD.
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PhysicsTeacher
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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by PhysicsTeacher » Sun May 31, 2015 3:03 pm

How comfortable would you be with losing a significant fraction of the 5k? There's no guarantee that any mutual fund you select will not drop in value over the next two years.

Also, how have you a arrived at $5k as the amount of your eventual down payment? How much do you expect a house to cost?

zayd13
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Re: 5k for a home down payment in 2 years: should I do a CD or a conservative mutual fund (i.e., VSCGX)?

Post by zayd13 » Sun May 31, 2015 3:03 pm

Noobvestor wrote:I'm pretty sure the ticker you listed isn't an actual fund. I'm also pretty sure that no fund is conservative enough to make sense for a two-year investment. Just look at the fund's history and see what the maximum drop was - if it's a bond fund it might only be 5-10%, a stock fund probably 30-60%, but either way do you want cash you need to potentially drop that much right before you need it? Go with the CD.


Woops! I meant VSCGX - Vanguard LifeStrategy Conservative Growth Fund.

zayd13
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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by zayd13 » Sun May 31, 2015 3:09 pm

PhysicsTeacher wrote:How comfortable would you be with losing a significant fraction of the 5k? There's no guarantee that any mutual fund you select will not drop in value over the next two years.

Also, how have you a arrived at $5k as the amount of your eventual down payment? How much do you expect a house to cost?



Well, I figure with my income that I'll be able to afford a house anywhere in the 90k-105k range in two years. 5k can serve as anywhere between 4.8-5.5% down payment. Of course, the higher the down payment the better - so that I can avoid too much mortgage insurance payments - but even as little as a 5% down payment is a start to me. What are your opinions? Again, I'm just hear to gather people's thoughts. Still kind of new to the whole pllanning my financial life out- thing. lol.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by sport » Sun May 31, 2015 3:13 pm

zayd13 wrote:The only thing I'm worried about with a conservative mutual fund is how I'll get taxed on dividends and how the dividends would count towards my AGI during tax time.

You should be more worried about the conservative mutual fund going down in value instead of up over the next 2 years. I would suggest putting the money in a CD.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by PhysicsTeacher » Sun May 31, 2015 3:33 pm

zayd13 wrote:Well, I figure with my income that I'll be able to afford a house anywhere in the 90k-105k range in two years. 5k can serve as anywhere between 4.8-5.5% down payment.


I'm twenty eight, saving for a house myself, and am far from an expert on finances yet. However, I did start my investing life in 2008 so I am well aware of what it feels like to see markets drop, and I would not be comfortable with puting money I will need in two years in a mutal fund.

I take it you are in a low cost of living area then. (I am too.) Have you looked at real estate websites at all to get a feel for whether there are good options available in your price range? Personally, I'm seeking to amass a bigger down payment and am shooting for 20% to avoid PMI entirely. Even if you don't want to do a big down payment, you will need to factor in closing costs and moving expenses, and 3.5% seems to be the bare minimum down payment to qualify for FHA programs. So you are off to a good start, but I wouldn't assume $5,000 is plenty.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by LadyGeek » Sun May 31, 2015 4:01 pm

zayd13 - You had a duplicate thread going in the personal finance forum. I merged the thread into here. The combined thread is in the Investing - Help with Personal Investments forum. I also removed your duplicate post.
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zayd13
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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by zayd13 » Sun May 31, 2015 4:34 pm

PhysicsTeacher wrote:
zayd13 wrote:Well, I figure with my income that I'll be able to afford a house anywhere in the 90k-105k range in two years. 5k can serve as anywhere between 4.8-5.5% down payment.


I'm twenty eight, saving for a house myself, and am far from an expert on finances yet. However, I did start my investing life in 2008 so I am well aware of what it feels like to see markets drop, and I would not be comfortable with puting money I will need in two years in a mutal fund.

I take it you are in a low cost of living area then. (I am too.) Have you looked at real estate websites at all to get a feel for whether there are good options available in your price range? Personally, I'm seeking to amass a bigger down payment and am shooting for 20% to avoid PMI entirely. Even if you don't want to do a big down payment, you will need to factor in closing costs and moving expenses, and 3.5% seems to be the bare minimum down payment to qualify for FHA programs. So you are off to a good start, but I wouldn't assume $5,000 is plenty.





I live in Columbus, OH, where the cost of living is pretty low in comparison to similar-sized cities. I've looked at some houses in this region and figured for my first house that 90-105k would be a good range. I totally get what you're saying though, in terms of the benefits of a higher down payment. I do have to factor moving expenses and closing costs. Also, a mutual fund, even a conservative one, is pretty risky if I'll need the money in 2-3 years the more that I look at it. I guess maybe I should keep saving up until I have a bigger down payment price (closer to 10k) before I consider putting anything into a CD for those purposes. I guess my dilemma was wanting to set money aside for this purpose, but also wanting the option to grow this money more than I would if it sat in a regular savings.

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Re: 5k for a home down payment in 2 years: should I do a CD or a conservative mutual fund (i.e., VSCGX)?

Post by ruralavalon » Sun May 31, 2015 4:41 pm

zayd13 wrote:
Noobvestor wrote:I'm pretty sure the ticker you listed isn't an actual fund. I'm also pretty sure that no fund is conservative enough to make sense for a two-year investment. Just look at the fund's history and see what the maximum drop was - if it's a bond fund it might only be 5-10%, a stock fund probably 30-60%, but either way do you want cash you need to potentially drop that much right before you need it? Go with the CD.


Woops! I meant VSCGX - Vanguard LifeStrategy Conservative Growth Fund.

I still think that a CD is your best choice to hold down payment money for a home you want to buy in a few years. It sounds like you intend saving more for a down payment, I think that's wise.
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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by LadyGeek » Sun May 31, 2015 5:52 pm

zayd13 wrote: I have the full 5k that I'm going to put down right now and want to preserve it somewhere that is safe but will yield more than a typical savings account until it is time for me to call on it.

zayd13 - Take a look in the wiki, as you need to be aware of a very important concept: Financial planning (Implement the plan)

Wiki wrote:1. Investment goals. The investment objectives (what the money is for) and time horizon (when you will need it) define the securities used to create the investment portfolio. For example, you should not purchase a 5 year CD when you need the money in 3 years. [note 1]

Note 1: Investment authorities commonly advise investors with goals coming due within five years to restrict investments to short term instruments such as bank CDs, money market funds, and short term treasury securities that all mature by the time the funds are needed. Longer term goals can include asset classes that fluctuate in price.

A balanced fund, such as the Vanguard LifeStrategy Conservative Growth Fund (VSCGX) does not align with these goals. Stick with a CD that matures just before you need the money.

Don't forget about taxes. A CD will pay interest and not lose any principal. A balanced fund will incur long- and short-term capital gains along with taxes on any realized gains.* Hopefully, you won't be taking a loss with this fund - there's no guarantee what it will do.

(I fixed the thread title. You can change it again by editing the Subject: line in Post #1.)

* Realized means you really did sell it. Unrealized means that you really didn't sell it. Don't ask, that's how I learned what realized and unrealized gains or losses meant.
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zayd13
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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by zayd13 » Sun May 31, 2015 6:30 pm

LadyGeek wrote:
zayd13 wrote: I have the full 5k that I'm going to put down right now and want to preserve it somewhere that is safe but will yield more than a typical savings account until it is time for me to call on it.

zayd13 - Take a look in the wiki, as you need to be aware of a very important concept: Financial planning (Implement the plan)

Wiki wrote:1. Investment goals. The investment objectives (what the money is for) and time horizon (when you will need it) define the securities used to create the investment portfolio. For example, you should not purchase a 5 year CD when you need the money in 3 years. [note 1]

Note 1: Investment authorities commonly advise investors with goals coming due within five years to restrict investments to short term instruments such as bank CDs, money market funds, and short term treasury securities that all mature by the time the funds are needed. Longer term goals can include asset classes that fluctuate in price.

A balanced fund, such as the Vanguard LifeStrategy Conservative Growth Fund (VSCGX) does not align with these goals. Stick with a CD that matures just before you need the money.

Don't forget about taxes. A CD will pay interest and not lose any principal. A balanced fund will incur long- and short-term capital gains along with taxes on any realized gains.* Hopefully, you won't be taking a loss with this fund - there's no guarantee what it will do.

(I fixed the thread title. You can change it again by editing the Subject: line in Post #1.)

* Realized means you really did sell it. Unrealized means that you really didn't sell it. Don't ask, that's how I learned what realized and unrealized gains or losses meant.




LadyGeek thank you so much for this info and your insight. The more I've thought about it, I think I'll continue to build my down payment savings to about 10k first, and then put it into a CD or MMF.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by acejacksingh » Sun May 31, 2015 6:46 pm

If you have to do a mutual fund go with VWITX (that's where my down payment is siting, FYSA I'm 26 too).

I think a CD is the best option since you only have 5k.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by PhysicsTeacher » Sun May 31, 2015 7:54 pm

There's no reason you can't put your $5k in a cd now, and then get another cd when you have more saved.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by chessmannextmove » Sun May 31, 2015 8:02 pm

Try to save 20% of the down payment.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VGCSX)?

Post by Thrifty Femme » Sun May 31, 2015 8:05 pm

zayd13 wrote:I live in Columbus, OH, where the cost of living is pretty low in comparison to similar-sized cities. I've looked at some houses in this region and figured for my first house that 90-105k would be a good range. I totally get what you're saying though, in terms of the benefits of a higher down payment. I do have to factor moving expenses and closing costs. Also, a mutual fund, even a conservative one, is pretty risky if I'll need the money in 2-3 years the more that I look at it. I guess maybe I should keep saving up until I have a bigger down payment price (closer to 10k) before I consider putting anything into a CD for those purposes. I guess my dilemma was wanting to set money aside for this purpose, but also wanting the option to grow this money more than I would if it sat in a regular savings.


Hello fellow Buckeye! Have you determined a target area of the city and run the numbers on renting vs buying? Have you considered what annual home maintenance (random stuff braking, mulch, maintaining the grass, cleaning the gutters, snow removal, utilities, etc.) will cost? Have you thought about the impact on your commute to work? I suggest you pretend you have are a homeowner and put the difference between your rent and monthly household expenses (principle + interest + property taxes + insurance + estimated home maintenance) into savings.

What type of emergency fund to you have? Tell us about the rest of your financial situation.

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Re: 5k for a home down payment in 2 years: CD or conservative mutual fund (i.e., VSCGX)?

Post by berg » Sun May 31, 2015 10:03 pm

If it's two years, a CD for sure. Especially with that little money. Imagine a great investment that did 10% for the next two years. You'd net out with $6000. Is that going to make or break your home purchase? If it would, you probably weren't ready to buy.

Personally, that number sounds too low to me. Even in a low cost of living area, the cost of owning a home can add up fast and I wouldn't feel comfortable with some more savings for both home DP and General savings.

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