Options for Saving for a First-Home Down Payment

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sapphire96
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Options for Saving for a First-Home Down Payment

Postby sapphire96 » Fri Jun 16, 2017 8:43 pm

Hello Bogleheads! This is my first post in the community and I have to say I am glad I found an active finance forum.

Situation: I am a rising senior in college, working a well-paying job that will transition to full-time work after graduation in Spring 2018. I have 6 months of cash in the bank for emergencies. I am trying to save $20,000 over the next 2 to 3 years so I can have a down payment for a first-time home.

I am struggling between the pros and cons of the many short-term investments options available...
-- Ally Bank Online Savings, 1.05% APY, as liquid as you can get.
-- Ally Bank 2-Year Raise-Your-Rate CD, 1.5% APY (if rates rise, I can raise my rate once during the term; 60 day interest early withdrawal penalty).
-- Vanguard Short-Term Investment-Grade Fund (VFSTX), personal expectation of 1.75-2% average yearly return. Small NAV fluctuations. I can always withdraw the funds at any time and have it in my bank account within a week.
-- I-Savings Bonds, personal expectation of 0.50-2% average yearly return depending on inflation.
-- 2-Year Treasury Bond, current yield of 1.28%.

Thanks everyone in advance!

randomguy
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Re: Options for Saving for a First-Home Down Payment

Postby randomguy » Fri Jun 16, 2017 8:54 pm

It doesn't matter. You are talking small amounts of money and figuring out the winner is requires a bunch of guesses. I would probably not do CDs or i-savings, or treasury bonds just because it is a pain to add money to them. You don't want to end up with 10+ CDs with various maturities. I would probably do the vanguard fund but the online savings account would work fine also.

mega317
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Re: Options for Saving for a First-Home Down Payment

Postby mega317 » Fri Jun 16, 2017 11:00 pm

You could do a little of each and learn how they work and how they affect your taxes.

itstoomuch
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Re: Options for Saving for a First-Home Down Payment

Postby itstoomuch » Fri Jun 16, 2017 11:39 pm

so, what is your career?
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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whodidntante
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Re: Options for Saving for a First-Home Down Payment

Postby whodidntante » Sat Jun 17, 2017 1:44 am

Welcome to the forum. I am glad you are here. I always like to see a person get a handle on their life and their finances.

If you do the math on any of those investment scenarios, you'll find it doesn't matter much. So pick the one you like. Feel free to ignore this next bit because you didn't ask, but I suggest you remain open to the idea of renting for a while, and possibly moving to another city. I would consider using parting of it buy stocks and fund a Roth IRA because you just don't know.

runner540
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Re: Options for Saving for a First-Home Down Payment

Postby runner540 » Sat Jun 17, 2017 9:19 am

whodidntante wrote:Welcome to the forum. I am glad you are here. I always like to see a person get a handle on their life and their finances.

If you do the math on any of those investment scenarios, you'll find it doesn't matter much. So pick the one you like. Feel free to ignore this next bit because you didn't ask, but I suggest you remain open to the idea of renting for a while, and possibly moving to another city. I would consider using parting of it buy stocks and fund a Roth IRA because you just don't know.


+1 This is good advice - get out of school, start working and see where life goes before you commit to a house. In the meantime, it's always a good idea to be saving money.

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Watty
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Re: Options for Saving for a First-Home Down Payment

Postby Watty » Sat Jun 17, 2017 9:26 am

It is a little bit different but some people use a Roth as their emergency fund if you would not be fully funding a Roth.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

If you are in your early 20's I would be cautious about buying a home until you are more settled in your life and career.

Several times I have seen job offers and promotions go to the person who would relocate the easiest. In one case there was an unexpected urgent opening and that promotion into management went to the person who could be in a different city the next Monday to start on the job. He flew back a few weeks later to move his stuff out of his apartment. There were other more qualified people but they could not relocate easily. I doubt that many of the other qualified people were able to ever get into management.

I was once able to relocate to a desirable city that I wanted to move to with a company that did not have a relocation budget. My relocation costs were basicly a u-Haul truck and a few nights in hotels.

Even if you stay in the same city getting your next job on the other side of town could leave with with a terrible commute from a home you purchase. A few years from now you could have a great job offer on the other side of town that you would be reluctant to accept because you are tied down to your house.

It varies by the field but many people will change jobs a couple of time in their first ten years out of college.

Owning a home also demands a lot of time and when you are in your mid 20's and likely single there are a lot of that you can do in the evenings, weekends, and vacations that will be harder to do when you are married someday and have a couple of kids. Don't underestimate how much time owning a home takes.

It varies with the type of home you are looking at but renting a nice apartment or townhouse would likely be a big step up from your college living situation and cost a lot less than owning a home too. If you rented for five years before buying a home you could save a lot in the right situation. If you are looking at buying a "starter" home that you are planning on upgrading from later on then renting longer could allow you to skip the "starter" home. Selling and buying a different home can easily cost you 10% of the home price.

If you are single and get married later then your future husband or wife might not want to live in your house especially if you have lived there with a prior boyfriend or girlfirend.

sapphire96
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Re: Options for Saving for a First-Home Down Payment

Postby sapphire96 » Sat Jun 17, 2017 1:22 pm

randomguy wrote:It doesn't matter. You are talking small amounts of money and figuring out the winner is requires a bunch of guesses. I would probably not do CDs or i-savings, or treasury bonds just because it is a pain to add money to them. You don't want to end up with 10+ CDs with various maturities. I would probably do the vanguard fund but the online savings account would work fine also.


Honestly that is what I am thinking. I like the VFSTX option the best. Thank you!

sapphire96
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Re: Options for Saving for a First-Home Down Payment

Postby sapphire96 » Sat Jun 17, 2017 1:25 pm

itstoomuch wrote:so, what is your career?


Double major in finance and accounting... I am working in the financial services industry.

retiredjg
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Re: Options for Saving for a First-Home Down Payment

Postby retiredjg » Sat Jun 17, 2017 1:36 pm

If you are considering short term bonds, you'll need to have an idea of what your tax bracket will be during the period of savings. In a higher bracket (28% or higher and maybe 25% as well) you should prefer a tax-exempt bond.

I'd vote for a combo of high interest savings, CDs, and short term bonds.

sapphire96
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Re: Options for Saving for a First-Home Down Payment

Postby sapphire96 » Sat Jun 17, 2017 1:46 pm

runner540 wrote:
whodidntante wrote:Welcome to the forum. I am glad you are here. I always like to see a person get a handle on their life and their finances.

If you do the math on any of those investment scenarios, you'll find it doesn't matter much. So pick the one you like. Feel free to ignore this next bit because you didn't ask, but I suggest you remain open to the idea of renting for a while, and possibly moving to another city. I would consider using parting of it buy stocks and fund a Roth IRA because you just don't know.


+1 This is good advice - get out of school, start working and see where life goes before you commit to a house. In the meantime, it's always a good idea to be saving money.


Thank you!

PS: I have been funding a Roth IRA as the start of my retirement fund. :D :moneybag

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Hawaiishrimp
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Re: Options for Saving for a First-Home Down Payment

Postby Hawaiishrimp » Sat Jun 17, 2017 2:04 pm

I will fund & max the ROTH first. Then, the rest will go to any high yield CD. If a good house come by, I can always it out from the CD.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

sapphire96
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Re: Options for Saving for a First-Home Down Payment

Postby sapphire96 » Sat Jun 17, 2017 3:03 pm

retiredjg wrote:If you are considering short term bonds, you'll need to have an idea of what your tax bracket will be during the period of savings. In a higher bracket (28% or higher and maybe 25% as well) you should prefer a tax-exempt bond.

I'd vote for a combo of high interest savings, CDs, and short term bonds.


My tax bracket will likely increase over the next few years, so I will definitely look into this. Thank you!

sapphire96
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Re: Options for Saving for a First-Home Down Payment

Postby sapphire96 » Sat Jun 17, 2017 3:05 pm

Hawaiishrimp wrote:I will fund & max the ROTH first. Then, the rest will go to any high yield CD. If a good house come by, I can always it out from the CD.


I am contributing to a Roth for the purposes of retirement... I am planning on maxing it out.

sapphire96
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Re: Options for Saving for a First-Home Down Payment

Postby sapphire96 » Sat Jun 17, 2017 3:14 pm

Watty wrote:It is a little bit different but some people use a Roth as their emergency fund if you would not be fully funding a Roth.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

If you are in your early 20's I would be cautious about buying a home until you are more settled in your life and career.

Several times I have seen job offers and promotions go to the person who would relocate the easiest. In one case there was an unexpected urgent opening and that promotion into management went to the person who could be in a different city the next Monday to start on the job. He flew back a few weeks later to move his stuff out of his apartment. There were other more qualified people but they could not relocate easily. I doubt that many of the other qualified people were able to ever get into management.

I was once able to relocate to a desirable city that I wanted to move to with a company that did not have a relocation budget. My relocation costs were basicly a u-Haul truck and a few nights in hotels.

Even if you stay in the same city getting your next job on the other side of town could leave with with a terrible commute from a home you purchase. A few years from now you could have a great job offer on the other side of town that you would be reluctant to accept because you are tied down to your house.

It varies by the field but many people will change jobs a couple of time in their first ten years out of college.

Owning a home also demands a lot of time and when you are in your mid 20's and likely single there are a lot of that you can do in the evenings, weekends, and vacations that will be harder to do when you are married someday and have a couple of kids. Don't underestimate how much time owning a home takes.

It varies with the type of home you are looking at but renting a nice apartment or townhouse would likely be a big step up from your college living situation and cost a lot less than owning a home too. If you rented for five years before buying a home you could save a lot in the right situation. If you are looking at buying a "starter" home that you are planning on upgrading from later on then renting longer could allow you to skip the "starter" home. Selling and buying a different home can easily cost you 10% of the home price.

If you are single and get married later then your future husband or wife might not want to live in your house especially if you have lived there with a prior boyfriend or girlfirend.


That's a valid point. My finance professor recommended I find a duplex, live in one half and rent out the other. Realistically, it will probably be 3 years+ before I will own a home or start the search for one, so my career's direction could easily shift.

aristotelian
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Re: Options for Saving for a First-Home Down Payment

Postby aristotelian » Sat Jun 17, 2017 4:10 pm

I would do I-Bonds $10k/year and any extra in VFSTX. In fact, that is what I do for my emergency fund, although I use VCSH (Short Term Corporate ETF).

itstoomuch
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Re: Options for Saving for a First-Home Down Payment

Postby itstoomuch » Sat Jun 17, 2017 7:13 pm

sapphire96 wrote:
randomguy wrote:It doesn't matter. You are talking small amounts of money and figuring out the winner is requires a bunch of guesses. I would probably not do CDs or i-savings, or treasury bonds just because it is a pain to add money to them. You don't want to end up with 10+ CDs with various maturities. I would probably do the vanguard fund but the online savings account would work fine also.


Honestly that is what I am thinking. I like the VFSTX option the best. Thank you!

Since you are in finance and accounting, you can understand why? :?:
My son did VTI and a couple of stocks. Can you explain why ? :?:
Good training exercise :moneybag
Ymmv :greedy
Last edited by itstoomuch on Sat Jun 17, 2017 7:50 pm, edited 1 time in total.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

TheJoker
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Re: Options for Saving for a First-Home Down Payment

Postby TheJoker » Sat Jun 17, 2017 7:38 pm

Buy a home or condo as soon as you can and lock in that mortgage (rent) payment for 30 years because rents increase 3-4% per year (long term). And sale prices increase at least that much over the long run.

You will also put the interest deduction on schedule A. Rent as you know is not a deduction.


former CPA (retired). The Joker

pasadena
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Re: Options for Saving for a First-Home Down Payment

Postby pasadena » Sat Jun 17, 2017 8:33 pm

Hawaiishrimp wrote:I will fund & max the ROTH first. Then, the rest will go to any high yield CD. If a good house come by, I can always it out from the CD.


Unless you already have money, a CD might not work - you have to fund it and leave it. You can't add money to an existing CD

aristotelian
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Re: Options for Saving for a First-Home Down Payment

Postby aristotelian » Sat Jun 17, 2017 8:44 pm

pasadena wrote:
Hawaiishrimp wrote:I will fund & max the ROTH first. Then, the rest will go to any high yield CD. If a good house come by, I can always it out from the CD.


Unless you already have money, a CD might not work - you have to fund it and leave it. You can't add money to an existing CD


No but you can do a "ladder" of multiple CDs.

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gmtret
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Re: Options for Saving for a First-Home Down Payment

Postby gmtret » Sun Jun 18, 2017 3:06 am

pasadena wrote:
Hawaiishrimp wrote:I will fund & max the ROTH first. Then, the rest will go to any high yield CD. If a good house come by, I can always it out from the CD.


Unless you already have money, a CD might not work - you have to fund it and leave it. c


I totally disagree with the "You can't add money to an existing CD" point. I currently hold CDs at NFCU, and with a few qualifiers, can add money to existing CDs.
"The most beautiful thing we can experience is the mysterious. It is the source of all true art and science." | - Albert Einstein

pasadena
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Re: Options for Saving for a First-Home Down Payment

Postby pasadena » Sun Jun 18, 2017 9:02 am

gmtret wrote:
pasadena wrote:
Hawaiishrimp wrote:I will fund & max the ROTH first. Then, the rest will go to any high yield CD. If a good house come by, I can always it out from the CD.


Unless you already have money, a CD might not work - you have to fund it and leave it. c


I totally disagree with the "You can't add money to an existing CD" point. I currently hold CDs at NFCU, and with a few qualifiers, can add money to existing CDs.


Well, thanks for the info. All the CDs I have seen (all online) have that restriction. It's good to know some do not. I guess the point is for OP to make sure he checks that when choosing his strategy.

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blaugranamd
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Re: Options for Saving for a First-Home Down Payment

Postby blaugranamd » Sun Jun 18, 2017 10:20 am

1-3% compounded over 2-3 years with a savings rate to give you $20k during that time is gonna amount to a few hundred dollars with less than a few hundreds in differences between the options. You're obsessing over vehicles that will, at best, net you an extra $100-300 dollars before you have to hand that money over to a bank, which is pretty negligible. Pick the safest option for your principle that also doesn't add extra complexity: savings account.
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

itstoomuch
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Re: Options for Saving for a First-Home Down Payment

Postby itstoomuch » Sun Jun 18, 2017 10:53 am

TheJoker wrote:Buy a home or condo as soon as you can and lock in that mortgage (rent) payment for 30 years because rents increase 3-4% per year (long term). And sale prices increase at least that much over the long run.
You will also put the interest deduction on schedule A. Rent as you know is not a deduction.
former CPA (retired). The Joker


And in Seattle area, home prices are increasing at 10-12%/a.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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Hawaiishrimp
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Re: Options for Saving for a First-Home Down Payment

Postby Hawaiishrimp » Sun Jun 18, 2017 12:26 pm

Just open new CD once you have the minimum amount, my point is: pick something safe and easy to take out.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Meaty
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Re: Options for Saving for a First-Home Down Payment

Postby Meaty » Mon Jun 19, 2017 5:51 am

Watty wrote:It is a little bit different but some people use a Roth as their emergency fund if you would not be fully funding a Roth.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

If you are in your early 20's I would be cautious about buying a home until you are more settled in your life and career.

Several times I have seen job offers and promotions go to the person who would relocate the easiest. In one case there was an unexpected urgent opening and that promotion into management went to the person who could be in a different city the next Monday to start on the job. He flew back a few weeks later to move his stuff out of his apartment. There were other more qualified people but they could not relocate easily. I doubt that many of the other qualified people were able to ever get into management.

I was once able to relocate to a desirable city that I wanted to move to with a company that did not have a relocation budget. My relocation costs were basicly a u-Haul truck and a few nights in hotels.

Even if you stay in the same city getting your next job on the other side of town could leave with with a terrible commute from a home you purchase. A few years from now you could have a great job offer on the other side of town that you would be reluctant to accept because you are tied down to your house.

It varies by the field but many people will change jobs a couple of time in their first ten years out of college.

Owning a home also demands a lot of time and when you are in your mid 20's and likely single there are a lot of that you can do in the evenings, weekends, and vacations that will be harder to do when you are married someday and have a couple of kids. Don't underestimate how much time owning a home takes.

It varies with the type of home you are looking at but renting a nice apartment or townhouse would likely be a big step up from your college living situation and cost a lot less than owning a home too. If you rented for five years before buying a home you could save a lot in the right situation. If you are looking at buying a "starter" home that you are planning on upgrading from later on then renting longer could allow you to skip the "starter" home. Selling and buying a different home can easily cost you 10% of the home price.

If you are single and get married later then your future husband or wife might not want to live in your house especially if you have lived there with a prior boyfriend or girlfirend.


+1. I moved numerous times early in my career which paid off in a huge way. I'd recommend you stay a renter for the first 5 years
"Discipline equals Freedom" - Jocko Willink


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