Home Down Payment - Where to Save?

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chomsky81
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Home Down Payment - Where to Save?

Post by chomsky81 » Mon Dec 03, 2018 11:02 am

Bogleheads,

What are some of the strategies/perspectives you take or advice you'd give to those looking to store money for a house down payment. Personally, I am hoping to be in a position to buy a home (get married/have kids etc.) - though if I remain single throughout my life I don't think i'd buy and use the savings as investments for retirement and traveling, etc.

Thoughts on credit union money market (1.75% APY) vs. bonds vs. CD or a combo of all, etc?

Let's say I'm saving $80,000 what would be some of the best ways to allocate that savings?
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

SpaceMonkey
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Re: Home Down Payment - Where to Save?

Post by SpaceMonkey » Mon Dec 03, 2018 11:25 am

The traditional recommendation is to save it in something that has no or minimal risk of losing nominal value -- so high yield savings account, money market fund, CDs, etc. But that's typically geared toward someone for whom a downpayment is a known, upcoming requirement.

For your situation:

"I am hoping to be in a position to buy a home (get married/have kids etc.) - though if I remain single throughout my life I don't think i'd buy" and use the savings as investments for retirement and traveling, etc."

You could consider investing everything according to your overall allocation. If you decided to sell funds from your taxable account(s) to pay for a downpayment, you would rebalance in your tax-advantaged accounts. If your timeline is flexible as you say, you can put off looking to buy if the stock market is down. If your timeline becomes less flexible (get married/have kids etc.) you can adjust your allocation and/or start saving cash.

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Mon Dec 03, 2018 11:42 am

Thanks! I had thought about that but then, again, these variables regarding having a family/etc. aren't predictable at the moment and the market could have a appreciable correction in the next 2-5 years, which would hurt my position more than if I was in safer vehicles. Make sense?

I'd like to take $80,000 and put that in safe vehicles. I am currently in a credit union and could transfer those vanguard funds to an account getting 1.75%. I could also transfer it to Ally Bank, etc., which is giving 2% currently and I believe they're FDIC insured. As far as I know they're not taxable, are money market accounts or just funds, taxable?

Would it make sense to do the following:

A. Put all $80,000 in a savings account like my 1.75 or Ally Bank's 2.0?
B. Put $40,000 in a savings account, $20,000 in a bank CD, $20,000 in a money market?
C. ???
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

RickBoglehead
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Re: Home Down Payment - Where to Save?

Post by RickBoglehead » Mon Dec 03, 2018 11:44 am

Right.

And think about what you asked in your post. Money Market vs CD for example. That would depend on returns, and your timing. Since you currently have no timing, if you didn't want to take market risk (bad idea IMO), you'd probably want to take the best return you could get, remembering that CDs can always be terminated early with penalty. Do a CD ladder for example, and keep revolving it until your timeline becomes more known.

Edit - Vanguard is actually over 2.2% in Vanguard Prime Money Market.

Your B scenario makes no sense to me. What's the difference between a savings account and a money market account in terms of risk, or return?

And everything you listed is taxable, unless it's a state-tax-free fund.

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Mon Dec 03, 2018 11:50 am

I see,

Are you seeing that taking market risk is a bad move or that me avoiding the market is bad? I could also apportion some of that down payment money to index funds in a non-retirement brokerage account at Vanguard.

I see - so they're all taxable regardless of where I keep it? In that case finding the highest safe yield makes sense. Vanguard Prime Money Market probably makes more send than my bank and others? I should probably put the bulk in the VPMM. I'll go as far as to say it is probably silly then to keep the money I have in my banks 1.75% money market and put it all in Vanguards VPMM along with the other cash I now have from selling stocks.
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Mon Dec 03, 2018 8:27 pm

What funds would you recommend I roll these into?
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

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unclescrooge
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Re: Home Down Payment - Where to Save?

Post by unclescrooge » Mon Dec 03, 2018 10:38 pm

chomsky81 wrote:
Mon Dec 03, 2018 11:02 am
Bogleheads,

What are some of the strategies/perspectives you take or advice you'd give to those looking to store money for a house down payment. Personally, I am hoping to be in a position to buy a home (get married/have kids etc.) - though if I remain single throughout my life I don't think i'd buy and use the savings as investments for retirement and traveling, etc.

Thoughts on credit union money market (1.75% APY) vs. bonds vs. CD or a combo of all, etc?

Let's say I'm saving $80,000 what would be some of the best ways to allocate that savings?
What is your time frame? If under 5 years, then Muni bonds.
If more than 5 years, then I'd add in some stock.

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Tue Dec 04, 2018 6:55 am

thanks,

What are the advantages of Municipal Bond funds over Vanguard MM or FDIC insured bank MM/CDs? What are the cons?
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

friuli_croatan
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Re: Home Down Payment - Where to Save?

Post by friuli_croatan » Tue Dec 04, 2018 7:19 am

I am a one year boglehead newbie but I am currently doing the ally savings and no penalty CD. I will soon begin to do the ladder method once I determine if I will extend my timeline.

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Tue Dec 04, 2018 8:47 am

That's what I am going to look into. I noticed that when I liquidated my individual stocks I don't have access to the money but I think I saw someone mention it takes 7 days for those funds to be available for use.

Is there any reason not to use Ally?
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

guitarman555
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Re: Home Down Payment - Where to Save?

Post by guitarman555 » Tue Dec 04, 2018 9:32 am

CIT Bank has a "savings builder" money market account that's paying 2.25 percent if you either, maintain a 25k balance, or deposit 100 a month.

SelfEmployed123
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Re: Home Down Payment - Where to Save?

Post by SelfEmployed123 » Tue Dec 04, 2018 10:49 am

I'm a big fan of Vanguard's Treasury Money Market Fund (VUSXX). It is 100% invested in short-term T-Bills. The share price is pegged to $1. It has less risk than the Vanguard Prime Money Market due to all debt being held with Uncle Sam. The yield is slightly lower than Prime Money Market, but at certain tax brackets the difference in yield between the two is minimal due to being exempt from state income taxes. Biggest drawback is the $50k minimum.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Tue Dec 04, 2018 12:35 pm

VUSXX and the VMXX funds seem like a good place to park down payment money. I'm struggling trying to make a decisions as to whether or not to park all my money there, all of it in a ladder CD/regular CD, or put some in both. This is my own neurosis playing itself out but I am a bit cautious - that may mean I'd feel better in an FDIC insured account that yields a little less than those funds? Thanks for all the perspectives and thoughts!
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

ryman554
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Re: Home Down Payment - Where to Save?

Post by ryman554 » Tue Dec 04, 2018 1:40 pm

The OP may or may not be buying a house in the near future.

Therefore, the OP should be putting extra money in equities for the long term.

When the details of OP's life clarifies to the point where purchasing a house (or have anything else major) is in the immediate future, then the OP should be moving those funds to something safer.

Am I missing anything?

chomsky81
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Re: Home Down Payment - Where to Save?

Post by chomsky81 » Tue Dec 04, 2018 1:51 pm

No you're not.

Being in my mid-30s I am actively working on life decisions that would lead to settling down and starting a family, which would necessitate a home purchase for my chosen life style, if in fact that happens. The reticence comes in that life can meander in ways unpredictable - meaning if I don't meet anyone in the next 3-5 years I most likely won't have children or a need for a home purchase - i'd rather rent and/or buy a rental property for income.

I had thought that allocating a good chunk of a down payment (15-20% of median home values in NY suburbs, which would be about 80-120k) in safe vehicles would make most sense.

Is there any argument to keep that 15-20% in a total index fund of stocks or diversity it to be 50 total index stock/50 total index bond?
"Governments that issue their own currency are never in fear of default but only constrained by inflation"

Ben Mathew
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Re: Home Down Payment - Where to Save?

Post by Ben Mathew » Tue Dec 04, 2018 2:25 pm

Keeping the downpayment in low interest savings accounts, money market funds, etc. for many years is unnecessary.

The money can come from the bonds in your overall asset allocation. Leave these bonds in tax shielded accounts as it's taxed at a higher rate than stocks. Invest your taxable account in stocks. If and when you need the downpayment, sell the stocks in your taxable account and convert an equivalent amount of bonds to stocks in your tax-shielded account. The end result of all this is that your downpayment money will come indirectly from the bonds in the tax-shielded account.

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ruralavalon
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Re: Home Down Payment - Where to Save?

Post by ruralavalon » Tue Dec 04, 2018 5:35 pm

chomsky81 wrote:
Mon Dec 03, 2018 11:02 am
Bogleheads,

What are some of the strategies/perspectives you take or advice you'd give to those looking to store money for a house down payment. Personally, I am hoping to be in a position to buy a home (get married/have kids etc.) - though if I remain single throughout my life I don't think i'd buy and use the savings as investments for retirement and traveling, etc.

Thoughts on credit union money market (1.75% APY) vs. bonds vs. CD or a combo of all, etc?

Let's say I'm saving $80,000 what would be some of the best ways to allocate that savings?
For short-term goals such a home down payment, use high yield but very safe savings vehicles like:

1) federally insured savings accounts, or federally insured short-term CDs. For rates see www.bankrate.com;

2) higher yield money market funds, like Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.30%;

3) Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.64%;

4) another Vanguard Short-term bond fund (current SEC Yields in the range 2.80% - 3.66%); or

5) any combination of these, depending on the amount of time until possible home purchase.

chomsky81 wrote:
Tue Dec 04, 2018 12:35 pm
VUSXX and the VMXX funds seem like a good place to park down payment money. I'm struggling trying to make a decisions as to whether or not to park all my money there, all of it in a ladder CD/regular CD, or put some in both. This is my own neurosis playing itself out but I am a bit cautious - that may mean I'd feel better in an FDIC insured account that yields a little less than those funds? Thanks for all the perspectives and thoughts!
FDIC insurance adds a degree of safety, but money market funds are generally very safe anyway. Also the Vanguard short-term, or ultra short-term funds are likely very safe too.


chomsky81 wrote:
Tue Dec 04, 2018 1:51 pm
. . . . .
Being in my mid-30s I am actively working on life decisions that would lead to settling down and starting a family, which would necessitate a home purchase for my chosen life style, if in fact that happens. The reticence comes in that life can meander in ways unpredictable [emphasis added] - meaning if I don't meet anyone in the next 3-5 years I most likely won't have children or a need for a home purchase - i'd rather rent and/or buy a rental property for income.

I had thought that allocating a good chunk of a down payment (15-20% of median home values in NY suburbs [emphasis added], which would be about 80-120k) in safe vehicles would make most sense.

Is there any argument to keep that 15-20% in a total index fund of stocks or diversity it to be 50 total index stock/50 total index bond?
What is your tax bracket, both federal and state?

As you are in New York, there is a state specific fund that might be useful -- Vanguard New York Municipal Money Market Fund (VYFXX), current SEC/yield = 1.58%.

You are correct, life is uncertain. If you believe that a home purchase is unlikely, then I suggest that you invest "as if" for the long-term for retirement. This means a reasonable mix of equities and fixed income, which (in your mid-30s) might be as aggressive as 75% stocks/25% bonds which could include intermediate term bond fund(s).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Triple digit golfer
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Re: Home Down Payment - Where to Save?

Post by Triple digit golfer » Tue Dec 04, 2018 7:03 pm

Put it in an Ally Savings account. 2.00% APY and FDIC insured.

The difference between this and money market funds is so minimal, why even bother with them?

If you are not okay with losing money on this, do not invest in equities. Even 20% of your $80k in equities can lose $8,000 in a 50% market downturn. Would you be okay with your $80k being $72k?

I think of it this way. If you remain single and don't have kids and don't buy a house, your $80k will be there and you'll probably be in good shape anyway due to not having expensive little people to care for and a house to maintain. If you end up having a wife, kids and buying the house, your money will be there for you when you need it.

There is no downside to putting it in a savings account. People sometimes rag on savings accounts, but they have their place. Of course in hindsight if the market goes up, you could always say, "if only i had invested in equities." So what? This goal is for a potential big purchase and you want that money to be there. If you don't make the big purchase, then you're 40 with $88k sitting there to do whatever you want with.

Just my opinion, of course.

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unclescrooge
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Re: Home Down Payment - Where to Save?

Post by unclescrooge » Tue Dec 04, 2018 9:19 pm

chomsky81 wrote:
Tue Dec 04, 2018 6:55 am
thanks,

What are the advantages of Municipal Bond funds over Vanguard MM or FDIC insured bank MM/CDs? What are the cons?
Municipal bonds are tax free. MM/CDs are taxable at your highest marginal tax bracket.

There is credit risk and interest rate risk, but you mitigate both by choosing investment grade and short duration munies

Nissanzx1
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Re: Home Down Payment - Where to Save?

Post by Nissanzx1 » Tue Dec 04, 2018 9:24 pm

We are saving for a rental home now and we are with Discover bank and Capital One 360. I believe it pays 2% in savings account. FDIC insured. We love it!

coupleofcents
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Re: Home Down Payment - Where to Save?

Post by coupleofcents » Wed Dec 05, 2018 12:31 pm

My savings goal is 80K as well for a down payment and currently have about 67K already. I do not have a definite time frame so here's what I do:

42K Total Stock/Total Int at Vanguard Brokerage.
25K ALLY No Penalty CD at 2.25% (3.25% currently with the Ally Bonus)

I was in Vanguard Money Market (about 2.2-2.3%) for the cash but when Ally did their +1% back in October I jumped on that.

This breaks down to about 60% stocks/40% cash instruments. I am saving another $500/month and putting it into Ally/Vanguard money market so gradually my cash percentage will increase. Once I have a definite time frame I will wind down the stocks as best as possible to reduce capital gains.

Flyer24
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Re: Home Down Payment - Where to Save?

Post by Flyer24 » Wed Dec 05, 2018 1:51 pm

Anything needed in less than 5 years should not be in the stock market.

SelfEmployed123
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Re: Home Down Payment - Where to Save?

Post by SelfEmployed123 » Wed Dec 05, 2018 2:00 pm

chomsky81 wrote:
Tue Dec 04, 2018 12:35 pm
VUSXX and the VMXX funds seem like a good place to park down payment money. I'm struggling trying to make a decisions as to whether or not to park all my money there, all of it in a ladder CD/regular CD, or put some in both. This is my own neurosis playing itself out but I am a bit cautious - that may mean I'd feel better in an FDIC insured account that yields a little less than those funds? Thanks for all the perspectives and thoughts!
If I were you I would be thinking about risk, liquidity, and simplicity. There are a number of very low risk options listed in the comments above. You really cannot go wrong with any combination of CD ladder, money market fund, or high interest savings account. The main questions you should ask yourself are how liquid do you need your investment and can you find a simple investment to put your money into? I prefer VUSXX for its low risk, high liquidity, and simplicity. 100% of my house down payment is in that fund and I never think twice about it. However, the 3+ percent yield you are getting on the Ally CD sounds great and I am sorry I missed it. When in doubt, remember the oft quoted statement by Ray DeVoe: "More money has been lost reaching for yield than at the point of a gun."
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

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