I'm only 26yrs old. I wasn't sure what the best way to save for a home is. My original thoughts where that all of my investments are for retiring. Should I invest any differently for saving for a home? Or should I just make some stock withdraws for the home after I accumulate some money, so I can pay for the down payment? It's kind of discouraging to have to withdraw some of my money that is set aside for retirement, since I've seen so many charts illustrating the power of time and compounding interest. I know I should look at buying a home an investment, but wasn't sure if there is a specific way to keep on investing for retirement and have a separate account for saving specifically for my first home.Any advice would be appreciated.Brian
I wasn't sure what the best way to save for a home is. My original thoughts where that all of my investments are for retiring. Should I invest any differently for saving for a home?Assuming that you are looking to buy a home in the fairly near future (within the next 5 years, say), then you should definitely invest differently for that than for retirement. The Foolish philosophy is to keep long term money in the market, but not short term money.When I look at my savings, I mentally divide it into three "buckets". Bucket A is my "emergency fund", this is money that I want available at any time in case of...well, an emergency. I would normally keep this money in a money market fund with checkwriting privileges (many discount brokerages offer this). Bucket B is money for predictable, extraordinary expenses you expect to have within the next three to five years. A house down payment would fall into this category. Think of this money as money that will need (aka "can't afford to lose") within 3-5 years.Bucket C is long term savings (money you don't expect to touch for at least 5 years). Saving for retirement is the most common "Bucket C" goal. The Motley Fool believes that best place for "Bucket C" money is the stock market, and historical results would back that up.Now, where should you invest "Bucket B" funds? Well, we don't recommend the stock market because, as the last few months have demonstrated, stocks can go up and down dramatically at times. In any given year, you could lose over 25% of your savings. Over the long haul, stocks should do better than other investments, but in the short run, they could do much worse. Imagine having $20,000 saved for a down payment, then watch the market drop 25% and now you only have 15K left. Time to reassess your house plans.For bucket B money, I'd recommend CD's, bonds, or possibly bond funds. In general, longer term CD's and bonds have better interest rates, although that's not exactly the case now (we have an "inverted yield curve" which means that many 2 yr. bonds are paying more interest than 5 or 10 yr. bonds). You can compare rates on bank CD's at www.bankrate.com . As for bonds, you can purchase US Treasury notes directly (in increments of $1,000). Check http://www.publicdebt.treas.gov/sec/secinvsr.htm for more information.Another possibility is bond funds. Vanguard (see www.vanguard.com ) has a number of bond funds that have very low expense ratios (0.3% or less). Just like stock funds, the expense ratio is the amount that gets taken out to run the fund. Obviously, you want this to be as low as possible.If you buy CD's or bonds, you lock in a set interest rate, and have virtually no risk of loss if you hold to maturity (bank CD's are FDIC insured up to 100K, and US treasuries are backed by the government). The drawback is that it's difficult to add small amounts of money (you usually need to purchase CD's and bonds in increments of $1,000 at a time, and interest can't be easily reinvested). Also, CD's have penalties for early termination. Bonds can be sold, but have a commission cost. Also, you'll get less for them on sale if interest rates go up. If you buy individual bonds, plan to hold them to maturity.Bond funds offer the opportunity to add in small amounts of money over time and reinvest dividends, and are easy to sell if necessary. The problem is that bond funds usually decline in value when interest rates go up. (Although they usually don't decline much. Vanguard's "Total Bond Market Index" fund had its worst year in 1994, when it declined 2.66%. Some funds have had worse years, of course).So, when are you aiming to buy a house? If you're thinking "I'd like to buy one within five years, but if it takes longer, that's fine", then keep putting money in stocks for now. If you're almost sure you'll buy a house in the next few years, then look at bonds or bond funds, and put your "buy a house" (Bucket B) money there.For more on the "three bucket" approach, you can check these articles:http://www.fool.com/workshop/1999/workshop991109.htmhttp://www.fool.com/workshop/1999/workshop991123.htmYou can also find out more about bonds at the "Bonds & Fixed Income Investments" board: http://boards.fool.com/Messages.asp?id=1030062000000000Sorry for the long response. Hope this is helpful,-synchronicity
Brian,Hi! Congratulations on thinking ahead.My suggestion is to set up a separate investment for just a home downpayment. That way you won't have to touch your retirement funds. You have to decide what type of account to open: savings, CDs, money market, mutual funds or stocks. Whatever you decide if you start saving now you'll be a lot happier when you go looking for a house!Good luck
I would consider using a Money Market. These are more liquid than a cd and most allow free (but limited) check writting privileges. These are not guaranteed but are a pretty safe bet. It is very important to a home buyer and lender that you have the money available when you are ready to buy. You don't want to find the dream home and then be subject to penalties for early w/d on a cd.
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