How should I be saving my money right now?

In My Humble Opinion
1

For a while now, I’ve been saving up to afford a house down payment. All my debts are paid off except for my student loan debt, and I can live with that but I really want to get out of renting and become a home owner within the next few years. I want to be able to save up enough for a 20% down payment, so I’m looking at roughly saving $40k-$50k. I’m not sure exactly how long that’s going to take, but at the rate I’m saving now, I think I can manage to save approximately $10k a year, maybe up to $15k if I’m really frugal (usually I’m not).

Right now, I have about $10k (technically more than that, but I like to have a couple thousand for emergencies, so I’m not counting that as part of my house savings even though it’s all in the same account right now) in a checking account. Meaning that it’s earning my exactly 0% interest right now. Boo!

I do business with BoA (ugh, that’s another can of worms), and their savings accounts and CD rates are an abysmal joke. It’s a nonstarter. So I need to shop around.

The key thing I’m looking for is my money to be safe. I understand that with rates what they are, I’m not going to be earning much on interest, but some is better than none, eh? Savings accounts and CDs that could earn even 1% would be great, but it looks like even that’s just a pipe dream. I don’t want to put this money in anything that has a chance of losing principle, even if it’s not very likely. So I think that limits me to savings accounts and CDs… but I’m not sure.

So what are my savings options? Anything that I can do with ~$10k that is safe, and will earn at least a little interest, and that I can keep adding to as I continue to save?

2

Anything you do that is going to make much more than what BoA is going to pay you in interest is going to have risk. You might be able to find a CD or bank that pays a small amount more, but nothing safe as houses that keeps up with the rate of inflation. That’s how the game works.

3

That isn’t true - you can get around 1% at the best paying online banks in a 1 yr CD or Savings account that is FDIC insured.

More than that and you have to take some risk though.

4

I wouldn’t call that much more and it isn’t keeping pace with inflation. Or, in other words, that’s what I said.

5

Honestly, I wouldn’t bother. You want the money in the relatively near future, you’re (wisely) risk averse with this kind of savings, and rates are so low that I’d go with convenience over a few tenths of a percent. Stick it in a BofA savings account.

6

I save with Capital One 360 and Barclays US. They’re both online and pay somewhere between .7-.9% IIRC. I contribute to them via direct deposit and I can transfer money to my main checking account if I need it, but the extra step keeps me from spending it on frivolous things.

7

Clearly, I don’t know anything about this stuff. I wanted to comment on it, because I’ve been thinking of some safer ways to invest money lately, as well. And, I wanted to see how far off my opinions are from reality.

One thing I came across are CD Ladders. Which are using CD investments to make them more liquid, and to protect yourself, somewhat, against changes in interest rates. I don’t think that would work for your situation. But, maybe CDs could still work? Kind of a reverse ladder.

I pretended I was you and I wanted to start saving for a house to buy in about 5 years. I went to this GE Capital Bank to use their CD calculator. (I’m pretending that current rates will stay the same for all 5 years. Impossible, I know. But, I’m already pretending to be you. Suspend your disbelief for a second.) I want to invest in a bunch of CDs and have them all mature at the same time.

I have $10,000 right now to invest somewhere. ANYWHERE other than BofA. GE Bank has great rates. Let’s go with them.

Year 0. 5 Year CD.
$10,000 2.25% APY

Here comes the next year. I have given up coffee on weekends, and fancy lunches and I have another $10,000.
Year 1. 4 Year CD.
$10,000 1.65% APY

No big deal. Another year without lunches.
Year 2 3 Year CD
$10,000 1.35% APY

Huh. I really do miss eating out. Maybe once a week? I’m almost there.
Year 3 2 year CD
$10,000 1.20% APY

This house better be worth it. I am SO sick of baloney sandwiches.
Year 4 1 year CD
$10,000 1.09% APY

Alright. I am almost there. One more year without Starbucks and I get my dream marble top kitchen!
Year 5
$10,000

DING! Year 5 and the money is ready! Just like an EZ-Bake oven.
$11,177
$10,677
$10,410
$10,241
$10,110
$10,000
$62,615

So, that’s an extra $2000. If, you just choose to do it in 4 years, it’s an extra $1000 or so. That’s not a ton of money, and it doesn’t beat inflation. But, it seems better than a BofA savings account. If I am reading the website correctly, BofA’s rates are lower than .05%.

Of course, this ties you to a 4 or 5 year plan, so if you come across your dream house before then you are going to have to pay penalties to go after it.

Anyone have any ideas what’s wrong with this plan?

8

Do you want to own a house, because it is the best residential arrangement at this time for your life into the misty future? Or have you simply decided, as an article of faith, that you “want to become a home owner”?

It is more important to makes sure you know the answer to that question, than to plan the mechanics of bringing it about. Nevertheless, saving the money will do you no harm.

9

I’m going contrarian here and recommend you put the money in a Vanguard target date index fund, specifically the 2020 target fund, VTWNX. There is, of course, risk here, you’re around 65% equities in this fund, and would get hosed in a market downturn, but hell, a significant market downturn might make you think twice about buying a house anyway. Savings accounts in excess of six months living expenses are a sucker’s bet. You’d be hard pressed to find a five year period when this fund has lost money. Going back to inception this thing has made an average annual return of 6.7%, and that includes the great recession. Low fees too, 0.16%.

10

While there there is some risk associated if I were you I’d look into your local municipal bonds. The ones around here are paying 4-6% and I don’t see any of them folding in the next 5 years. Plus the interest is tax free so you’d actually get all of your money.

11

While the income from bonds is safe the face value is not guaranteed unless held to maturity. In a rising interest rate environment bond prices go down as yields go up for fairly obvious reasons. If the new bonds start to pay more than the old bonds nobody wants the old ones so the price on them tends to fall until the yield matches the yields on the new bonds.

12

Or you’ll pay penalties if you need the money for any other reason - like you lose your job. Its a good plan - if you can afford to tie up your money.

That’s the issue with muni’s as well. If you need to cash them out, you’ll get what the market is paying for them - that might be more or less than you need.

And to a bigger extent, that’s the issue with throwing it into a Vanguard index fund - the market needs to be up from where you invested the day you need the money - IF you can afford to wait it out if the market goes down…that is what I would do is put in in an index fund, keep investing in the index fund - and if the market is down when I want to buy, wait. More risk, but you are likely to get a bigger return.

So the question is whether this is your only savings. If you’ll need this money to do double duty - both be your downpayment fund AND be your emergency fund for job loss or illness - then the best place is the savings account making very little money.

13

This is a good idea - as would be Vanguard Wellington, a fund so old and well managed that it survived the Crash of 1929.

14

I appreciate all the feedback. I don’t feel comfortable doing the fund, as I don’t want to be tied to waiting for a down market to come back up if it’s down when I want the money.

I have enough other savings than the 10K I was thinking of doing something with, so this would not be used for emergencies. But I don’t want to tie it up indefinitely.

Thank you to the poster who recommended the high-interest savings account online option. I may go that route.

And owning a home is definitely the best option for me because for the house I’d be buying, I’d pay way more in rent for a similar house than I would in mortgage+taxes+expenses. Renting is expensive in Houston right now but buying is a sensible option if you have the down payment.

15

It’s a mistake to use the current situation to project what will be 5 years from now.

In particular, the “rent vs own” calculation constantly changes, It can be slower than other forms of market realignment since apartments/houses are built only slowly and are also slow to switch from homeowner-occupied to rented. But eventually it evens out, and if you are making a long term assessment based on what may be a temporary misalignment, you would be making a mistake.

In addition, while the mortgage rates are higher than they were a year or two ago, they are still very low by historical standards, and it’s very possible that they will be a lot higher 4-5 years from now. An increase in mortgage rates would tend to depress home prices, but there could be other factors at work, and if the increase in mortgage rates is based on a corresponding improvement in the economy, prices could go up while mortgage rates are increasing.

But the bottom line answer is that there is no good solution. One of the most fundamental rules of investment is the risk and reward tradeoff, and you can’t increase your reward without taking on more risk, of one sort or another. If you need a very secure investment, right now there’s no real reward at all. Thank the Fed. :slight_smile:

16

That part rukes out most, if not all CD’s. The most common remaining options that allow additions on a regular basis are stock/bond funds or “high yield” savings/money market accounts. My vote, given your particular scenario, would be for the latter.

17

You could buy a five year CD this year, a four year CD next year, a three year the year after…

18

Problem is if inflation picks up and home prices along with it, he’s locked into these CDs.

19

As I remember, the penalty for breaking a CD is only a few months interest. If interest rates rise a lot, it might be worth it.

20

Well after thinking about things some more, and doing a bit of research, with the full understanding that if things tank in the next few years, I might lose a lot, and I’ll have to bite the bullet and put off buying a house until later, I went ahead and invested $10K into the Vanguard Wellington mutual fund.