Hey all,
I’m completely clueless when it comes to investing. Mr. Smaje and I have a small but of savings but we need money for a house down payment one of these days. I have a 401k and retirement account through work, but don’t want to touch those for a loooooooong time. How do normal people get the money for things like down payments?
We try our best to contribute to our bank savings account every month but it’s slow going…
Any advice or resource would be appreciated!
Are you asking about investing or saving?
With respect to the latter, one of the best things is to have your employer send part or your paycheque to your main account, and then specify a second account for the rest, perhaps $1000 per paycheque which is intended for savings. The money isn’t looked or trapped, just not as readily available.
If your goal is “need a down payment within 5 years” keep the money is something very close to cash (not literally) so that it’s available. If you know it won’t be for at least 2 years you can start to look at CD and TBills. After you buy your first house you can start to look and more exotic investments.
I suppose I’m talking about investing… I have a 401k, and am putting away money every paycheck (although the idea of putting $1000 away every paycheck is nowhere near feasible – but I am putting a significant % away every 2 weeks and my employer matches that).
But let’s say I have $10k just sitting in a savings account. Isn’t there a better place to put that money for 2 or 3 or 5 years to get a reasonable return on it?
You mention CDs and TBills. Has anyone had personal experience with trying those out? Again, I can’t explain enough how little I know about this stuff. I can google things, but I’d really rather hear from a living human about how it’s worked for them.
Define “reasonable return.” Right now, the best rates I can find on one- or two-year CDs is about one percent. If you really need the money in a couple of years to buy a house, you really can’t risk losing principal so I would not advise investing in the stock market.
I agree that the stock market is not the place to gamble away our meager savings.
So CDs, eh?
For something you’ll need short-ish term like a down payment, “cash” is the way to go. I don’t mean cash under the mattress, but a standard savings account, money market account, or certificate of deposit.
By “short-ish term” I mean anything in the next 3-5 years.
There are also bond money market funds which don’t have the upside of the stock market but which are a lot less volatile. My father insisted on a municipal bond fund - it doesn’t pay s super high return , it maintained its value very well during the crash. They are not risk free, of course.
Cash means you have dollars. Those dollars are kept in a savings account. It’s your money. However, the truth is while in the bank, banks only keep on hand 10% of the money people save in their banks anyway and they invest the rest in the form of extending loans at higher interest rates. They keep a bulk of the interest collected and give you a taste via your much more meager savings interest rates for your savings account. Well, hey if the bank is going to invest your savings anyway, why not demand a bigger cut?
That’s what CD’s are. Instead of just keeping the money as your own in a savings account, you say to the bank “Well, if you’re just going to repurpose my money anyway, you might as well give me a bigger cut.” The bank says “Fine, but you can move money around in a savings account. You can withdraw it, transfer it, or just change banks. You’re going to have to lend me whatever amount and I’ll pay you back once I collect enough interest from lending out your money.” That’s why CD’s go for 1 year terms. You can’t touch the money because it’s being lent out. It’ll return a higher interest than your savings account but at the cost of it not being your money temporarily.
However, that’s still a bit risky seeing as how certain banks may not make wise loans, or might not be too big to fail. The safest way to invest your money is to lend the money to the US government which may well be too big to fail. When you lend your money to the US government, you’ll be buying T-bills and bonds. Bills are more short term and bonds go for much longer.
The caveat for either of these options is that it is NOT your money and it can’t be touched before the maturation date. That means if something happens and you need to access your savings for whatever reason, the money won’t be readily available to you. You’ll have to find a broker to sell your bonds/CDs to a 3rd party and recoup your money that way.
Money market accounts are a blend of savings vs CD’s. It’s a very limited savings account. It often has high reserve requirements and is very restrictive on how many transactions you can have within the account - like 3-6 times transactions per month (checks, transfers, etc.). The bank gets a guarantee that you’re locking in money with them for the long term and they know you can’t just off and abscond with it because of hefty penalties and minimums. Also unlike a CD, they don’t just pay you and leave you. They’ll give you your interest but it’s still locked up in their vault/computers. It’s almost win-win.
You might pull a huge chunk of it down for a down payment for your house loan but guess who you’re giving the down payment to? Right back to them and then you’ll be the one making even MORE mortgage payments to them only to have it trickle down to your savings and MM account while they keep the bulk of the interest… you can see why Bankers can get to be so damn rich.
I think the conventional wisdom is to have at least 2 months spending expenses in the savings account before you go off investing. If you have 10k, set aside… (I’m guessing) half of that to stay with in the savings and ask your bank for what they offer in terms of MM and CD’s. It varies.
For instance, I know Navy Federal Credit Union CD is doing something outlandish like 3% returns but you need to set up direct deposit of $300 a month. If you start with 5 grand and can keep that up for 5 years you’ll have saved ~25k. However that’s just one example and an extreme one in the current banking environment. Really though, talk to your bank.
You are talking about savings.
The best place to put savings is currently online banks as they have slightly higher interest rates. There are multiple websites that can tell you who has the best rate.
The best place for most people to ‘find’ more money to save is to pay off any non-mortgage debt. Pay off your smallest debt. Then put half of the payment you use to make on that debt onto your next smallest debt and save the other half.