Savings vs. 401K

[haychalet]

Good afternoon! I have a question that I hope someone can guide me on. I'm 25 years old and want to purchase a home in the future. Currently I am contributing 10% into my 401k and I have a savings account with a $5 balance! Should I contribute less to my 401k and instead start building my savings account? Thanks for your help!

[terry1156]

Re: Savings vs. 401K

Does your 401K match funds contributed?

[haychalet]

Re: Savings vs. 401K

My employer matches 50% of what I contribute up to 2K a year.

[DivaJen]

Re: Savings vs. 401K

If you want to buy a house you need to do some saving outside of your 401k, that much is fairly clear. I don't know how much your 10% contribution is right now, but unless I'm mistaken, your employer will match contributions up to $4000, right? If you can it would be great to keep contributing that $4000 yearly, and then anything else can go into savings for the down payment.

It's nice that your employer matches 50%. WhenI taught, there was no matching for the 403b I had, and at DH's company now, they match once you contribute a certain percentage of your income. I think it's 3%, but offhand I can't remember.

[terry1156]

Re: Savings vs. 401K

Are you contributing the entire $2000 a year? I would contribute that $2000 as your first priority. That's a 50% return on your investment guaranteed and you're not going to get that anywhere else. Even if it means delaying getting a house for a few years, I think it is worth it. Then you'll be set for retirement. After that $2000, you should save as much as you can.

There are plenty of people who can help you find more money for savings if you share your current expendatures. You'd be in great shape if you could contribute the mas with the 50% match.

[amomof4]

Re: Savings vs. 401K

Just my 2 cents. If your saving for a house, you might want to reconsider the 401K. I know that employers match up to a certain amount, but it won't help you in buying a house. You might want to consider the Roth account. The money is put in after taxes & all money is then tax free, including the interest. But the funds can be withdrawn for purchasing a house.

It's also my guess that the housing market will continue to raise for no more than 2 years. After that, the values will remain pretty constant for probably 10 years. At least this is how it has been for the last 20 years.

Also, the best time to buy is when no one else is buying. I bought my first house in 1984 when no one else was buying. The seller had owned the house for 5 years, yet still had to pay for part of the closing cost from their savings. I tried to sell it 4 years later, but the market was not good. One year later, I sold it for $58K more than I paid for it.

We bought another house in 1996 in an area that was really hit be devaluation. We sold it in 2004 for double what we paid for it.

In both of these situations, most of the appreciation occurred in the last year before selling.

[Tree0164]

Re: Savings vs. 401K

Fund your 401k to the match-it is free money that you do not want to throw away. Plus your contributions into your 401k go pre-tax thus lowering your taxes.

Then be aggressive outside your 401k to save for a house.

Good luck!!!

[PennyPincher]

Re: Savings vs. 401K

I'm kicking myself for leaving my last job, which had a generous 401k as well! I could contribute up to 10% of my salary, and they would match the first 4%. I didn't realize at the time how substantial that was... (aaaaah, regrets....)

I too would recommend continuing to do the 401K. If there is leftover from what the employer matches, I would put it toward home savings. Using ING will at least earn you 2.6% interest or so right now... When you apply for a mortgage, you generally need a minimum of 3% down payment. It is very possible that interest rates will go on the rise, and then we are all in a position of being able to afford less. In many cases, a 1% difference in interest rates can bump a monthly payment up $200! (Considering a home about $150K). So....I would try to take advantage of the lower interest rates, and SAVE now for the house.

It's all about starting young, and if you regulary contribute to that 401K, you will be SET for retirement. Way to go!

[barbd00]

Re: Savings vs. 401K

Take a look at the return on your savings vs the return (and matching) of your 401k. CDs might be a way to go also. But I would say, unless you are thinking you might need the cash at some point, a 401 or other retirement account is a good place for the money.

CDs offer pretty high rates especially if you want to go with higher year ones (5yr). I have seen them up to almost 8%.

But no bank is going to match your money like your employer, so that is always a good thing to have.

[WellManicuredMan]

Re: Savings vs. 401K

Sorry for bumping an old post to the top, but my situation is very similar to the original poster. I just started a 401(k) and right now I am contributing 8% to it and my employer puts another 2% (the max they will do). I am saving for a house in the not too distant future and currently have about $20,000 in savings (some in EmigrantDirect, some in short-term CDs).

Should I lower my 401(k) contribution to 4% (still getting the 2% maximum match from my employer) or is $20k in savings probably good enough? I don't have any debt. Car is paid off, no student loans, no credit card debt, nothing. But I want to stop renting as it is throwing my money away!

I just started my 401(k) so I need to build it up as it is currently at $0!

I am 26. Thanks.

[TBH]

Re: Savings vs. 401K

WellManMan:
Good for you for contributing 8% to your 401k, and at 26 years of age. You've got a lot of compounding years ahead of you.

I can't know if 20K is enough for a downpayment on a house without knowing how much houses cost in your area and what you are hoping to buy. I would suggest you spend a few hours looking at house listings online. Think about what you want to buy and where, and then get your head out of the clouds and think about what you really need and what is just excessive. If you can put down 20%, of course that's the best, because then you don't have to pay PMI.

Once you have a ballpark for how much you realistically need to put down (don't forget closing costs and some extra for that surprise furnace you'll have to replace in the first six months of home ownership) you'll have an idea of how much savings you need and whether 20K is enough.

If you decide 20K is NOT enough, I think you should first take a long hard look at your budget and see if you can start putting some money in savings without reducing your 401k contributions. You might just try putting some $$ in savings when you get your paycheck and see if you miss it during the month.

If you really, really can't save any more than the 8% you're already saving, give yourself permission to scale back to the amount you need to put in to get the employer match. But make sure you inch it back up to 8% and beyond (you should be putting in 10%) as soon as you've got your house, when you get your next raise, etc.

You sound like you're doing great. Keep us posted.

[WellManicuredMan]

Re: Savings vs. 401K

Claire,

Thanks for the help! I have been looking at houses in the area, but here is the tough part, I really don't want to settle down where I currently live! (by that I mean this part of the country) So I don't know what kind of housing costs I should be looking for. I'm basically stuck here due to college and getting a job right after college in the same town.

Even with putting 8% into my 401(k) I will be able to keep building up my savings so I will continue to do that. What I really need to do is figure out where I want to live and try to figure out how that is going to work as far as a job goes (will I need to change jobs or find something with the same company at a different location, etc).

With the above issues I have to iron out, a house may still be a ways off. I'll try to keep you posted.

[Haku]

Re: Savings vs. 401K

Here's my $.02 cents worth anyways.

I say, yeah, go ahead and lower your 401k match to 4%. You'll still get the match while you can take the rest and save towards your house.

Wherever you go, I suspect that a house will still cost ~100k. (Granted, it could be half of that, or it could be double that.) Whatever the price, I fully agree that you'll want that arbitrary 20% needed to avoid PMI.

With those numbers, it can and will easily wipe out all your current savings, which means you will also need to rebuild said savings. (Incidentally, I hope the savings isn't also your emergency fund. If so, I think it would be best to figure out what part of that savings is your EF, and leave that part alone.)

Also, there's no rule out there that says you can't pay down more than 20% on a piece of property.

[TBH]

Re: Savings vs. 401K

I would still say if you can save on top of the 8% going to your 401k, don't lower your 401k contribs. It will be nice to have a solid base of cash in your 401k in case you do need to lower contributions later when you have a more targeted savings goal after you've figured out where you want to live.

Good point, Haku. It would be good to build up an emergency fund of 3-6 months' living expenses on top of the money you're saving for a house.

[Ima saver]

Re: Savings vs. 401K

I would say lower the 401k contribution and start saving for a house. In our area, it is hard to find anything decent under $200,000. You will need to save the 20% downpayment.