Advice on saving up for a house

[keviny182]

Hello all. I am new to the forums and I am looking forward to absorbing all the wisdom everyone has to offer.

I am 24 years old with a full-time job in advertisement. My plan is to be able to have enough for a downpayment on a house in 3-4 years. Although I am unsure where I plan to settle, and the price range that follows that decision, I want to beginning putting money away now.

Can anyone spare any advice on a smart way to do so?

Thanks.

[scfr]

Is your question where to come up with the money to save, or where you should put those savings, or both?

[keviny182]

Is your question where to come up with the money to save, or where you should put those savings, or both?

More of on the side of where I should put my savings. I have already opened a savings account with American Express and currently looking into certain stocks. I wanted to see if there are any other avenues I should pursue.

Thanks!

[scfr]

More of on the side of where I should put my savings. I have already opened a savings account with American Express and currently looking into certain stocks. I wanted to see if there are any other avenues I should pursue.

Thanks!

If it's the American Express account paying 0.85% interest then you've already found a good spot. (There are a couple on-line savings accounts where you can earn a bit more interest but you have one of the better ones already.)

With a window of only 3-4 years, my suggestion is stick with FDIC-insured savings and stay away from stocks. One thing to think about is moving most of what you currently have in savings to a 3-year CD where you could get 2% interest. http://www.depositaccounts.com/cd/3-year-cd-rates.html In a year, you could do the same but with a 2-year CD.

[Jerry91]

If you wish to save money, then the first and the most important thing that you need to consider is to plan and follow a budget. This will help you in getting rid of your unnecessary expenses and you will have more money to save. So, you can take help of a good budgeting software to formulate a budget.

[jpham540]

Money that u need for less than 5 years should be in a high yield saving account or you can try CD. Anything longer than 5 year you can get put in the stock market.

[keviny182]

If it's the American Express account paying 0.85% interest then you've already found a good spot. (There are a couple on-line savings accounts where you can earn a bit more interest but you have one of the better ones already.)

With a window of only 3-4 years, my suggestion is stick with FDIC-insured savings and stay away from stocks. One thing to think about is moving most of what you currently have in savings to a 3-year CD where you could get 2% interest. In a year, you could do the same but with a 2-year CD.

Thanks for the link! The Pentagon Federal Credit Union 3yr CD looks rather attractive. 2.02 APY with a 1k min. Perhaps this may be a better option than the American Express 0.85 APY.

Being that I just opened the American Express savings account, would it be a good idea to hold savings in both accounts? or Just move everything over to a 3yr CD?

Thanks again!

[btctony]

You can close the account just as quickly as you opened it. If you're not going to need any of the money for the term of the cd, there really isn't any reason not to earn the higher rate on as much money as you can.

That being said, I wouldn't keep my emergency fund in a cd, unless there is no penalty for early withdraws.

[jIM_Ohio]

Hello all. I am new to the forums and I am looking forward to absorbing all the wisdom everyone has to offer.

I am 24 years old with a full-time job in advertisement. My plan is to be able to have enough for a downpayment on a house in 3-4 years. Although I am unsure where I plan to settle, and the price range that follows that decision, I want to beginning putting money away now.

Can anyone spare any advice on a smart way to do so?

Thanks.

Take your current rent payment (or if you are living at home, find what rent costs in your area, and identify amount). Save 100% of your rent cost each month in a SAVINGS account, and every $1000 open a CD to lock money away (remove liquidity).

This will prove several things
1) you learned how to research prices
2) you learned how to save a fixed amount regularly
3) you put money in an account you have "limited" access to.
4) when you purchase house, you can handle a payment 2X the amount of rent in the area.

General guideline is to save 20% of each paycheck anyway. If your rent is more than 20% of your paycheck, discuss this issue.

[bjl584]

General advice is to save 20% down payment and have a 6 month emergency fund in place before you buy.

It's also a good idea to clear up as much debt as you can before buying a home. Clear out any credit card balances and car loans if possible.

Your price range should not exceed 2.5 times your annual gross income.

[scfr]

Thanks for the link! The Pentagon Federal Credit Union 3yr CD looks rather attractive. 2.02 APY with a 1k min. Perhaps this may be a better option than the American Express 0.85 APY.

Being that I just opened the American Express savings account, would it be a good idea to hold savings in both accounts? or Just move everything over to a 3yr CD?

Thanks again!

Keep a bit in the American Express account (to cover emergencies), and move the rest to a 3-year CD. Be sure to read about the Pen Fed membership requirements ... You may need to join an association that costs $15. I don't know how much money you are talking about, but make sure that if you have to pay that $15 you will be able to make that up in interest earned over & above what you would have earned at AmEx.

[scfr]

Take your current rent payment (or if you are living at home, find what rent costs in your area, and identify amount). Save 100% of your rent cost each month in a SAVINGS account, and every $1000 open a CD to lock money away (remove liquidity).

This will prove several things
1) you learned how to research prices
2) you learned how to save a fixed amount regularly
3) you put money in an account you have "limited" access to.
4) when you purchase house, you can handle a payment 2X the amount of rent in the area.

General guideline is to save 20% of each paycheck anyway. If your rent is more than 20% of your paycheck, discuss this issue.

This is excellent advice. When my husband & I saved for our first condo oh so many years ago I got a small CD every paycheck, for reasons 2 & 3 listed above. I had not thought about #4 on the list, but it is true.

[ua_guy]

My advice? Different.

Save it in a tax-deferred retirement account. Invest it aggressively. Then, take advantage of the IRS rule that says you can liquidate certain types of funds penalty-free for the purchase of your first home.

Some of my funds in my IRA have returned better than 24% in the last year. Will it continue? Probably not, but a more sustainable 5-7% is better than 0.5% in a savings account, or 3% in a CD. If plans change, you have a heavily bolstered retirement account that, if you can refrain from touching it, will be graced by the power of compounding interest.

[kork13]

First off, there are savings priorities:
1) Are you saving for retirement? At least save enough in your company's 401k (or equivalent) to earn the full match.
2) Do you have a 6-month emergency fund in savings?
3) Back to retirement--If possible, max out a Roth IRA.
3) Okay, NOW you can save for a house. You want to save up a 20% downpayment, plus expect you will need at least another 5% to cover fees & closing costs, furnishing costs (appliances & furniture), and other initial "startup" expenses for owning your home (lawn care stuff, general maintenance tools & supplies, etc.). But please--don't buy until you REALLY CAN afford it. Buy too early, and it can be easy to get yourself into financial trouble.

My advice? Different.

Save it in a tax-deferred retirement account. Invest it aggressively. Then, take advantage of the IRS rule that says you can liquidate certain types of funds penalty-free for the purchase of your first home.

Some of my funds in my IRA have returned better than 24% in the last year. Will it continue? Probably not, but a more sustainable 5-7% is better than 0.5% in a savings account, or 3% in a CD. If plans change, you have a heavily bolstered retirement account that, if you can refrain from touching it, will be graced by the power of compounding interest.

My thinking (and what I did) is more in line with ua_guy's.

I'm 27, and bought my home 1.5 years ago (wow... I just realized it's already been that long!). I saved up for my house in a combination of cash, stocks, and bonds. I was honestly probably TOO aggressive, but I think that is still a good way to go. By the time I bought my home, I had $50k for my downpayment over the course of saving for about 5 years (during which time my income also rose dramatically, being fresh out of college). 25% of that was in bonds (I used a GNMA bond fund, but specific investments are a personal choice), 50% in stocks (S&P 500), and 25% in cash from a savings account. Looking back, I probably should have been more conservative, and just done equal shares of each (split one-third of my savings into each: bonds, stocks & cash, or perhaps also use I-Bonds). That allows you to protect your savings somewhat while also allowing it to grow somewhat, or at least much better than it will in a savings account for 4-5 years.

Using a Roth IRA as your savings vehicle, at least for a portion of your house savings, might be a good option for you -- you can withdraw your contributions tax free. Additionally, if (and only if) you've held the IRA for at least 5 years, the IRS allows withdrawals for first-time homebuyers with no penalties (first time home purchase is a "qualified distribution"). However, just keep in mind that if you go the Roth IRA route, you're cheating your retirement savings for the long run. So if at all possible, you want to make up for that by increasing your savings into your 401k plan by an equivalent amount (a Roth 401k would likely be even better for you, if your plan offers it). I didn't use my Roth IRA, I just used taxable accounts -- I didn't want to mess with my retirement accounts. But your level of comfort in optimizing your taxes might be different.

[snafu]

I'm wondering what's driving your desire for a house. It is such an illiquid asset so you need to know for sure where you want to live and what the district offers in your current circumstances and future needs. Buying and selling is expensive, you may believe the seller is paying the commission but the money has come from you! There are so many costs associated with buying it makes your head spin. I hope you will check out how the mortgage amortization tables work. You may believe that your mortgage payments are building equity in that home but really for the longest time your money is going to escrow and paying interest, interest interest.