Where to Stash Your Down Payment Savings

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Last Updated on September 13, 2022 by Carolyn

Note: This post may contain affiliate links. Full disclosure here. Investment advice published here is of a general nature only as disclosed here.

Where to Stash your Down Payment Savings

Where should you stash your down payment savings? That’s a very good question. You want to see it grow not to stagnate in a bank account earning a dismal interest rate of less than 1%. But on the other hand, you can’t afford to lose the stash you’ve so steadfastly saved. Is investing in stocks too risky? If all your eggs are in this one basket your dreams of homeownership could plummet right along with the market, should it crash.

So what should you do? It seems that real estate prices are rising by the day but your down payment stashes rate of return isn’t keeping up and the gap between your required down payment and your nest egg keeps growing despite your diligent saving.

My daughter is 21 and is saving for her first house. I’ve cautioned her to wait out this housing boom and buy when prices realign with reality. In the meantime, she wants to earn a better return on her home down payment savings.

“Can you invest my money for me”, she asks. I respond “No, but I’ll help you decide where to invest it.” I’m a firm believer in learning by doing, and if I guide her on where to start, she’ll learn by implementing the plan.

Establish Your Timeline

I ask “When would you like to buy your first home?” She replies “In the next couple of years”. Looking at your timeline is important when implementing any investment strategy. She adds, “Hopefully by then the housing market will have cooled down, if not I might wait a little longer.”

Many people are afraid that if they don’t buy right now that they’ll miss their opportunity and never be able to. I don’t agree with this philosophy. There are some markets where it just doesn’t make sense to buy. When your rent is less than what your mortgage payment would be with insurance and property taxes factored in, you’re probably better off not buying. What about all that possible appreciation you won’t earn because you’re renting, isn’t that a missed opportunity? Perhaps, but if you take the monthly payment savings as well as the additional costs you’d incur as a homeowner for maintenance, property taxes, and insurance, and invest that, the opportunity cost is not as large as you’d think.

Diversification: Maximize Returns While Minimizing Risk

I tell my daughter “I recommend you diversify your investments to maximize possible upside appreciation and minimize investment risk.” I go on to recommend my daughter invest in the following 4 different types of investments:

• I-bonds;
• A non-publicly traded REIT such as Fundrise;
• High Yield Savings account with Bonus;
• Index Fund such as Vanguard VTSAX

I-bonds

I-Bonds: You might be wondering what is an I-bond? An I-bond is a security that earns interest based on both a fixed rate and a rate that is set 2 times a year based on inflation.

The rate for I-Bonds sold between Nov 2021 and April 2022 is 7.12%.

The maximum annual purchase is $10,000 in electronic bonds and up to $5,000 in paper bonds purchased with your income tax refund.

I- bonds can be purchased from Treasury Direct.

Non Publicly Traded REITS

Non-Publicly traded REITs are a means to keep a foot in the real estate market. Many, like Fundrise have pretty stellar earnings records. At the time of writing this post, Fundrise funds have consistently yielded returns from 8%-11% annually. They also boast 0 quarters with negative returns, so to date have proven to be much less volatile than the stock market. With minimum purchases as low as $10, these funds are a nice way to get your foot in the real estate investing door.

Non-Publicly Traded REITS are real estate investments with company shares that are not listed on a public exchange. They allow investors to invest in investments that include office space, multifamily properties, residential developments, farmland, shopping centers, hotels, warehouses, etc. REITs allow investors to diversify their real estate portfolios while benefiting from the experience of seasoned managers.

High Yield Savings Accounts with Bonuses

Despite their name, high yield savings accounts (HYSA) don’t currently provide much of a yield, with most offering interest rates in the 0.25-0.60% range.

However, HYSA returns can be significantly boosted by choosing accounts that offer opening bonuses. These bonuses vary based on the average amount invested, minimum investment period and often require monthly direct deposits. Account opening bonuses are normally in the $150-$300 range.

Nerdwallet.com keeps a good list of account bonuses available with a description of terms and conditions.

Index Fund

You might be surprised that I recommend that my daughter put a portion of her hard-earned money into an index fund. What if the market crashes?

I counter that question with ” What if the market doesn’t crash? ” She’d have missed out on a lot of potential growth. There are ways to protect your stock investments with stop-loss strategies that will allow you to reap the rewards of an increasing market but minimize downside risk.

I choose an index fund like VTSAX for her because this fund spreads its investments over the entire stock market, thus reducing overall risk, it has low fees and is operated by Vanguard, a leader in the low-cost index fund sector. Over the past 10 years, this fund has yielded an over 13% return.

Be Pro Active

Don’t be thinking you can invest your savings, kick up your heels and just watch it grow. You need to be sure to invest the additional funds you put aside each month, make them work for you!

You should also rebalance your investment portfolio from time to time. Though it may be tempting to put all of your money in the investment that’s doing best, that violates the whole concept of diversification. Be sure to keep the investments in the different sectors fairly equal.

Follow the Growth of My Daughters Down Payment Stash

I’ll post quarterly updates on the progress of my daughter’s nest egg. This month she’ll be implementing her savings strategy which will be to invest fairly equally in the investments described above.

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