A financial planner explains where to keep your money if you want to buy a home in the next few years - and where not to

Courtesy of Brian Face

Brian Face, CFP, CRPC.

• If you're saving money you need within a year or two for a big purchase like a home, there's a right and a wrong place to keep it.
• You need somewhere the money is accessible, but growing, and not exposed to risk.
• A financial planner says the place that ticks those boxes is a high-yield savings account, which has the accessibility of a savings account with slow-but-steady growth.

If you're saving up for a major purchase, like your first home, you're in a delicate position. It's a large amount of money, so you want to make sure you can earn interest, but you don't want to run the risk of losing your precious savings.

So where do you keep the money so it grows without risk?

We asked Brian Face, CFP, CRPC, and founder of Michigan-based Face 2 Face Planning, for advice.

The right place to keep your money: high yield savings

"If you're buying [a home] or making another large purchase within a year to two years," said Face, "you want to put your money in a place that will grow some but cannot lose principal." 

There is a place that does that: the high-yield savings account.

"I recommend clients put their money for a house in a high-yield savings account," Face said - one that earns at least 2% interest. Unlike an investment account, he said, this will keep your money secure, and give you a nice bonus to help you reach your goal faster.

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If you put $50,000 in a high-yield savings account with 2% interest (compounded monthly), at the end of the year you would have earned an extra $1,010 - that's a whopping 200 times what you'd earn in a big bank savings or checking account with a 0.01% interest rate.

Several online banks and credit unions offer interest rates above 2%, including Ally Bank, which is a favorite among financial planners. 

If you know that you won't need that money for a few months, also be sure to check out Certificates of Deposit (CDs) - especially at those online banks.

CDs allow you to lock in a high interest rate for a fixed time period, ranging from three months to five years - typically the longer the time period, the higher the interest rate. CD rates can be as high as 2.8%, but they won't allow you to withdraw your money without penalty for a set period of time, which could be as little as three months. 

Where not to keep your money: in the the market or in checking

Brokerage accounts, which invest your money in the market, are a better for long-term investments like retirement, which give you time to make up the inevitable losses with gains. But in the short term, the market can fluctuate at any time, and you could end up losing value at just the wrong moment, without the leeway to make it up.

You also want to avoid keeping that money in a checking account, Face said. Besides putting your money at your fingertips where it's easiest to spend, checking accounts rarely earn interest. Those that do tend to have extra fees or requirements like monthly payroll deposits, or a certain number of debit card transactions each month.

Even savings accounts at most banks earn virtually no interest, Face continued - often as little as 0.01% APY. With that interest rate, that same $50,000 of savings that earned over $1,000 in a checking account will earn just $5.00 after an entire year.

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