A financial planner explains why you shouldn't invest the money you're saving to buy a house in the next few years
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- It might be tempting to invest your down payment savings for a home in the stock market to take advantage of returns, but a financial planner cautions against it.
- That's because if you need the money in the next eight years, you won't have time to recover from any potential losses - plus, you might be discouraged by seeing your savings balance fluctuate.
- It's a better idea to keep down payment savings in a high-yield savings account, as it gives you the best return with the lowest risk.
- And don't consider retirement savings an option for a house down payment - that could have a huge impact on your retirement.
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Where financial planner Michael Anderson is based in Ventura, California, Zillow says the median home price $610,100 - nearly three times the national average in the US. So it's understandable why people might be tempted to invest their down payment savings to take advantage of returns that outpace any other savings vehicle.But Anderson says that wouldn't be the best move.Advertisement
"If you are going to buy a house in the next eight years, it's best to keep your money safe in a savings account or CD," says Anderson of Maranatha Financial. "This will provide access to your money when and if you need it."
He suggests avoiding riskier investments when saving for a short-term goal like a down payment. "There is very little benefit with attempting to invest money for bigger returns with such a short timeframe until you will need the money," he says.He doesn't suggest putting short-term cash savings into a mutual fund or ETF, or even low-risk bond funds. If you need the funds within the next few years, it's not worth risking any losses, he says, even if it means lower returns.
To put 20% down on a $600,000 home, you would need $120,000 in savings. Putting that kind of money away is a serious challenge, particularly if you have high expenses."Everyone wants to save more, few actually do," Anderson said. "Don't overestimate the difficulty of saving. Start so small that it feels very easy."The current average savings rate is 6.5%, according to the Federal Reserve Bank of St. Louis. But a Northwestern Mutual study found that one in three Americans has less than $5,000 in retirement savings. It highlights the challenges many households face when saving for a home, college, retirement, or any other goal.Advertisement
"Set up an automatic deposit into a new savings account, preferably a high-interest savings account," he says. "It is very easy to open and set up a free recurring transfer into your new savings account." If you make it automatic and line up your automatic deposits with your payday schedule, you will hardly notice that it isn't there.
But when it comes to buying a home, "do not invest your savings account," Anderson says. "If you are trying to save more but see the value drop with your account, it will likely curtail your saving. I have seen people make this mistake."And for the record, Anderson cautions against tapping into retirement funds to pay for real estate. "This is not a strategy to be taken lightly," he explained. "When you use retirement money for a home today it will have an impact on your retirement saving. "People who used this strategy from 2005 to 2007 saw their money vanish as real estate prices dropped."Advertisement
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