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Practical advice to brighten up your financial future.
At the risk of sounding like a boring influencer, I got a lot of questions about what to do with the money you plan to use for a down payment on a house. The best thing to do is save and invest your down payment according to your risk tolerance and time horizon.
Risk tolerance is the amount of potential loss you can bear in pursuit of a potential gain. Pair it with your time horizon or when you plan to buy your home in the future and you have a down payment investment strategy.
In general, you can be riskier with money that you don’t need soon. If you don’t plan to buy a home for 10 years, most of your down payment may be in risky assets, like the stock market, as the markets still have plenty of time to recover if they do. dive.
However, as you approach your target closing date, you will want to move your money into safer investments to avoid the risk of losing a significant amount of money in the markets when there is not enough. time to retrieve it.
From the riskiest to the most secure, here are the vehicles at your disposal:
- Total stock index funds: You shouldn’t plan to withdraw the money you’ve put here for at least five years. Since the stock market tends to fluctuate a lot in the short term (but it only ever rose in the long term), you need some time on your side to park the down payment money here.
- Total bond market index funds: The broad bond market is historically less volatile than the stock market, making it a safer place to preserve your money. On the other hand, you are less likely to see as much growth compared to the previous option.
- Certificates of deposit (CD): We no longer wade through the investment pool, which means there is virtually no risk of losing your money. If you’re sure you won’t buy a home next year, CDs are a great place to keep your money safe and earn more interest than a High Yield Savings Account (HYSA).
- High yield savings accounts: I get it, keeping a huge pile of cash in a bank account that earns virtually no interest (in this inflationary economy!) Is frustrating. But it really is the best place to store the money you will need to spend over the next few months.
Bonus tip: You can also withdraw up to $ 10,000 from an IRA to buy your first home, but think twice before giving up some of your retirement savings to buy a home. The IRS also has a great definition of a first-time home buyer, which you’ll want to familiarize yourself with here.
Besides having kids, buying a home can be the most important financial decision a person can make, so I don’t take your questions lightly. Talk to a financial advisor about the best strategy for your situation.
