Six Year Time Horizon

[mdm85]

Hi Guys, long time lurker, first time poster.

DH and I are 24 and have lived in our starter home for 3 years.

We are saving for a downpayment for our next house. We are planning to move in ~6 years are our goal is to save ~10k a year.

What investment strategy do you guys suggest? I currently have the money in an HSBC online savings account earning 1%.

Thanks, everyone. Love this board!

 

[Htown Harry]

Welcome.

There's nothing wrong with a bank account at this early stage in your financial life. The number one advantage, of course, is your savings won't go down in nominal value.

If you have a separate cash-equivalent emergency fund already available, you can juice up the returns a little with CD's, purchased to expire / roll over around your target date.

Over the next 6 years, however, there's some inflation risk. With savings interest rates near a generational low, I personally wouldn't buy a 5-year CD. Better to buy a 2-year CD and roll it over twice, to maintain some potential to catch higher rates [-]if[/-] when rates go up.

I-bonds or other US savings bonds purchased through your employer or bank would be as exotic as I would go in your situation. Save the riskier - and potentially higher-returning - investments for your retirement accounts. (It's been a long time for me - definitely check for minimum holding periods before your buy savings bonds.)

That's my 2 cents...

More specific responses will come more easily if you provide a more specific problem statement. Perhaps you could elaborate a bit on your overall financial situation, your (and your spouse's) tolerance for risk, and savings options you have been considering.

 

[kumquat]

If you own your house now, just dump the extra $10K into paying off the mortgage (if possible). It will gain whatever percentage you are paying and up your down payment by whatever you put in.

Six years is not enough time to pursue riskier investments.

 

[kyounge1956]

If you own your house now, just dump the extra $10K into paying off the mortgage (if possible). It will gain whatever percentage you are paying and up your down payment by whatever you put in.

Six years is not enough time to pursue riskier investments.

But what if housing prices drop some more? The OP could pay a lot extra on the mortgage without his equity necessarily increasing by the same amount.

 

[DblDoc]

But what if housing prices drop some more? The OP could pay a lot extra on the mortgage without his equity necessarily increasing by the same amount.

Doesn't matter. They have, in essence, a (-) bond they have to pay off regardless of what housing prices do. Paying it off will yield whatever their mortgage interest rate is minus their tax write off which is likely MUCH better than any short term CD rate offered currently. I'd go with Kumquat's advice.

DD

 

[mdm85]

Thank you all for your advice; I genuinely appreciate it.

I can give some more of our financial picture if that helps:

So far we are saving 9% of our income in a 401(k) (up to the match) and maxing out a Roth.

Additionally, we have about ~20k in various mutual funds. (We are thinking this would be a good jump start to our future kids' college funds)

We also have a 9 month emergency fund in an online savings account.

=====================

I really like the idea of paying down the mortgage and think that right now that may give us the biggest return possible, but I worry about the liquidity. We will definitely be picky when buying our next house and want to buy before we sell our current home and I want to have the money in hand to put down on the new house to reduce our monthly payments.

As for our current house, we are lucky to be in an area that wasn't really affected by the housing crash and we currently have positive equity.

 

[norisk]

I really like the idea of paying down the mortgage and think that right now that may give us the biggest return possible, but I worry about the liquidity. We will definitely be picky when buying our next house and want to buy before we sell our current home and I want to have the money in hand to put down on the new house to reduce our monthly payments.

As for our current house, we are lucky to be in an area that wasn't really affected by the housing crash and we currently have positive equity.

I agree with the strategy to pay off mortgage - its effect is like "earning" a return on your investment equal to your current mortgagage rate it (since you are not spending it on interest payment) with no risk involved. I think this works even if the house prices tank, since you owe the same amont to the bank whether or not your equity is positive or not - what you are doing is effectively reducing the loan to the bank.

You could get home equity line of credit (HELOC) to use for downpayment when you are ready. That way you have the liquidity when you need it, you dont pay any itnerst until you use it. I used this strategy with my first home, and it worked out beautifully (in my CU there was no cost for HELOC, which may not be the case everywhere - in some states you may have to pay some tax on HELOC).

 

[rayvt]

Unless your plans change----or get changed for you. That 10K is locked up in your house until you sell it.
Money you are saving for a down payment must not be risked. Which means that you can't invest it, you need to save it in a savings account. You don't invest it in the stock market, you don't invest it in a REIT, and you don't invest it in real-estate. Which includes not investing it in your own house.