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nieceandtows

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Short Term Places for a Downpayment (lemm.ee)

submitted 11 months ago by [email protected] to c/[email protected]

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Hi all -

I need reassurance that having 60-80k in cash isn't wild if we plan to buy/look at buying a home in the next 2-3 years. We're in a DINK lifestyle in a LCOL area and are easily saving $2k+ towards specifically a down payment per month.

Currently: 8k is in a Vanguard account and has been invested in index funds for about 2-3 years now 10k is in treasury funds 5k is abroad in a high interest account that's locked for about another year from a grandparents inheritance 5k is in a CD making ~5% APY

I'm thinking that as we start building up more I'll be trying to keep opening 3-12 month CDs on a regular basis as long as rates stay at 5%

But I'm super risk tolerant and part of me sees all the cash laying around as a waste when I could add to the Vanguard account with more stocks. Mostly because until now I haven't had a real timeline for buying and it always seemed so far in the future that keeping it in stocks made sense.

Can someone help me think through what I'm giving up with both options? 5% isn't bad for now but I don't think rates are going to stay so high forever either.

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[–] [email protected] 9 points 11 months ago* (last edited 11 months ago)

If you're firmly going to buy a house in 2-3 years, putting a down payment into stocks just adds volatility to the amount you're putting down, meaning volatility to the type of house you're able to afford and/or whether or not you are able to afford a house at all. Stocks usually go up 10% ish as a long term average, but they could easily go down 20% in both of the next 2 years.

If you're willing to take the risk and maybe wait up to 3 more years or something to actually buy a house, probably putting them in stocks helps you because the money grows faster. But most people, for lifestyle reasons, want a house in the next 2-3 years and that timeline is firm and not really relying on that money to grow. That is why the advice is usually a CD or high yield internet savings account like Ally or Discover.

[–] [email protected] 4 points 11 months ago* (last edited 11 months ago)

But I'm super risk tolerant

Can you quantify? If the market tanks 30% next year and then stays flat until the end of your 2-3 year timeframe, what's the plan? Will you be OK with that plan?

If that scenario bothers you, or you think it can't happen, maybe reconsider whether you are really as risk tolerant as you think you are.

[–] [email protected] 3 points 11 months ago* (last edited 11 months ago)

The best options are Treasuries or CDs since they lock in rates for the term of the bond/CD. You should be able to do a little better than 5% though, I see brokered CDs at 5-5.5%, and t-bills are ~5.4% for 1-year.

If your state taxes are high, consider t-bills since they avoid state taxes. Check out this site to directly compare fixed income rates based on your tax rate.

RE risk tolerance, you really shouldn't be doing anything risky with a timeline of 2 years. The potential gains will be absolutely dwarfed by your contributions, and any losses will delay your purchase date, especially if they happen at the end of the 2 years. 5-6% is pretty much the limit these days for risk free or low risk returns, so pick something and get to saving.

[–] [email protected] 2 points 11 months ago

It’s not wild. Do the CD ladder or a high APY savings account and consider any loss of growth an insurance payment for not losing half in a market downturn.

It’s especially not a big deal if you have assets beyond what is set aside for your down payment.