You want to buy a house. But you know the market is tough right now with a lack of supply and mortgage rates that are much higher than they were in recent years.
Perhaps you’re taking Clark Howard’s advice and waiting on the real estate market to improve. Or maybe you’re not ready to commit to a city or a mortgage for a number of years. But you’ve already started saving for a down payment.
You know that keeping a stack of cash under your mattress will be a failure. Inflation will eat away at your purchasing power. And you could be earning more than 4% interest by stashing it with one of the best high-yield savings accounts. But depending on how long you have before you’re going to buy a home, that seems conservative.
So where should you put the money? That’s what a listener of the Clark Howard Podcast recently asked.
Where Should I Put My Down Payment Money When I’m Years From Buying a House?
I’m planning on buying a house, but not for a number of years. Where should I stash my down payment money in the meantime?
That’s what a Clark listener asked on the June 21 podcast episode.
Asked Katie in North Carolina: “My husband is active-duty Army. He’s approaching Year 9 of the 20-year full retirement. We are serial renters until we’re finished with the military.
“Therefore, we want to buy a house in 11 or 12 years. We are setting aside $10-15,000 per year. What is the best location to save these funds? We are currently putting it into a moderate-risk money market account with Vanguard. Would you suggest a different location given the length of time till the funds are used?”
You won’t get a scowl of disapproval from Clark based on that approach.
“That’s actually a decent choice,” Clark says. “You’re probably in the Vanguard Federal Money Market Fund or some equivalent.
“Having the money for the home in a Vanguard money market fund is absolutely a wonderful choice. If it’s a federal obligation, it’s equivalent nad potentially superior to FDIC insurance.”
Getting a Return With a Horizon of a Decade: Considering the Options
Let’s take a step back.
According to Katie’s numbers, her family will set aside somewhere between $110,000 and $180,000 by the time they’re ready to buy. Katie also didn’t indicate if this is the first year they’re starting to save or if they’ve already accumulated a big amount.
Either way, Katie and her husband expect to set aside a six-figure amount between now and the year they plan to buy a house.
Even assuming the minimum of $110,000, at 20% down — a typical amount that mortgage lenders want — you could get a mortgage worth $550,000.
If the couple has already saved some money, waits 12 years instead of 11 and saves closer to $15,000 a year instead of $10,000, that bottom-line number will be much larger. That’s not even counting any interest the couple makes on their money.
The Vanguard money market fund that Clark cited has returned 3.89% annually since its inception in 1981. That’s a lower rate than the savings accounts I cited earlier. Remember that one-year CDs are paying better than 5% right now.
Saving for a House: Consider Investing the Money
Clark has long defined true investing as a time horizon of 10+ years. And in this case, Katie and her husband are saying they’re not planning to buy a home for more than 10 years.
So it seems fair to mention that the couple could put some or all of their money in the market.
The average annual return of the S&P 500 (1957 through 2022) is about 10.1%.
Assuming they save $2,500 per quarter for 11 years, a 4% return — slightly above the long-term average of the Vanguard Federal Money Market Fund, excluding the 0.11% expense ratio — they’d save $138,219 before taxes.
Now let’s change the annual return to 10%. Suddenly their pre-tax mortgage amount equals $196,756. A 20% down payment would equate to a mortgage of nearly $1 million.
Given the length of time that Katie and her husband plan to save, and the amount of money they’re putting aside every year, how conservative or aggressive they are with the money could be of major consequence.
You’re also not stuck making an all-or-nothing decision with the full amount you’re setting aside for a home. You can allocate some to a total stock market index fund or ETF and keep the rest in a money market fund, for example.
Consider Investing in Your Thrift Savings Plan Before Saving for a House
We’ve only discussed saving for a home in a vacuum. But military members have access to the Thrift Savings Plan (TSP).
While not as publicized as 401(k) accounts, TSPs are terrific retirement plans. Clark highly recommends them.
“One thing you’ve not said is whether your husband is participating in the TSP. It’s an important part of your long-term financial security going forward,” Clark says.
“I would even be comfortable with you reducing the amount you’re putting aside for the purchase of a house in 11 or 12 years so that you’re putting money into the Roth version of the Thrift Savings Plan.”
Clark thinks, based on the information that Katie gave, that she and her husband may be hoping to pay for a home in cash. Or at least are trying to get a mortgage with a down payment representing a very significant percentage of the home’s value.
“I’d rather you make a huge down payment [instead of buying the home outright] even if you have to take out a mortgage for some amount of it just so you’re putting significant money into the TSP,” Clark says.
If you’re saving money for a house and you plan to wait years before you buy, you have options.
The shorter your time frame, the more conservative you want to be with your money. Most people aren’t putting aside massive amounts of money more than 10 years before they plan to purchase a home.
However, you don’t want to totally sit on your money and earn nothing. Each year, inflation will make your cash worth a little less on the market.