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How should I invest monthly deposits so I can save for a home purchase?

I'm looking for the best way to invest my money. I want to create savings for a possible home purchase within the next 2-3 years. If I have $700 to start with and $400 in monthly deposits, what are my options for the best outcome in a 2 year span?

Financial Planning, Investing, Real Estate
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December 2016

This won't be the answer you are hoping for, but investing is a long-term game. If you think you'll need access to your money within 2-3 years, the "book" says to stick with conservative short-term investments (like a money market fund, short-term bonds, CDs, etc). The reason is, that if you happen to invest in stocks and there is a market downturn, you could temporarily "lose" value in your account. The ideal response would be to not sell and liquidate the account, but to wait for the market to rebound so you can recoup your losses. This happened in 2008 and it took us a few years to get back to even and you may not want to wait an extra few years to purchase that house. So, with that said, it's safer to stick with ultra conservative investments for that time horizon. Unfortunately, CDs and money market funds aren't paying much interest over 2-3 years, but at least you'll know your money is safe. The best thing you can do is save as much as possible and buy a home that is within your means. With no interest, you should have over $15,000 in 3 years.

Another thing to consider is to speak with a mortgage lender to determine what potential first-time homebuyer programs might be available to you (assuming this is your first home). Sometimes, you may be able to receive grants from your state, or you may not be required to put as much down for a down payment when buying your first home. With good credit, one can currently borrow 95% on a conventional mortgage and pay a little extra for mortgage insurance (not saying I recommend to do so, but it's available). The key is to know that you don't necessarily need to put 20% down to purchase a home, even though that would be ideal to do so.

Good luck to you and good job thinking about these things 2-3 years ahead of time.

Joe Allaria, CFP®

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