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?
You can open up a bank account with the initial $700, and then begin a payroll savings plan that will automatically transfer $400 into that account each month. That will be the easiest way, since it will involve no effort on your part, and the transfers will be automatic.
As to where to invest the money, you need to be conservative since you A) have a short time horizon of just two or three years, and B) you have a very specific purpose for the money.
I would just put it into a bank money market account, or even short-term CDs. You should be more concerned with keeping your principal value safe than with growing the account.
The problem with growth investments is that they come with risk. For example, it's possible that while looking to gain 10% in investment earnings, you end up losing 20% in a market downturn. That would hurt your effort to save for the down payment on a house, rather than helping it.
Using the numbers that you have given of $700 upfront, plus $400 per month for two years, will give you a balance of $10,300, plus interest. Given that you can purchase a home with a down payment of as little as 3% of the purchase price, that would enable you to buy a house for over $330,000, if your income can support the mortgage.
If you save for three years, that will give you $15,100, which will enable you to purchase a home for over $500,000.
Buying your first home is an exciting goal and you’re planning wisely by setting aside monthly savings towards that goal. A key consideration when determining how to invest those savings is the length of time until you will need to access those savings. 2 years is right around the corner, and considered a shorter time horizon, so it is prudent to pick conservative investments for the time being, such as CDs (Certificates of Deposit), money market fund, or short duration bonds. The reason for this is that you want to park your savings somewhere that will protect your money from declining in value. Other investments, such as stocks & mutual funds are considered more volatile, as they fluctuate. Market fluctuation exposes yourself to the risk that at the time you want to access your funds to buy your home, the value may have declined.
I recommend that you speak with a mortgage consultant to help you determine what your mortgage options will be as a first-time home buyer, and to prepare you for the fees and closing costs that you will also incur and may need to bring to closing.
Cheers to your decision to buy a home!
Like others will say, you should invest in a safe investment vehicle.
The problem these days is that interest rates are so low, that you won't get much upside on your investment. However, especially where we are now in the market cycle, you would be risking a 25-30% loss versus gaining maybe 10-15% over the next 2 years. I don't like these odds. That's why we recommend that you invest very conservatively.
You should check online banks. They normally have higher rates than brick and mortar banks. You could get a $700 6-month CD to start with. Contribute into a savings account. Once your first CD matures, get another one with your savings account money and your proceeds. As interest should go up over the next 1-2 years, you should be able to earn about 1%... Not much but better than nothing.
I hope this helps.
With a time frame of 2 to 3 years, your best way to save is in a savings account. Look for accounts that pay the best interest or look for a CD that matches your timeline. Usually, credit unions and online banks tend to pay the most competitive interest rates. I do not recommend investing in the market because if the market dropped, you probably would not have enough time to recover, delaying your goal of buying within 2 to 3 years. Personally, I don't think the potential for gain is worth the risk for loss with a short window of time.
I would recommend waiting until at least 2020 to buy a house, since we have likely entered a second major bear market for U.S. real estate which could be more severe than the one in 2006-2011 because valuations in many cities today are considerably higher than they had been in 2005-2007.
Starting with 700 dollars and adding 400 monthly is a good plan. I would go to http://myra.gov/ where you can get 2.25% guaranteed by the U.S. government. You can link this account to your checking or savings account and make periodic or one-time deposits. You can also keep those funds there if you wish to build up your account for the future where it will grow tax-free for life. You can make a withdrawal for a down payment without a 10% penalty to buy a house, but by then you may have another source of funds available. It is a very good idea to have this kind of account or an equivalent Roth IRA so that you are compounding your assets through time so they can double repeatedly. That can't happen with a house except rarely in bubble conditions which is much less reliable.