I have $25,000 in savings, am debt-free, and I live at home; what's the best way to make my money grow?
I'm 24 years old and making roughly $30,000 per year. I put 8 percent of my income into my employer's 401(k). I plan to buy a house within the next few years, but in the meantime I don't want to leave this money in a savings account with interest rates being as low as they are. I have $25,000 in savings, am debt-free, and I live at home. What's the best way I can use my savings to increase before I use it for a down payment?
Stocks are the best source to help your money grow.
I would first suggest thinking about a time horizon or goal on when you plan on buying a house. That should really determine what type of investments are suitable. If it's within a couple years, you don't want to be too aggressive incase a market correction happens within that window.
Rule of thumb if you're young invest in stocks
Other than using a higher yielding savings account, you do not want to risk investing your $25,000 by investing it. If you are planning to buy a house in the next few years, then the $25,000 can be used as part of the downpayment. You may need to come up with additional downpayment money but it depends on the purchase price of your future home. In other words, if you are planning to buy a home for $200,000, then 20% (down payment) would be $40,000. You are short $15,000 of that 20% downpayment so you should consider adding additional savings to reach the 20% downpayment goal. You may be able to put less money down on a home, but working toward 20% is a good start.
If you want to earn higher income on your cash, then I would recommend establishing an online savings account at American Express Bank, Synchrony Bank, Ally Bank, etc. Most of those online banks are yielding about 1.60% or more. You can link your primary checking account to those accounts. There are no minimums and literally zero fees.
You have zero debt, but I'm not sure of your other living expenses. However, since you live at home, they are probably low. You may want to consider establishing a Roth IRA, which is a great retirement account to help compliment your 401(k). You can contribute up to $5,500 per year and the money grows tax-free. It is a powerful retirement account. If you have the cash flow to make the maximum, then I would strongly encourage you to do so. You can establish a Roth IRA at a discount broker like Schwab or Fidelity. At some point, you may want to target 10% toward your 401(k) or even higher. However, if contributing 8% to your 401(k) allows you to contribute the maximum to your Roth IRA, then continue contributing 8% to your 401(k).
Lastly, make sure you have a sound investment allocation, with a fair amount of exposure to growth assets like U.S. and foreign stocks, using high-quality mutual funds and/or exchange-traded funds. You are young, and should be able to withstand greater volatility than most meaning you have many years to make up for losses in your portfolio should your portfolio suffer temporary setbacks.
Best of luck to you!
It's hard to definitely say you should invest the cash that you're saving for a downpayment with such a short amount of time until you'll want to use it to buy a home. Markets are anything but predictable in the short-term and it'd be a shame to have less than what you started with when it came time for the downpayment.
We advise many of our clients with similar goals and time horizon to use high yield savings accounts at online banks such as ally bank. They offer higher interest rates than traditional banks even if it's not a significant amount more, you might as well be getting the best rate you can while sitting in cash.
Unfortunately, there aren't' many other alternatives in the current environment that don't open you up to market risk.
Great job on your retirement and short term savings! Unfortunately, there aren't a ton of options to keep your money safe until the house purchase but still get tons of growth. With a time horizon of 2 years or less, you don't want to put that money at risk in the stock market. Safety is key, at the risk of losing out on growth. If you think you may be 3 or more years away from your home purchase, a short term bond fund might give you a boost in interest, but there is still risk to principal.
I would put your savings in a high-yield savings account such as at American Express or Ally Bank. I would not advise exposing your down payment money to risk by investing it. What if the market crashes a year from now and stays that way for several years? You'd be digging yourself an even deeper hole. With a high-yield savings, at least you can earn 1.7%+ on safe, FDIC-insured cash. Keep saving to it every month until you have enough for your down payment.