Which investment and/or saving option will help me generate the most funds to put toward a down payment?
I am 26 and I have no debt. With my current job, I can comfortably put money into my 401(k), ESPP, and HSA. I don’t own a house, and I am not saving enough for a down payment on a house. I wanted to save my ESPP investments for a possible down payment in the future, but I am enjoying the growth in the stocks right now. Should I ease off on contributing to my 401(k) plan, or should I stop participating in the ESPP and save that money for a house? My goal is to save at least $10,000 in my 401(k) every year, in addition to the company match, and eventually max out my 401(k), my HSA contributions and my ESPP contributions.
One of the biggest mistakes I see people make is not to have a balance between funds in retirement (non-liquid available funds) and after-tax available funds. They are so worried about the tax deduction, that they cannot do things outside of retirement like buying a home or alternative assets. A good rule of thumb is to have 30% to 40% on the outside, and then 60% to 70% inside their retirement accounts.
The other mistake it to get too much stock in the company they work at because their salary & "life" is tied to that company. Think of your salary as a company bond. You shouldn't own more than 8% in any one stock, especially including the company you work for unless you are willing and able to take more risk. So if you participate in the ESPP because of a discounted stock price, I would sell some or all as soon as you vest and diversify away from your own company. Enron comes to mind and the employees all thought they had knowledge of the company's future not knowing what upper management was really up to. If you are too young to remember, Google it.
So without knowing all of your details, I would suspect you need to either save more on the outside or sell the ESPP stock as soon as it vest. The good news is that you are off to a great start early so congratulations.
Hope this helps and best of luck, Dan Stewart CFA®
Congratulations on a clean balance sheet!
First, your priority should be the 401k - you never get these years back and the compounding effect of the money you're saving growing tax-free for 30-40 years is huge!
Next, your HSA is also a tax-advantaged account that you could keep around for many years. If you don't have a lot of medical expenses it's not imperative to save there, but it can also be a tremendous place to grow funds over the years because of the tax advantage. I'd probably keep it.
Finally, your ESPP. The answer here is highly dependent on the terms of your ESPP and also how soon you plan to buy the house! Most ESPP allow employees a chance to buy stock at a discount, or similar advantage. That's a great way to save...but right now you have another goal. If you're funding the first two accounts, you're already off to a great start saving, and now you have to prioritize the rest. You could use the ESPP to save for the house, but the terms may not provide the liquidity you're looking for, and remember, stocks can go down too! If you save $50k for a downpayment and it turns into $40k by the time you can access it, you're going to be quite upset.
My advice: save in the tax advantaged accounts first. If you are buying in the ESPP and can liquidate the stock quickly, then you could continue to save that way and simply sell the shares and move them into something safer. If that's too much and/or the rules won't allow you? Just forget the ESPP for now, and max out a good old short-term savings account until you reach your house goal.
Consider these questions: How much do you need to save for the down payment? How soon do you want the down payment money (goal timeframe)? How much will you need to save to reach your goal? Assuming the answer is a short-term goal (1-3 years) you should start putting money into something secure and non-tax deferred - i.e. just a regular type of savings account or a very low fee, liquid, defensive invesmtent strategy. You don't want to take risk with that money since it is a short term goal. The other thing is, you don't want any penalties or to short-change your long term retirement but taking money out for a house anyway. So, reduce the contributons appropriately where it makes sense for the short term to reach your short term goal.
You can always invest more later anway and a house might be a great investment.
Hope that helps.
While every situation is circumstantial, based on the information given here you should forget the ESPP for the time being. DO NOT ease off 401(k) contributions. Remember that time in the market will always beat timing the market. The power of compounding is enormous, especially since you have 33.5 years left before you can withdraw those funds without penalty. There are plenty of ways to grow your savings without taking on nearly as much risk and keeping the funds liquid (depending on your timeframe) such as lattered CDs, money market funds, and high interest savings accounts. In the meantime while you are saving, look into first time home buyer programs in your state to discover ways to leverage assistance programs.
You don't use ANY of those to put a down payment on a ANYTHING. Those are retirement vehicles which are taxable when you withdraw the money (as well as a 10% penalty if you are under 59 1/2). In addition, your HSA can only be used healthcare cost. Those are also long-term savings vehicles which mean that in the short-term may have some volatility. Stocks may be doing good now, but maybe not so good when you need the money for the down payment.
For issues like you are stating or for short-term needs and purchases the best place to put your money is in a savings account in the bank. Its the safest and most liquid vehicle to use.
Hope this helps.