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March 7, 2022

Is it Better to Invest or Save Your Home Down Payment Money?

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With housing prices soaring, it can be hard for people looking to save for a home down payment. To make things worse, even high yield savings accounts aren't yielding much.

Recently, I received a question wondering if investing for short-term goals like a home down payment is a smart way to go. 

“Is there a recommended way to save for a home down payment through investments given the relatively short term (3-5 years) of the investment before withdrawal?”

This is a big question and one that stirs up some old memories for me. 

Let me tell you about the time I invested my home down payment money and why I’ll never do it again. 

My Experience With Investing My Home Down Payment Money

10 years ago, my wife I were talking about buying a new home. 

She was tired of trying to make my bachelor pad into a family home and wanted some more space for our growing family. We had one baby and we were already considering another. 

Before we started looking for our next family home, we knew we needed to save up for the home down payment. 

At the time, I had heard it was smart to save at least 20% for the home down payment. Given my horrendous experience with my first home mortgage, I was all for a 20% down payment or much more if we could swing it. 

Lucky for us, my new job was paying off big time. I went from making $70,000 in 2010 to $240,000 in 2012. My base pay didn’t change much, but my commission went up immensely based on some huge sales that happened that year. 

We weren’t used to that kind of money. So we just saved a ton of it. 

There was a point in the year when we had a $100,000 commission check coming home and I didn’t know what to do with it. We wanted to get a house and we wanted to do the smartest thing with it. 

So, I asked my investment broker at the time, that I had connected with through Dave Ramsey’s ELP system. Nicole didn’t trust him. I thought he had the Dave Ramsey blessing so I hung on every word he said. 

I mentioned we had a few years before we were going to buy a house and we wanted to put this money someplace safe. He ended up buying $100,000 worth of bond funds because they were a safer shorter-term investment. 

Here's where investing our home down payment went wrong:

  1. The initiated buy and the subsequent front-load fees took our $100k down to around $95k
  2. The bond market (or at the least the funds he invested in) went down so our $95k was starting to lose value as well
  3. We got nervous about this drop in value (that we didn’t understand) and pulled our money out early

It was a combination of my blind faith in an investment broker and my lack of knowledge about investing and the inherent risks associated with it. We were so shaken by this experience that we ended up leaving this investment broker altogether

Why I Won’t Invest My Home Down Payment 

After financially traumatic events like this, I usually get pretty sad. And then, I take action. 

For me, this meant, understanding what went wrong and then never repeating it again. Also, it meant educating myself on investing. 

And now after 10 years of managing my own portfolio and helping our family’s net worth grow to over $1,000,000, I’ve learned some important lessons about investing:

A 3-5 Year Investing Timeframe is Too Short

Some folks may call not investing your home down payment money conservative, but I find it comfortable. 

The average bear market lasts around 9 months, but the worst one lasted 5 years. I'd hate for my home down payment money to be tied up in a down market when I’m ready to buy.  

Could I invest in bonds instead of stocks? Sure! But with bonds not looking so hot lately, there’s a chance those could lose value as well. 

Also, with such a short period of time for compound growth, the overall gains might not work in my favor. 

Your Timeframe Could Become Shorter

In our example, not only were we nervous about our portfolio losing value, but we ended up wanting our home sooner than we originally thought. So when we say we have a 3-5 year timeframe, what happens if you find the house of your dreams in year one?

Yes, you could sell off your portfolio. Similar to our situation, you could sell it at a loss and find yourself in a state of financial depression as we did. 

Amplified Stress in the Home Buying Process

Buying a home in this market is already stressful enough. We’ve heard stories of new homebuyers paying $100,000 over the asking price just to get their new home. 

Managing an intricate investment portfolio and managing the home buying process might be enough to make a family lose their minds. 

If we ever buy a home again, we'll be keeping our home down payment savings in cash.

How to Invest Home Down Payment Money (If You’re Not Too Conservative Like Me)

Okay, you’ve heard my background on why I’d never do this again and my strong opinions on why I won’t do it in the future. 

But what if I didn’t make these mistakes in the past. What if I wasn’t so scarred by the home buying process? The same scars that made me want to become mortgage-free in less than 5 years.

Well, let’s pretend I’m more aggressive with my money and I didn’t have these past financial bruises. If that were the case, I might consider something like a balanced fund, 60% stocks, 40% bonds. 

Or even something like my friend Sam Dogen suggests on his blog … a lower-risk portfolio of 50% stocks, 30% bonds, and 20% cash. 

I’m sure there are folks who even invest their entire home down payment in stocks! 

But I’m not one of them. Who am I fooling? 

I’ve had some rough experiences and I understand human nature. When the market drops, we freak out! Especially if we need this money sooner than later. 

I’m able to ignore most market drops because I know that I’m 20 years away from retirement. I know I don’t have that much strength and resolve when it comes to short-term investing. 

How to Save Your Home Down Payment

Let’s say you are feeling my neurosis and financial trauma and are not planning on putting your money in the market during this time. 

But you’re still thinking … “Hey Andy, this inflation is killing me. The housing market is killing me. How can I eventually get enough to buy this home I want?”

While you can’t control inflation or the rising housing market, you can only control yourself and your earnings. 

Here are 5 ideas to try:

​​Automate Your Savings

Once you’ve determined a reasonable monthly savings goal, make it automatic. 

Partner up with a good online bank that offers a high yield savings account. I like Ally.  I’ve been a customer of theirs for a few years now. 

Set up a recurring deposit each month from your checking account to your new online savings account. This way, you’re setting it and forgetting it. Before you know it, you’ll have that home down payment ready!

Use “New Money” to Fund Your Account

If you want to speed up the process even faster, take the “new money” that comes into your life over your savings period and save it all as well. Here are some examples:

  • Tax refunds
  • Selling stuff on Facebook Marketplace
  • Bonuses
  • Commission checks
  • Inheritances

Some of this newfound money is rare, but if you’ve made a conscious plan beforehand to allocate it toward your goal it won’t float away when it arrives. 

Transfer Spending to Cash Back Credit Cards

If you’re pretty good at living within your means. I’d suggest signing up for a cashback credit card like Capital One’s Quicksilver. It’s my favorite card. 

If you sign up and hit their $500 minimum spending requirement within 3 months, you’ll receive $200 cashback. Additionally, you’ll get 1.5% cashback on all purchases. 

Nicole and I get a check from them every so often based on our typical spending. I love getting random checks in the mail!

If you’re not already living on a budget and don’t have control of your spending, then I wouldn’t recommend getting a credit card. But if you are in control of your spending and you’re going to be spending the money anyway, you might as well be rewarded. 

Use Visual Motivation to Help You Hit Your Goal

If your home down payment savings goal lasts for years, your motivation might start to fade. That’s why it’s important to keep that goal front and center in your life. 

Print out a picture of your dream home and attach it to the fridge. That way, you’re reminding yourself of your goal on a daily basis. When you’re tempted to move away from your plan, that picture will keep you focused!

You can also use a chart or goal thermometer and have fun with it. Each week or month, you can color in another level on your chart until you’ve reached your goal.

Make Sure you Factor in All Other Costs of Homeownership

Your home mortgage is only one piece of the homeownership puzzle. Don’t forget about these important recurring monthly costs as well:

  • Utilities (electric, gas, water, etc)
  • Home maintenance and repairs
  • Lawn care

Also, you’ll want to save up enough for these one-time expenses as well:

  • Closing costs
  • Updates to the house when you move in
  • Furnishing the new home

When we forget about these important costs, that’s when the credit card debt can start to take over. It's super easy to throw that stuff on a credit card, but you’ll be paying majorly high interest for it and it might take a while before it’s all paid off. 

Final Thoughts on Investing or Saving Your Home Down Payment Money

Saving for a home down payment takes time and a whole lot of patience. 

After being a homeowner for nearly 20 years, there’s a whole lot of time and patience needed once you get the home too. It’s a lot of work! 

So enjoy the journey and try to appreciate where you are right now in life. You’ll be a homeowner soon and you’ll be onto the next responsibilities of life. 

Do you think you should invest for your home down payment?

Are you more conservative when it comes to short-term goals or more aggressive?

Please let me know in the comments below.

Andy Hill

Andy Hill is the award-winning family finance coach behind Marriage Kids and Money - a platform dedicated to helping young families build wealth and happiness. With millions of podcast downloads and video views, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world. When he's not "talking money", Andy enjoys being a Soccer Dad, singing karaoke with his wife and watching Marvel movies.

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