With the typical home down payment now over $60,000 — nearly double what it was before the pandemic, according to Redfin — it might seem like it would take forever to accumulate enough, putting the dream of homeownership out of reach.
Yes, starting from zero and trying to save a bit each month will take a while. To put together that princely sum, you’d have to save $500 a month for around nine years in a high-interest savings account yielding 2%.
But that’s not your only option.
You might be tempted to try the routes with the potential to speed the process — like investing in cryptocurrency, meme stocks or just an S&P 500 index fund
But this can go badly wrong.
“I had a client who day traded the down-payment money for his house. I didn’t know about this until I was working on their tax return and got the 1099-B from the broker. As expected, there was a very large capital loss,” says Larry Pon, a certified public accountant and financial adviser based in Redwood Shores, Calif.
Another client was convinced bitcoin
was the way to double his money fast. You can guess what happened to that plan.
And high-risk instruments are not a prerequisite for going astray. The Dow Jones Industrial Average DJIA, the Nasdaq COMP, the S&P 500 SPX and even the bond market BX:TMUBMUSD10Y are all down sharply this year.
“I’ve been doing this for 36 years, and the advice has never changed: You park a down payment somewhere safe,” says Pon.
The following are some strategies to help your savings grow faster so you don’t grow too old to enjoy your white picket fence.
First of all, you need a house fund
“Move [down-payment] money into a separate savings account and name it,” says Jean Chatzky, personal-finance expert and CEO of Her Money. People may find this silly, but she’s serious and includes it in a step in her Finance Fixx courses.
Be as visual about it as you can, like naming it the “304 Maple Avenue Fund,” so you’re motivated to save for a specific goal.
Then set up automatic monthly deposits, as you would with 401(k) deductions from your paycheck, Chatzky says. You can even ask your payroll department to have the money sent there directly from your paycheck, so you never have the opportunity to spend it.
Want to save even more? Shield the growth of your savings in a health savings account, where you can save up to $3,650 a year for an individual in 2022. That money comes out of your paycheck before taxes, and the growth is also free of federal, state and local income taxes.
“Don’t reimburse yourself as you go, but save the receipts,” suggests Pon.
When it’s time to buy a house, you can withdraw the money and the earnings — up to the amount you have justified with the receipts — without penalties or fees.
Squeeze the most yield you can
The goal with short-term savings is to get the most interest that you can without taking on risk. In today’s economy, that’s always shifting. I-bonds are a great option if you have a large chunk already saved and your house purchase is at least 15 months in the future. In October 2022, for example, you’d lock in a 9.62% rate for the next six months, and then probably another decent rate for another six months.
A couple of caveats: You must hold I-bonds for at least a year, and if you cash in before five years you’ll lose three months of interest. Since the rate changes every six months and the Treasurydirect.gov buying system is clunky, it’s probably not the best for incremental purchases.
That’s why financial adviser Jeremy Keil, based in Milwaukee, is turning right now to Treasury bills and laddering them for clients. “It’s always about getting the best interest you can find,” he says, and he finds the yield on six-month bills
at nearly 4% in early October, to be the best option.
Laddering strategies can be complicated, requiring spreadsheets and constant management, so you might want to ask a financial adviser for help. Some brokerages will help you create Treasury ladders or CD ladders that will automatically roll over and reinvest for you.
You can also consider other bond options. Nicholas Olesen, a financial adviser at Kathmere Capital Management in Wayne, Pa., has a client closing soon on a house, putting money into ultrashort California municipal bonds. You can access short-term bonds through exchange-traded funds too, and some yield 4%, he says.
With rates changing so quickly, you’ll want to be cautious on how long you lock up your money. In the very short term, a simple high-yield savings account might be your best option.
Other ways to turbocharge your savings
Still not going fast enough for you? Increase your savings rate. “Maybe you take on a weekend side hustle or ask for a raise. You could look for a better paying job,” says Bobbi Rebell, a certified financial planner and host of the podcast Money Tips for Financial Grownups.
You can also look at your tax refund, bonus and gifts from family members to put big cash infusions into your house fund.
“Drip-drip-drip is a great strategy, but people get impatient with that,” says Pon.
Another way Pon’s clients save for down payments is by looking at their restricted stock options and employee stock-purchase plans. “This is part of income, not necessarily part of equity,” he says, especially if you exercise the options right away when you know their value.
Shift the goalposts
At the end of the day, a goal of $60,000 — or whatever your initial target might be — could be too much for you. So think about a smaller house or waiting out a housing market in which mortgage interest rates are touching 7% and house values are shifting daily. “Biding your time is a good financial move,” says Chatzky.
If anything seems too expensive, it probably is. Walk away and keep looking. “Take comfort in the fact that as a buyer you always have choices. There will be another property to buy,” says Rebell.