Would you risk your savings if you thought you could squeeze more gains from them?
Conventional advice says you should not invest the money you are putting away for the down payment on a home. The reason is you never know what direction your investments will move, and when you are ready to buy a home, you run the risk of not having as much money as you thought.
I’m using a home down payment as an example on account of how large this figure tends to be. If you’re not interested in buying a home, substitute the example with an equally large savings goal that will require a prolonged period to raise.
The recommendation is that you put your money in a safe investment vehicle like a high yield savings account or a certificate of deposit. The interest rates on these vehicles are painfully low, but at least you know the money will be there when you’re ready to put in a bid on a property.
Ignoring Conventional Advice
I’ve chosen to ignore conventional advice for a few reasons:
First, I am in no rush to buy a home. If my timeframe was in the range of twelve to eighteen months, I would be more cautious. A lot of my down payment savings are invested in stock, and if the market were to drop, I would need sufficient time to recover. It’s my goal to get as close to 20 percent of the home price as possible, and it’s going to take a little while for me to reach that range.
Second, it’s because interests rates are so dismal that I don’t see the advantage of keeping my cash stagnant. I worry about the rate of government spending. I can’t gauge the negative impact it will have on the economy. I would rather try to stay a few steps ahead of inflation. Keeping my money parked at a bank where the interest rate is .04 percent won’t help me do that. I’ll take my chances with the 10 percent average return on the stock market.
Third, the idea that I would ever be surprised by the amount of money I have is laughable. I don’t obsess over my investments, but I always have a fair idea of how hard my money is working for me. I’ll scan everything at the start of each month when I go to deposit another contribution.
Fourth, I will never take a direct hit, because my down payment investments are diversified. I don’t invest in single stocks. I invest in total index funds that cover me domestically and internationally, and just recently I got into real estate with Fundrise. I’ll have to educate myself a little more before buying into the crypto craze, but my point is I do not have all my eggs in one basket.
The Fundrise link, by the way, is a referral link that mutually reduces operating costs for both of us.
Finally, I’m no longer convinced buying a home is part of my American dream. I don’t deny the benefits of beating rising rent rates. I do see the value of taking a place and modifying it to make it my own, but if I can remain flexible while passing off maintenance and home owner association expenses onto the property owner, my available cash can help me achieve other goals.
In other words, I have removed the pressure of owning a home as a status symbol. If I buy again, it will be because I feel it is the best fit for my family and not because anyone else thinks it’s what I should do.
When I think of it that way, my cash reserves feel nimble. The money will be there whether I want to use it for a home purchase, a family vacation, or as an extension of my emergency fund, and the cash will have grown at a faster rate because I did not keep it in a bubble.
Think Before You Follow
It’s important to recognize the factors that make this level of risk feasible.
I always pay myself first. My investments get their piece of the pie at the start of the month before any restaurant or retail store get their shot at my money. I don’t even allocate rent money until later in the month.
Yes, you read that correctly. My investments are prioritized ahead of my rent.
But my family’s welfare is never in jeopardy. Any unforeseen changes in employment or health would be absorbed by an emergency fund that’s kept separate from the primary bank accounts. Before I began any serious investing, I sought to build up an account I knew would not generate great returns. The point for this pot of money is to respond to emergencies, but even here I found a money market account with better than average interest rates.
By operating this way, I am steadily growing my savings. Yes, it’s possible my investments could take a hit the way they did in March 2020, but the more money I invest, the less painful the blow from an unexpected surprise. And if there is a surprise, the only thing at risk is the timing of a home purchase. Since I’m already on the fence about homeownership, the risk is minimal.
However, the most important factor in my thought process is my financial discipline. I don’t carry credit card debt. I experience great pleasure from paying off bills, and I am always learning new ways to maximize my capital. You don’t have to think like me to follow my strategy, but setting your priorities and following a strategy that helps you achieve your financial goals will go a long way in ensuring this way of thinking works for you.
Let me rephrase that more bluntly: If you don’t have a good financial discipline, do not follow this advice. Park your money somewhere with a good interest rate, and don’t touch it until you’ve met your savings goal. Also, don’t follow this advice if you’re sensitive to market volatility.
What Comes Next?
If a home purchase makes sense after a few years, I’ll slowly start moving money out of investments and into a money market account to shield it from market fluctuation. As I’ve already emphasized, it’s always important to park your money in a bank with the best interest rates at the time.
I suppose there’s an argument to be made for moving the investments into a more conservative vehicle like bonds instead of a money market. Yet I wouldn’t take that approach, because given the short timeframe, I wouldn’t want to be taxed for short-term gains. If a decision to buy a home has been made, I’m going to want to position myself to pull the trigger without waiting for the bonds to mature.
And then? Well then I would brace myself for the bumpy ride that is the home buying process.
Financial advisors are not wrong to recommend you not invest large ticket savings like your down payment on a home purchase. You don’t want to find yourself short of the money you need to put in a competitive bid. It’s no fun when your investments zig when you needed them to zag, and the timing of this pattern is well beyond your control. Just understand the amount of money you stash away in a traditional savings account will remain largely flat.
However, if you’re flexible with your timeframe, and if you have good discipline, you’ll give yourself breathing room. Adjust your finances the closer you get to the end of your timeframe.
I know this style of thinking will not be for everyone. If it blows up on me, I’ll let you know, but what I am advocating is not gambling. What I’m going for is strategic investment. There’s nothing wrong with earning a little more on money you hadn’t been planning on touching for a while anyway.
So, what do you say? If you beg to differ, sound off in the comments!