Advice for house downpayment savings

[Coronet]

Hi all. I am starting my future house downpayment fund. I am curious what you suggest would be the best option for me. I am not looking to buy this year, or maybe even the next so 2-3 years would be when I would need the money.


I already have about $20k to start with. I am looking to grow this money (as well as put more in) to help curb inflation and keep my money growing. I have considered CDs, Money Market funds (which I currently have the money in), and Mutual Funds. I am not too happy with the poor APR on CDS/money markets. I am also relatively young and new to investing (I'm 23 and just graduated college. I work full-time and have a good income, no debt, etc).

Mutual Funds seem like a great option. I've been reading up on them and have been figuring out which degree of risk I'm willing to take with my money. I am confused a bit by the whole income tax on mutual funds which I'd like to make sure I understand better before I choose this option.

What do you guys suggest I do? Keep my money in money markets (which make me jack, honestly) or move on to something more aggressive such as a mutual fund?

Any advice is much appreciated!

[disneysteve]

If you anticipate needing this money to purchase a home within 5 years, keep it in money markets and CDs. That is too short a time period to ride out the ups and downs of the stock market.

If you are willing to take some degree of risk with the understanding that you may lose principal, you might try investing 10-20% of the money in a diversified stock mutual fund like a total stock market index fund or ETF.

As for taxes, mutual funds make capital gains distributions each year. Those are taxable. Depending on the fund, there can also be dividends which are also taxable. Finally, when you sell your holdings, there are taxes.

[MonkeyMama]

Agreed. Cash. Interest rates are terrible, no doubt, but a down payment on a home in a couple of years is not worth the gamble of bigger returns.

[jIM_Ohio]

The difference in return between CDs and the stock market would be about 9% (and that assumes the market had a "decent" (decent=average) year.

9% of 20k is about $1800. Will $1800 get you a better house?

Weigh the risks and returns.

The biggest risk is you cannot get the house you want when you want. You need to put a price on that (is getting $1800 this year worth that risk). Only you can answer that.

I would do cash with any money I needed to keep
if you can risk losing money, then put that money in the market.

[Coronet]

Thanks for all the advice. I think I have a good idea of what I want to do now.