Investing Savings Wisely: Your Path To Home Ownership

Saving for a house is a major financial goal, but it shouldn't get in the way of investing for other long-term goals such as retirement. If you're planning to buy a house within five years or less, financial experts recommend against investing your down payment in the stock market or other volatile or long-term investments. Instead, consider putting your money in a savings account, money market account, or certificate of deposit (CD). These options offer higher yields than traditional savings accounts, are FDIC-insured, and provide easy access to your funds. However, if you have a longer time horizon until homeownership, you may have more savings options, including investing in the stock market or government-backed securities.

Savings accounts

There are several types of savings accounts to consider:

High-Yield Savings Accounts

These accounts, often found at online banks, offer higher interest rates than traditional savings accounts. For example, in 2024, Ally Bank offered an annual percentage yield (APY) of 1.05% on its online savings accounts, compared to the average of 0.06% at big banks. LendingClub LevelUp Savings is another example of a high-yield savings account, currently offering an APY of 5.00% when you deposit at least $250 per month.

Money Market Accounts

Money market accounts offer several checking account features, such as check-writing privileges, debit cards, and ATM access. They also tend to provide higher interest rates than traditional savings accounts, though they are not set up for frequent withdrawals and transactions. CNBC recommends the Ally Bank Money Market Account as the best overall money market account.

Certificates of Deposit (CDs)

CDs are a type of contract where you lend money to a bank for a specific period, such as three months or two years, in exchange for a guaranteed rate of return. Typically, the longer you agree to keep your money in the bank, the more interest you will earn. However, if you need to access your money before the maturity date, the bank may charge a penalty fee of up to six months' worth of interest. CDs are best if you don't need your funds for at least six months.

U.S. Treasury Bills

Treasury bills are obligations of the U.S. government that mature in one year or less. They are considered low-risk because they are backed by the full taxing power of the government. You buy them at a discount, and when they mature, you receive the full value. However, this option only makes sense if you have a significant amount of money already saved, typically at least $10,000 to $20,000.

U.S. Savings Bonds

U.S. savings bonds come in two main types: Series I and Series EE. Both offer similar terms and guarantee that investors will never lose principal. However, they are not a good option if you need access to your money soon, as they must be held for at least a year and have withdrawal penalties if you take out your money in less than three years.

Money market accounts

• Competitive APYs: Money market accounts typically offer higher APYs than traditional savings accounts, helping your savings grow faster.
• Check-writing privileges: A unique feature of money market accounts is the ability to write checks against the account, providing added flexibility for payments and withdrawals.
• Minimum balance requirements: To earn interest and avoid monthly maintenance fees, money market accounts often require a minimum balance.
• Withdrawal limits: There may be restrictions on the number of withdrawals or transfers allowed per statement cycle, typically limited to six transactions.
• Debit card access: Some money market accounts offer a debit card, allowing you to access and deposit your savings at ATMs.

When choosing a money market account, it is essential to compare options and consider factors such as APYs, fees, minimum balance requirements, and withdrawal limits. Additionally, look for accounts that are FDIC-insured, ensuring your funds are protected.

• Vio Bank: 5.05% APY, $100 minimum deposit
• Quontic Bank: 5.00% APY, $100 minimum deposit
• CFG Community Bank: 4.90% APY, $1,000 minimum deposit
• UFB Direct: 4.57% APY, no minimum deposit
• Sallie Mae Bank: 4.20% APY, no minimum deposit

Remember, it is crucial to assess your financial situation, set clear savings goals, and consider all available options before deciding where to invest your savings for a house.

Short-term securities

If you're looking for short-term securities to invest your savings in, there are a few options to consider. Firstly, you can opt for a high-yield savings account, which typically offers higher interest rates than traditional savings accounts. These accounts are FDIC-insured, providing protection for your funds. Money market accounts are another option, offering features similar to checking accounts, such as check-writing privileges and ATM access. However, they may not be suitable for frequent withdrawals or transactions.

If you're willing to keep your money invested for a slightly longer period, you can explore certificates of deposit (CDs). CDs are offered by FDIC-member financial institutions and provide a guaranteed rate of return for a specific period, such as three months or two years. The longer you agree to keep your money in the CD, the higher the interest rate you'll earn. However, withdrawing your funds before the maturity date may result in penalty fees.

Another option is U.S. Treasury securities, particularly Treasury bills. These are considered low-risk as they are backed by the full taxing power of the U.S. government and mature in one year or less. However, you typically need a substantial amount of money, such as $10,000 or $20,000, to make this investment worthwhile.

Retirement funds

When you withdraw money from your retirement account early, you typically incur a 10% penalty fee if you are under the age of 59 1/2. Additionally, you may have to pay income tax on the withdrawn amount, depending on the type of retirement account you have. Traditional 401(k) and IRA accounts are funded with pre-tax dollars, so you will need to pay income tax on withdrawals. On the other hand, Roth IRAs are funded with after-tax dollars, so you can withdraw your contributions without paying taxes or penalties. However, you will need to pay taxes on any earnings withdrawn from a Roth IRA unless you meet certain conditions.

Another important consideration is the potential impact on your retirement savings. By withdrawing funds early, you are reducing your retirement savings and missing out on potential investment growth over time. This can significantly impact your long-term retirement goals and should not be taken lightly.

If you are considering using retirement funds to buy a house, it is essential to weigh the pros and cons carefully. Consult with a financial advisor to assess your individual financial circumstances, goals, and risk tolerance to make the best decision for your situation.

Low-risk investment portfolios

High-yield savings accounts

Online banks that have lower overhead expenses than traditional banks often offer high-yield savings accounts with attractive interest rates. These accounts are FDIC-insured, meaning potential losses of up to $250,000 per institution are covered, and you can withdraw funds at any time. However, returns are still quite low, and some banks may charge account fees.

Money market funds

Money market funds are pools of low-risk investments, such as CDs and short-term bonds, that are grouped together to diversify risk. They are typically sold by brokerage firms and mutual fund companies. Money market funds are liquid, allowing you to withdraw funds at any time without penalties. While they are considered safe, they are not FDIC-insured and offer modest returns.

Short-term certificates of deposit (CDs)

CDs are FDIC-insured investments that offer fixed interest rates over a set period, often six months to five years. They are loss-proof in an FDIC-backed account unless you withdraw the money early. With interest rates rising, it may be best to opt for short-term CDs and reinvest when rates go up. There are also no-penalty CDs that allow you to withdraw your money early without incurring the usual costs. However, CDs may have account minimums, and if you withdraw funds early, you will typically lose some of the earned interest.

Series I savings bonds

Series I savings bonds are low-risk bonds that adjust for inflation. They have a fixed rate and an inflation rate that is adjusted every six months. These bonds are purchased from TreasuryDirect.gov and are backed by the US government. If you redeem the bond before five years, there is a penalty of three months' interest.

Treasury bills, notes, bonds, and TIPS

Treasury bills, notes, and bonds are highly liquid securities issued by the US Treasury. Treasury bills mature in one year or less, notes mature in up to ten years, and bonds mature in up to 30 years. Treasury Inflation-Protected Securities (TIPS) have principal values that adjust with inflation. All of these options can be bought and sold directly or through mutual funds. While they are highly liquid, if you sell them before maturity, you may lose some of your principal.

Dividend-paying stocks

Dividend stocks are generally considered safer than high-growth stocks as they pay cash dividends and offer the potential for stock price appreciation. However, they still carry some risk, as a company may run into tough times and cut or eliminate dividends, hurting the stock price.

Frequently asked questions