We’ve been on our journey of saving for our home down payment for a bit over a year now. While we had hoped to reach our goal in twelve months, we didn’t. But extending our timeline has fortuitously synchronized with all the other cogs that are turning in our day-to-day lives. So no tears.
During this time, I’ve thought a lot about the best ways to maximize our savings. This has been the best way to save for a house…for us. Feel free to pull from any of these techniques, or give a read over some that have not been the best match for us, but are still good ways to save.
Best Way to Save for a House: High-Yield Savings Accounts
Initially, we were keeping all of our savings in the dull savings account offered by our established financial institution. I was getting really frustrated with the interest rate, though. I shopped around, and found a high-yield savings account that quadrupled what I was earning before.
This has allowed our money to grow at an increased clip. Interest can feel like free money, but you should remember that sometime in January, your bank will be sending you a 1099-INT, which is a form you’ll need to file taxes. That’s right: you’ll have to pay taxes on the interest, but as long as that interest doesn’t bump you into the next tax bracket, it’s likely better to pay taxes on more money than to not pay taxes on no money. At least that’s the way it worked out for us.
Best Way to Save for a House: myRA
myRAs are meant to be retirement accounts. However, since they operate like Roth IRAs, you can pull your contributions out at anytime without a tax penalty. You just can’t touch the interest.
Why, oh why, would we want to put our money into a myRA if we can’t use the interest without penalty? Because of the tax savings. The myRA falls under the Savers Tax Credit, allowing you to deduct anywhere from 10%-50% of your contributions up to $2,000 if, as a married couple, you make under $61k. For us, that meant the tax savings was greater than the interest we’d gain by keeping it in our high-yield savings account. Plus, there’s the small bonus of the interest from the bonds. That we’ll keep for retirement.
You may be thinking that we should have just invested that money via a Roth IRA. We’d have much greater potential for higher gains. This is true, but we’d also have much greater potential for higher losses. This is a short-term savings goal of ours, and we don’t have 30 years to wait for the market to correct itself.
We were only able to take this deduction once instead of twice, because my husband is a full-time student and therefore ineligible. Another thing to take into consideration is that if your Roth IRA is currently your sole retirement vehicle, you may not want to take this route. You are only allowed to contribute $5,500 per year if you are under 50, and anything you contribute towards a myRA counts towards that limit. It doesn’t matter if you have two separate accounts. You, as a person, are limited to $5,500 total. Saving for a house shouldn’t cramp your retirement savings.
Best Way to Save for a House: Certificates of Deposit (CDs)
If saving for a home is more of a medium-term goal for you, you might want to look at CDs. When you open a CD, you give your money to a financial institution for x amount of years, and they promise to pay you an interest rate which is usually higher than anything you’d be able to find even with a high-yield savings account. You just can’t touch the money until x amount of years are over.
Interest rates used to be much higher prior to the recession, but in recent months they have started creeping back up, making this something worth looking at. (UPDATE: Since I wrote this post, the Fed announced that they will not be raising interest rates again for the time being. It will be interesting to see how and if this effects the slight rise we saw in interest rates on CDs during Q1 this year.)
We haven’t done this because we know we don’t want to have to wait a few years to purchase.
Twelve more months?
Hopefully we’ll be at our goal in the next twelve months. We had an income stream blow up and then implode like a supernova since we set this goal, and also found out that marriage made our tax return much smaller, causing further delay. I’m glad we had the goal, though, because it forced me to put more effort into my online endeavors which are now capable of supporting my family. (You can learn to do this, too.)
In all honesty, we could probably buy now with down payment assistance programs if we were willing to take on some PMI. It would even be the kind that eventually goes away. Unless the absolute perfect house comes along, though, we’re going to keep stashing away our pennies.
What we are happy with is the way the money we have been saving has been optimized. The high-yield savings account and myRA were great options for our situation.
Have you ever saved for a home? How did you optimize your savings?