Best place to put money for saving for a house?

Question

I am a few years away from buying my first house, and am wondering where to save up for that. Currently, I invest through Betterment with a general investing plan and a Roth IRA, and I also contribute to my employers Roth 401k plan. I also have a HYSA. I want to start a separate bucket for house funds, but am not sure what to do/where to put this where I can get the most out of it in a few years. Thank you!

John Bowens · Answer

Not sure if I can answer your question exactly, but did want to say, great job on saving in a Roth IRA, Roth 401(k), and HSA. The power of tax-free compounding growth can be really meaningful over long periods of time. Far too many I have seen go many years with no retirement and then try to play catch up.

What is great about an HSA is that you get tax-deductions for contributions. Tax-Free growth and then you can distribute and use for healthcare and pay no taxes. You can also reimburse yourself for past healthcare expenses that you incurred while you had an HSA with funds in it. For example, you incur a $1,000 healthcare bill today and pay out of pocket. You don't take deduction on this. You grow HSA over years and then in the future you can distribute from the HSA tax-free to reimburse yourself.

Kevin Hintz · Answer

I totally get where you’re coming from! When I was saving for my first house, I kept my funds in a high-yield savings account, and it worked out well because I wanted something safe and accessible. I also looked into short-term bond funds, but I preferred the simplicity of the savings account. It really helped to keep that money separate from my other investments so I could see my progress toward the down payment.

Andy Krafft · Answer

For time horizons of 5 years or less, I usually prefer something safe like a HYSA or money-market fund. Just be sure you understand the liquidity of the HYSA because there are some banks that only allow a certain amount to be withdrawn each month.

Alternatively, if you're wanting to do something more aggressive, you could consider a balanced fund, such as Vanguard's LifeStrategy Income Fund (VASIX), which is 20% Stocks / 80% Bonds. It's not my personal preference, as you are still exposing a chunk of your portfolio to volatility, but it's an option.

Tim Delaney · Answer

It really depends on your risk tolerance and your goals. Will using a high yield savings account and your current savings rate get you the capital you need in the timeframe you desire? If not, you may want to take a small risk and put the money in an after tax brokerage account and invest in some index funds. The downside is that the market drops and you lose more than you gain; but if you can weather the downturns things have historically always gone back up. Personally I have never been a fan of pre-tax accounts (401Ks and IRAs) because I feel like they constrain my ability to invest in the assets I want, so another consideration you may have is to temporarily stop those investments to save faster for your house.

Paul Novak · Answer

Emmy,

For me I would put money like that in a high yield savings account because when I start saving for a shorter term goal I want to be able to use the growth to help me save.  The other thing I use for savings is my cash position in my taxable brokerage account which right now is getting 4.5% interest.  For me doing this gives me the flexibility that if something comes up I could use this savings in two ways for emergencies and for my savings goal.

I have in the past taken more risk and put the money in low cost index funds within my taxable brokerage account like VOO but there is risk here.  Your money could grow at 20% for the year and they could go down in value 20% for the year.  This year the market is up 21.09%, last year the market was down 13.04%, 2021 the market was up 39.44%.  My wife and I have two reliable vehicles but I decided when they were paid off to start saving right away for the next one by making car payments to myself.  I have put all that money in VOO over the past 3 years and the results have been great but there is risk.

I think this is all about risk tolerance.  If you have more specific questions let me know.