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?
FAQs
The average person can afford a house by choosing an affordable area to live, saving up a strong down payment, and paying off all their debt to make sure they have plenty of margin in their budget.
How do people have enough money to buy a house? ›
The average person can afford a house by choosing an affordable area to live, saving up a strong down payment, and paying off all their debt to make sure they have plenty of margin in their budget.
Where is the best place to put money for interest? ›
CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk. Learn how they compare in terms of yield, liquidity, and guarantees.
What factors should you take into account when determining how much you can spend on housing? ›
Gather your financial documents
- Your monthly and annual household income.
- Your credit score.
- Existing debt, including credit cards, car loans and student loans.
- Your savings and investments, which will help determine how much of a down payment you can afford.
When it comes to buying a home, your credit score plays a vital role. Improving your buyer's credit score will increase your chance of being approved for a mortgage and it'll give you more leeway to put down a smaller down payment. As you start saving for your first home, keep your end goal in mind.
How much house can I afford if I make $70,000 a year? ›
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
How to afford to live in 2024? ›
A household with two adults and two children would need a combined income of around $235,000 to live without financial worries. The disparity in the cost of family life is particularly pronounced in certain cities. A family of four, two adults and children, need to make more than $300,000 to live comfortably.
Where is the safest place to keep cash at home? ›
Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.
Where can I get 7% interest on my money? ›
As of May 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Where to put $10,000 for best interest? ›
Many investment experts recommend a 60/40 mix. That is an investment portfolio invested 60% in equities (company shares) and 40% in bonds. For higher returns, an attractive investment for £10,000 could be shares or equity funds (which are made up of shares).
If you earn $60K a year, that means you can afford to spend around $180,000 on a house, maybe a bit more if you have little or no other debts. However, depending on where you want to live, interest rates, and how much debt you're carrying, that figure could change significantly.
What is the 50/30/20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How much house can I afford with a 50k salary? ›
The 28% of your income rule
Considering a 20% down payment, a 6.89% mortgage rate and a 30-year term, that's about what you can expect to pay on a $185,900 home. If you only put 5% down and had a 6.89% mortgage rate and a 30-year term, you could likely afford a $159,300 home.
What percentage of my savings should I put down on a house? ›
Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a rule that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).
Is it better to put more money down on a house or save money? ›
You can often secure better rates with a larger down payment, but you also need to understand how much you can afford. Paying too little for your down payment might cost more over time, while paying too much may drain your savings. A lender will look at your down payment and determine which mortgage is best.
Is it better to save for a house or retirement? ›
To safeguard your financial health, prioritize paying off high-interest debts, adding to an emergency fund, and paying into a retirement account. Home equity can benefit you financially, but retirement savings may be critical to supplement Social Security payments and pay for essentials later in life.
How much money should you have before buying a house? ›
A good number to shoot for when saving for a house is 25% of the sale price to cover your down payment, closing costs and moving expenses. (This amount is separate from saving up 3–6 months of your typical living expenses in a fully-funded emergency fund—which I recommend you do first, before saving up for a home.)
How much money do I need to comfortably buy a house? ›
Now, Americans must earn roughly $106,500 in order to comfortably afford a typical home, a significant increase from the $59,000 annual household income that put homeownership within reach for families in 2020, according to new research from digital real estate company Zillow.
How are people affording million dollar homes? ›
Apply for a jumbo loan
These loans exceed the limits set by government-sponsored entities, making them suitable for million-dollar homes. Jumbo loans often require a strong credit score, a low debt-to-income ratio, and, typically, a higher down payment.
Will Gen Z ever be able to afford a house? ›
Millennials Got Cheaper Mortgages Than Their Parents
“As Gen Z looks to buy their starter homes in the next few years, they will face both high rates and high prices. It may be years before the housing market is affordable again,” Allison explains.
