Question from a reader: What are recommended savings or other vehicles to use when saving for a down payment on a house?
The most common response from financial advisers is to put the savings in a liquid account.
Gregory Alerte, a Certified Financial Planner professional, said each case is different and generally he likes to meet with a client to determine the best option for their goals, but as a general rule savings he agrees savings should be put as a liquid investment.
“Just put it in something that is relatively liquid that wont loose value in the long run,”Alerte said. “Put it in savings, a CD, or money market anything else is too risky.”
Hank Coleman, a financial planner and originator of the Money Q&A blog, agrees. Liquid funds don’t provide a high rate of return, but if you have to withdraw money, you aren’t punished for it. He recommends a simple money market or savings account.
“You need easy access to your funds and do not want to pay any fees or early termination penalties to withdraw that money,” Coleman said.
Savings vehicles like mutual funds, index funds, certificates of deposit or other options, tie money down. Coleman advises savers to stay away from these options for house down payment savings.
If you are too ambitious about trying to earn a lot on the savings, it sometimes backfires, said Andrew Schrage, founder of Money Crashers.
“Consider only a few of the safer investment vehicles, rather than trying to earn a significant return on your savings,” Schrage said. “Trying to earn a return on your savings requires a significant amount of risk, and there's a chance you could end up losing some of your savings.”
The best rates on savings accounts are generally found through online banking companies. Andrea Woroch, a money-saving expert, said opening an online savings account is the best place to start.
Along with receiving a somewhat higher interest rate, it’s easy to set up auto transfers and direct deposit. This helps in the actual saving for the house.Comment on this story
“A great way to avoid spending your entire paycheck is to have funds automatically transferred into some sort of savings account,” Woroch said. “Out of sight is out of mind, right? If you never see the cash, you're less likely to spend it.”
Money Rates compared the best average savings account rates of banking companies from 2012’s fourth quarter. Ally Bank had the highest at 0.95 percent, American Express and Sallie Mae Bank offered 0.90 percent and Met Life Bank was paying 0.85 percent.
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