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What to do with money for a downpayment?


Where to put your hard earned cash for a downpayment? You have been saving up to buy a property, not ready to buy just yet given the sky high real estate prices. Where to put the cash not to lose money, but to somewhat earn some interest?

There are a few options, let's first cover the ones NOT to do.

1- Do NOT put the money in the stock market. Money invested in the stock market is money you are not planning to use for at least 5 years. Should you have invested money January 2022, today you would have been 20% or more down. Don't get me wrong, the stock market is a great way to make money, it's not wise to put money you are planning to use in the next 5 years.

2- Do not leave the money in a regular checking/savings account. It will earn you close to 0%.

3- Do not put the money in a 401k or an IRA.

4- Under your bed.


Now let's cover the more favorable options.

1- Money market mutual fund

Making a clear distinction between the money market account that is offered through a bank, (a type of savings account) and the money market mutual fund offered through an investment brokerage firm. The money market mutual fund invests in short term debt such as treasury bills etc.

Money market mutual fund is a great option. Risk of losing your money is low, as such the reward is low. But hey, it will earn you more than a savings account in a bank.

Typically these investments are not federally insured.

They are sold as shares.

Some have minimum amounts, researching this is your best option.

I have used Vanguards money market fund VMFXX good results.

2- CD's (Certificate of deposit)

A CD is a savings account that holds a fixed amount of money for a fixed period of time ie. 6 months, 1 year. When you cash or redeem your CD you receive the money you originally invested plus any interest.

CD's come in different flavors. The longer the timeframe, the higher the return, for example a 12 months CD will earn you more than a 6 months CD.

The downside of a CD is that your money is locked up for the time you signed up for. Should you need your money before, there could be a penalty.

These are federally insured up to 250k.

Some CD's have a variable rate, meaning it could go up or down depending on markets.

3- Bank savings account

This one is the easiest but least attractive of all the choices. Will earn you the least amount of money.

It is federally insured up to 250k.


Till next time,


JL

 

Disclaimer - This blog is meant purely for educational discussion of finances. It contains only general information about financial matters. It is not financial advice, should not be treated as such. The contents of this blog are not medical advice, for medical advice please talk to your medical provider.

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