Question from a financial "newbie" about buying a house...

[SKKY]

...Here's the deal. In about 8 years I'm looking at buying my first home. What I need advice on is best way to save for that. I've got a decent chunk already and would obviously add more to that on a monthly basis. I'm not what you might call "aggressive", but I don't mind a bit of risk either. HELP!!!!

[amazona]

1. with an 8 year timeline you can't take much risk

Your investment horizon is a little too short for the stock market. If you have a "decent chunk" already and plan to hold it at least 5 years, then you get I-Bonds and have a guaranteed no loss of principal and an inflation-linked interest rate. Right now I-Bonds are paying 4.8 percent interest which is pretty good for an investment that can grow without being taxed each year. Keep in mind, with I-Bonds, you can't cash out the first year you own them if an emergency arises (unless there is a federal declaration of emergency where you live). If you've held them more than 1 year but less than 5 years, you can cash out but you lose the last 3 months of interest (the same penalty as most CDs). After 5 years, you can cash them with no penalty.

Here is the link:

http://www.publicdebt.treas.gov/com/comi0505.htm

You can buy them at your bank if you have trouble buying them online. For an investment with NO risk of loss of principal and a small guaranteed return on investment -- plus the advantages of deferred federal tax on gains and NO state/local tax allowed on these gains -- I think 4.8 percent is a damn good interest rate these days.

You absolutely want the savings to be there when you need it, and this way you can have safety plus keep ahead of inflation and taxes.
And NO TRANSACTION FEES!!!!

Savings bonds are not glamorous but they may be the way to go for short/middle-term savings. I highly recommend the I-Bond.

The conservation movement is a breeding ground of communists
and other subversives. We intend to clean them out,
even if it means rounding up every birdwatcher in the country.
--John Mitchell, US Attorney General 1969-72

[MsTryska]

2. what about a Roth IRA? nt

nt

[amazona]

3. rules for the roth ira

Yeah, if it's his first time buying a home, he can take $10K out of the ROth IRA for that purpose. Here is a link to the rules:

http://www.fairmark.com/rothira/first.htm

If the down-payment is going to be more than $10K he is still going to need other savings vehicles though.

The conservation movement is a breeding ground of communists
and other subversives. We intend to clean them out,
even if it means rounding up every birdwatcher in the country.
--John Mitchell, US Attorney General 1969-72

[MsTryska]

5. ah, thanks!

i didn't realize it was a 10K max.


hardly seems worth it, in that case.

[scruffy]

4. If I were doing it . . .

I would put the "decent chunk" in a balanced fund and then add to it monthly until you're a little closer to needing it - then tone it down and put it in something boring like a money market or CD. A balanced fund is both stock and bonds in the same account - they are usually a fairly conservative type of fund, but will give you the potential for some appreciation.

[amazona]

6. it also gives you the potential for some loss

I'm not convinced that in today's economy we have a situation where taking risk is rewarded with greater rewards. Indeed we appear to have the opposite. The person who bought I-Bonds in 2000 is getting a 7 percent return right now, with NO potential for any loss. The person who buys the I-Bond today will get a 4.8 percent return, again no chance of loss of principal. The person who bought a stock or balanced fund has, at best, not gone anywhere since 2000, yet they have taken the risk of actually having the potential to see the value of their investment go down.

None of us knows the future, of course, but the recent past does not suggest that funds are worth the risk in my humble opinion.

You should never take risk without potential of reward commensurate with that risk. When no-risk alternatives are offering the same (or greater!) rewards than investments that offer a chance of loss, it doesn't seem logical to take the risk.

On Edit-- NOTHING should be going into money markets at the moment, the returns are an insult to our intelligence. THere are some good CDs around though, agreed. In fact, closer to the "cash out" time, I think he SHOULD buy CDs if the market conditions are still the same.

The conservation movement is a breeding ground of communists
and other subversives. We intend to clean them out,
even if it means rounding up every birdwatcher in the country.
--John Mitchell, US Attorney General 1969-72

[scruffy]

7. I agree he doesn't want too much risk, except

that his time frame is 8 years. I would be willing to bet that during that 8 year period, there will be periods when the balanced funds will substantially outperform I-bonds. To me, the trade-off is worth it - the balanced fund has the potential to out-perform the I-bond, and if there are losses, they tend to be minimal.

But we're looking at the original question in a bit of a vacuum. Without knowing for sure what ALiberalSailor's time frame is, what other assets he has, exactly how much he has set aside and how much more he can add to it - it's difficult to come out and say for sure where he should be putting that house money. My only contention is that the type of investment should match the time frame.

And PERSONALLY, there are lots of times when I would take on the additional risk, especially with that 8 year time frame. Plus, I've never cared that much for bonds of any type, so I'm biased!

[SKKY]

8. Wow. It would appear that, with you responding to my post, I've...

...hit the jackpot for financial adivce. Explain more about what I-Bonds are. Another option I was looking at was an Adjustable Rate CD. My bank offers one at 4.83 which may or may not go up. Seems reasonable to me. What do you think?

[amazona]

12. "explain what I Bonds are" -- OK

I'll try to link you--

http://www.publicdebt.treas.gov/com/comi0505.htm

In short they are a gov't issued and secured savings bond with no risk of loss of principal. To quote them: Treasury's inflation-indexed I Bonds are designed to offer all Americans a way to save that protects the purchasing power of their investment by assuring them a real rate of return above inflation. I Bonds have features that make them attractive to many investors. They are sold in electronic form in amounts of $25 and above, or in paper form at face value in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000, and earn interest for as long as 30 years. I Bond earnings are added every month and interest is compounded semiannually. They are State and local income tax exempt, and Federal income tax on I Bond earnings can be deferred until the bonds are cashed or they stop earning interest after 30 years. Investors cashing I Bonds before five years are subject to a 3-month earnings penalty.

Compared to a CD, I get a little better rate and some small tax advantage in exchange for not being able to cash out the I Bond until I've held it for at least a year.

You can buy them online, and I have done so before. However, when their website is being cranky, I can and have bought them at a local bank. The bank will have both the EE and the I bonds so make sure they know which you want.

The adjustable rate CD sounds like it might be a good deal also. I believe (hope) that rates are going up.

[Digit]

9. Why are you waiting?

Has anyone done a rent vs purchase analysis for you?
If you already have a decent chunk reserved for a future purchase, what are you waiting for?
Just curious...

[SKKY]

10. I'm in the Military stationed overseas, and will be so for the next...

...3+ years. So it would be a bit more than I'd be able to afford paying a mortgage in the states and rent here in Spain. I was looking at the possibility of buying in my hometown, and renting to my sister who's looking to move out of the house soon, but I've learned that getting into financial situations with family members is almost never a good idea.

[Digit]

11. That makes perfect sense

Just thought I would ask.
Best of luck to you!

[amazona]

13. family members have a way of not paying rent

Better would be to buy the property and have a professional property manager rent the property to someone you don't know and are not related to. Renting to family members and friends always seems to end in a financial loss, as your loved ones just know you will understand those times when they can't afford to pay their rent. I guess I wouldn't buy in my hometown if I was going to be pressured to rent to my sister -- either that or I would not inform the rest of the family that I owned the property. I know, I'm sneaky, but I have to be. I'm quite low income but because I'm good at saving money I get hit up for my tiny nest egg regularly if I don't have a good story about being broke.

On edit-- get references and CHECK them for the property manager. One of my relatives had quite a bad experience with his long distance property. You have to be sure that the manager will not rent to people who will raise pit bulls and leave it with that kennel smell or manufacture crack and burn down the place. Since you'll be absentee, you really need to be able to trust that your manager is keeping an eye on things, not just taking the check and disappearing into the sunset every month.