You've decided that at some point in the distant future you'd love to own your own home, but you're not anywhere near ready to do so. That certainly doesn't mean that it's too early to begin a savings plan that is based on that dream. In fact, the sooner you begin saving the sooner you'll begin to be able to take advantage of some of the benefits that go along with long term savings plans.
What Are The Benefits Of Saving Money Early?
If you're planning to begin saving for a down payment even if you don't plan to consider buying for five years or more, then there are many benefits that are associated with beginning to save for your down payment today. First of all, you can take advantage of higher yield savings plans that will allow you to put money into a monthly savings plan without straining your budget. Compounding your interest over time allows you to be able to move your money into higher yield products as well such as certificates of deposit (CDs) or money market accounts. Savings accounts have the added benefits of allowing you to withdraw funds in an emergency.
Shop Around For A Great Interest Rate
You might think that interest rates are the same everywhere you go but this simply isn't true. While your local bank may offer you a savings account with 1 percent or less interest with no minimum opening balance or monthly minimum deposits, you can get online savings accounts from a number of companies that are offering rates from 2.05% up to 4.00%. I personally have decided that having an online savings account is helpful because it doesn't allow me to run up to the bank and remove $100 when I feel a little pinch! Two of the top high yield online savings accounts are ING DIRECT and Emigrant Direct. With high interest rates, no minimums, an FDIC guarantee, and so much more, I suggest you check out your high yield savings account options.
Another option for many savers are mutual fund money market accounts. There is this notion that a money market account works like any other mutual fund which simply is not true. Unlike most funds, money market accounts can never lose value. The rates are fixed at $1.00 per share and barring a complete meltdown of the mutual fund company, the money market account remains at $1.00. The interesting thing about mutual fund money market accounts is that they pay substantially larger interest than a bank or even an online savings product (which can help you grow your home down payment even faster).
What Are Money Market Accounts?
Unlike a savings account that is typically FDIC insured (which of course provides some comfort) when you deposit your home down payment savings into a money market account there are some restrictions that apply. First of all, there are usually minimum initial deposits, however once you make that initial deposit, you can generally have automatic savings put into the account on a weekly or monthly basis directly from your checking account.
Although most money market accounts are not typically traded like a stock would be for instance, ultimately they do take an additional 24-48 hours to withdraw money than say an online savings account or even a local savings account.
Since you want to take full advantage of compounding your interest and therefore growing your home down payment faster, it would help if you understand the comparison of interest rates. Most mutual fund companies will pay upwards of 5% on their money market funds (compounded monthly). It's critical that you do understand that while a money market fund rarely loses value, it is possible that it can. If you feel that the fund is safe (and the company is stable) a 5% interest rate paid by a money market fund will make a significant difference in your home down payment savings plan versus 3% (or substantially less) paid from most other savings plans.
Mutual Fund Money Market Accounts also have the same benefit of savings accounts in that there is no penalty if you need to suddenly withdraw funds in an emergency.
What Are Certificates Of Deposit?
Certificates of Deposit (CD's) are longer term savings instruments that are similar in nature to savings bonds but they carry shorter maturity times (depending on what you select). CD's can be purchased generally in denominations of $1,000 or more and may be held for periods from 3 months to several years. If you're saving early for your home down payment, these instruments may be beneficial to you in earning even more interest on your savings.
When you are considering a Certificate of Deposit, you should keep in mind that fluctuations in interest rates should dictate how long you invest. If interest rates are showing steady declines, then perhaps a longer term instrument is worth looking into (especially if you don't expect to need your home down payment for several years). Shorter term certificates of deposit are helpful if you believe that interest rates will increase during the maturity periods allowing you to roll your savings over into higher yielding certificates.
Remember, even if you're more than five years away from buying a home, beginning your savings plan early is a sound idea. Not only can you take advantage of compounded interest but you'll have even more money to put towards your home down payment resulting in a lower mortgage payment once you do purchase your home. The sooner you begin saving towards your home down payment, the more you'll be able to save. The end result means that you can buy a bigger house, put a bigger down payment or even allow you to purchase your first home and a vacation home at the same time! It's never to early to start saving to purchase your first home. A final closing thought: We mention several savings options in this article. The most prudent savers diversify into several savings vehicles. We recommend you do the same. A portfolio of different savings instruments is a great idea!
Want to learn more about high yield savings accounts as a great place to store your down payment fund? You may wish to check out our article all about high yield down payment savings accounts.
This article is written by guest author Doreen Martel exclusively for Save For House.