Where to Store Your Down Payment Money

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best online savings account

On Monday, I wrote about how we are looking around at houses a bit farther out and trying to decide where to live.  I think this will probably be a long process.  But since we aren’t in a big rush, neither one of us is too worried.  As most of you know, we paid off our mortgage.  We’d love to pay cash for the next house that we buy.  Paying off our mortgage was by far the best thing that I’ve ever done in my financial life.  So, I’d love to stay mortgage-free if at all possible.

 

Too Much Noise

best online savings accountAs you know, we’re looking for something out west, a little further out from the city, and a little more quiet.  I have lived next to major thoroughfares most of my life.  As a result, I would love the opportunity to escape the constant noise from those roadways.  I’m so ready for a little peace and quiet.

 

My wife and I currently live close by to a hospital.  It’s terrific when your wife is in labor and you need to get to the ER quickly, but not so great when ambulance sirens go off in the middle of the night.  Quick side thought– why do ambulances have to put on their sirens at full blast at 4 am when nobody is on the road?  They must get a perverse sense of joy letting everyone knowing that they are awake and doing something more important than us lazy, sleeping folk.

 

best online savings accountsAir Pollution

On top of the noise, our house is so dusty.  We find dirt build-up on the outside windows all the time.  My wife constantly complains that she feels like the house is never clean enough as the dust accumulates daily.  I bought her a super nice Dyson vacuum cleaner, which she uses every day.  Even so, between our polluted environment and our one-year-old scampering around the house, I’m not sure her cleanliness standards will ever be met.

 

Possibilities

Before I continue, I want to go on record saying I am incredibly grateful for my home.  It’s been an amazing place over the past 13 years.  I am perfectly content to live here the rest of my life if need be.  But given that I have switched jobs, which gives me the freedom to move farther out, I figure it’s worth exploring our options.

 

Reaching FIRE

best online savings accountI know some are reading this right now with their eyes bugged out.  Buying a new home would most likely delay our FIRE plans big time.  While I’m not really excited about the possibility of not reaching FIRE soon, I don’t want to pass up on an opportunity to move into a home with more space and land for my family to grow into.  I figure, why not find something that my wife and I both can enjoy now, instead of waiting until FIRE?  

 

Saving Money

best online savings accountSo, my wife and I have been socking away cash for the past two years.  The initial goal was to save up enough so that we’d be able to afford just about anything, within reason.  (My wife has informed me multiple times that she has no interest in living in a huge house, which is a huge relief to me as we’re not anywhere close to being able to afford one).  And of course the hope would be to avoid a mortgage.  We are getting closer and closer every day to reaching that goal.

 

No Stock Market Investing

However, our accumulating cash isn’t going into the stock market, like I would ideally like it to.  I purposefully wanted the excess money to remain as cash so that we’d be able to quickly execute on buying our dream home if it became available to us.

 

best online savings accountOf course, the stock market comes with risk.  If I had put all of our excess cash into the market, and it dropped by 20%, that would hurt badly.  So I figured we’d keep putting away money and not worry about the gains of the market.

 

Although, watching the Trump bump from the election has hurt a little bit.  Even without the 11% gain since Trump was elected though, I feel at peace knowing that at any time I can immediately access my money.

 

Online Savings Account

best online savings accountMost of the cash is currently in an ALLY bank account with a 1% yield.  About a year ago, I actually switched savings accounts from Capital One 360 to Ally since Capital One lowered the interest rate by 0.25%.  When I ran the math, 0.25% was a large enough difference for me to make the switch.

 

While I know that 1% is peanuts, I haven’t come across a better account where my money wouldn’t be locked up.  I have been checking out other online savings accounts, but nothing has exceeded the 0.25% difference.

 

I’ve also looked into the various Money Market Funds as well, and there isn’t much difference between those and the online bank rates.  So, I pretty much hit a dead end in terms of trying to stretch my money in that regard.  

 

Certificate of Deposits

best online savings accountAfter exploring the various online savings accounts, I then checked out short-term Certificate of Deposits (CDs).  

 

The best three-month CD rates I’ve seen provided an annual yield of 0.85%.  It made me wonder, why bother with a CD when I can get 1% from my bank without locking in my money for three months?  I might understand using this type of CD if you have more than the $500,000 FDIC limits.  But, I definitely don’t have that much.  So if someone could explain the logic to me in investing in a three-month CD below the $500,000 mark, I’d love to hear it.

 

The best that I’ve seen for six-month CD rates is 1.11%.  But again, why lock up for six months for just 0.11% more?  Finally, a one-year CD rate yields 1.42%.  While this is the best option available, it doesn’t provide me the flexibility and liquidity that I desire.

 

Safe, Liquid, and Interest-Bearing

best online savings accountHaving explored all my options, while a larger yield would be great, I’m not sure where else to turn.  I guess that’s the price that you pay in order to essentially have a risk-free asset.  

 

So readers, do you have any tips on squeezing out some extra cash from your savings stash?  Do you think I’m being too conservative?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.



79 Comments

  1. I would like to have a big house after FIRE because big house would provide more homework that would give more chances to do some exercises. So no need go to gym training club.
    Setting aside enough cash is good because of risks in stock market. I started to sell my funds and increase my cash.

    • Thanks for sharing Rich!!! I’d be ok with a small house in retirement if it meant that I was traveling the world and didn’t need it 🙂 But with a small child I don’t think that’s in the cards right now 🙁

  2. Hi MSM,

    I have to say I would like a good sized home, and in London that would be astronomical, so maybe I will have to move out, but I there are things I would consider essential that I would be willing to work for a few more years to get, as I know I would get frustrated without it.

    In terms of where to park your cash – if you think you are going to need it within the next year or two (or a chance you will) then I would just accept you wont get a good return. I don’t even bother touting around for the extra .25% to be honest, but I keep a lot less in cash than most people!

    Cheers,
    FiL

    • Thanks for sharing FiL!!! I can’t imagine trying to buy in London. I’m not sure I could afford a tiny shoebox in London.

      Thanks for the advice on parking my money 🙂

  3. Our current house was not a smart move FIRE-wise and probably adds about 3 to 5 years to reach it. But quality in life has greatly improved! So it has been a big win! We did look for more than a year so patience is key. Cheap living is more important in the beginning of the fire journey I think. The early years of getting a money stash to work for you are very important but once you have a decent stash the impact becomes less. We already had a decent stash when we bought the current place and did not touch it (we did get a mortgage as I love low intrest mortgages).
    financialfreedomsloth recently posted…Special circumstance investing – march updateMy Profile

    • Thanks for sharing FinancialFreedomSloth!!! I would love for my next home to be resort style living. Especially if I can manage a 40 hour week without killing myself. I feel like I would be “semi-retired” if I had that type of living arrangement 🙂 Thanks for sharing your perspective!!!

  4. Housing is the most likely item to keep people away from financial independence. In many locals, it has gotten pretty extreme with way more people looking for single family homes than are available.

    We have a love/hate relationship with our home. We love being in it day-to-day, It’s where my wife spends 90% of her time with the kids. I hate having the large mortgage note. If you have to have debt, however, a mortgage is the best option with the most favorable tax treatments.
    Doctor in Debt recently posted…11 Most Important Financial Vital Signs of Personal FinanceMy Profile

    • Thanks for sharing Doctor in Debt!!! If we weren’t bound to this area we would definitely split and run to a cheaper part of the county 🙂 But leaving isn’t quite in the cards just yet. Thanks for sharing your perspective!!!

  5. If you won’t need the down payment money for at least a year, I’d suggest checking out Ibonds. They’re currently paying 2.75%, are indexed to inflation (so if inflation goes up, they go up), and are completely safe and liquid. Downsides – you’ll lose 3 months interest as a penalty if you cash it before 5 years (but it would still be higher than 1% total), you can’t cash it for a year, and you can only contribute $10,000 per person per year. You can bump that up if you use your tax refund to get paper I bonds.
    Liz@ChiefMomOfficer recently posted…Use Your Latte Factor to Snowball Your Way to MillionsMy Profile

  6. So you aren’t selling your current place? That’s a smart move, get some retnal income coming in!! What are you thinking there?

    I’m in a similar situation… cash is the place to be right now, but there are no good options like you mention…
    Erik @ The Mastermind Within recently posted…6 Months to 6 FiguresMy Profile

    • I think are plan would be to sell our place. It wouldn’t rent out anywhere close to the 1% rule. Heck I’m not sure it would rent at 0.5% of what I paid for it 13 years ago. So we’ll sell it and roll the funds into the new place 🙂

  7. I am saving up for a known expense in my Capital one account. #1 it’s so easy to transfer from my main savings account. #2 It will be easy to transfer to checking when I need to pay. #3 I got lazy and haven’t looked further at online banks at 1% or better. I saw Ally and a few others at 1 or 1.1% when I looked last summer. Then there was a family trip, I came back to work news that led to a layoff in Nov, then Christmas. Over Christmas break, my dad had a major medical issue, and he is on the road to recovery now, but the worry took all my extra brain power. I think my current plan is to leave it there until I make the payment, and look at the other options for after.
    A few years ago my dad did recommend CD’s. I diligently looked into it, but the best rates were for 10k+ and 10 years. I was looking at like $1000 to invest. For 0.36% Capital one was still the way to go. My last layoff was the longest one, so I’m even more adamant about having the money liquid in a savings account vs a cd or the market.
    All the best for your house search! I agree, if you can start enjoying an ideal house / neighborhood on your way to FI, go for it!

    • Thanks for stopping by Jacq!!! Sounds like you have had a whirlwind past couple of months. I can definitely understand wanting to have liquid cash available right NOW!!! Thanks for sharing your perspective 🙂

  8. I always wonder where others keep their money that they want access to within a couple of years. We also decided to use Ally since it offers a decent rate and is very liquid. We also hope to get rid of a mortgage with our next move since we will be moving to a lower cost area (from our slightly higher cost area). I personally want an efficiently sized home that will provide sufficient space while minimizing our monthly costs (both monetary and time). Thanks for sharing your deliberations about this topic!

    • Thanks for stopping by Unconventional Sustainability!!! My wife does not want a mega mansion so I’m sure we’ll get a nice, modest house that makes sense for us. But I would love to move somewhere where we could get more bang for our buck. The DC area even out west is still expensive 🙂

  9. I would vote for keeping the down payment money in a savings account if you legitimately may spend it at any point. The potential gains by squeezing out a bit more interest are relatively minimal, especially over a short period of time, and finding and jumping through the hoops can be time consuming and stressful.
    Matt @ Optimize Your Life recently posted…The Scarcity MindsetMy Profile

  10. I’m with you MSM. I use Ally for both my emergency fund, vacation fund and new car fund. I recently started saving for a rental home with Ally too.

    I think Ally is a good option for the savings if you plan to use the money within the next 2 or 3 years. You eliminate all risk going with Ally, and you get a modest return.

  11. I personally am a big fan of real estate investing. Can you rent out your current house and buy another house for cash and then you would hopefully have income coming to cover your expenses, which would technically make you FIREd right now? Then, when you work, every dime just goes back into investing.
    Primal Prosperity recently posted…Living Outside the BoxMy Profile

    • Unfortunately I don’t think we could afford to buy a new house and rent out our current house. Plus I don’t think it would rent out for enough to really make it worth it. I’d be surprised if we could get 0.5% monthly rent for what we paid. Otherwise I would definitely do it 🙂

  12. These are good problems to have my friend. I tend to lean with most of the other readers and would say to just keep the cash where you currently have it if you plan to use it within a year or so. Sure you may miss out on gains, but piece of mind is important to keep in mind as well. Good luck!

  13. I can play devil’s advocate. My wife and I keep 33% to 50% of our safety net in a 1% interest bearing savings account and the rest is at Betterment. I highly recommend reading this quantitative study that Betterment published: https://www.betterment.com/resources/personal-finance/safety-net-funds-why-traditional-advice-is-wrong/

    Yes, it requires an additional 30% input to protect the “needed” principal on the downside but the income and growth we get is way greater than a traditional savings account.
    Holden Alexander recently posted…Economics Experienced: A Hidden Gem from the DepressionMy Profile

    • Thanks for sharing that great article Holden!!! This was definitely eye opening and definitely something to consider moving forward. I really appreciate the advice!!!

  14. I always struggle with where to put down payment money especially when you don’t know when you’ll need it. Like you, I’ve always just put it in a “high yield” savings account like ALLY. I think it’s extra tough for us in higher cost of living locations because you likely need a large down payment and it sucks to keep so much cash earning so little. But if you’ll need the money soon, it’s tough to risk it in the stock market. Unfortunately, I left a lot of money in online accounts because we thought we would buy then waited, always thinking we might buy soon. We ended up waiting 7 years.

    • Thanks for sharing Andrew!!! It’s nice to hear that I’m not the only one struggling with this dilemma. Living in high costs area really stinks at times. Actually most of the time 🙂

  15. Sounds like you’ve got the best option right now with the online account earning the 1%. Who knows when you might find the new house and will need to money. I like the idea of finding the house that fits your needs better now, even if it delays your FIRE plans a bit, I’m sure the immediate return with be worth it.
    Brian recently posted…Mo Money, No ProblemsMy Profile

    • Thanks for stopping by Brian!!! I definitely love the flexibility of an online account. Even though I hate the low returns. I guess you gotta outweigh the bad with the good 🙂

  16. I actually store all of my emergency fund in 5% interest, FDIC insured savings accounts. They’re sort of a secret product available in a variety of prepaid debit cards.

    If you’re a two person household, you can actually store away $30,000 total between 14 total accounts, earning a guaranteed 5% interest. I think most people get scared away by the idea of having 14 different savings accounts, but if you think of it as one big bucket, it isn’t very scary. And once it’s set up, you don’t have to think about the accounts at all. It’s not for everyone,but we’ve been using them for over a year now with no problem.

    I’ve been trying to get involved in the travel hacking scene and it seems like people are willing to spend hours, days, months, and even years maximizing their travel rewards and credit card sign up bonuses. But most people won’t take an hour to at least learn how these 5% interest accounts work. I guess savings accounts aren’t quite as “cool” of a topic as travel hacking, is my guess.
    Financial Panther recently posted…Independent Contractor vs. Employee: It Pays To Not Be An Employee In The Sharing EconomyMy Profile

  17. My wife and I are currently in the process of buying our first home. When we started saving up cash for the purchase, I thought about investing some in a low turnover, S&P 500 index fund. But my time-frame wasn’t long enough as we planned to find a home within one year. I only like to use the stock market if I’m saving for something 3 or more years out. Good luck with your home search and hopefully you can pay cash and remain completely debt-free!

  18. Interesting idea. I would definitely store this money somewhere safe, so stocks are out. It would blow to lose all that cash in a market downturn. If you want to grow your money and have a specific timeline to buy a house, I do think a CD is a great option. We wanted to buy a house ASAP, so we used an online account with our bank.
    Mrs. Picky Pincher recently posted…6 Smart Ways to Use Your Tax RefundMy Profile

    • Thanks for sharing Mrs. Picky Pincher!!! If the market turned all of a sudden on me, watching that money go out the door definitely exceeds the risk I’m currently willing to take 🙂

  19. I don’t have this problem as a current homeowner. But if I did I would do the exact opposite of the conventional wisdom of keeping the down payment fund in safe, interest-bearing assets. A house is a big chunk of equity levered up by a mortgage (=a short bond position). Saving a down payment for this I would ideally save in the same type of asset to hedge movements in that asset, though, only stocks have the necessary liquidity and unfortunately, they are not that correlated with housing. (but they were in 2008/9!). Because of the short-bond feature of the mortgage, I would stay away from fixed income assets. In fact, the worst advice for saving the down payment would be long-duration bonds. You’d lever up the interest rate risk: Interest rates go up, you’d pay more for the mortgage in the future and lose money in the bond portfolio. Double-whammy!
    Just a contrarian view. Something to think about! 🙂
    earlyretirementnow recently posted…The Ultimate Guide to Safe Withdrawal Rates – Part 11: Six Criteria to Grade Withdrawal RulesMy Profile

    • Thanks for the awesome advice EarlyRetireNow!!! I will definitely need to re-evaluate my thinking a little bit and take into consideration your point of view. Thanks as always for stopping by.

  20. A wise man once said “My wife and I have the sleep test. If a financial decision makes us stay up at night uneasy, it means we don’t move forward. If it helps me sleep like a baby I do it :)”. If this advice sounds familiar, it’s because it’s from a comment you left on one of my posts. I think this is great advice for your situation.
    I would also think about the following:

    Are you comfortable with any downside risk? If not, stick with cash. If so, look at short term bond ETFs and then slowly move up the risk spectrum, until you find something your comfortable with.

    Do you think it’s likely a stock market collapse wouldn’t impact home values? If you did invest in stocks and the market went down, you’ll (hopefully) be able to get a better price on the home purchase.

    Ultimately, there’s a lot of other things to consider, but do what you think will bring you the least amount of future regret.
    NinjaPiggy recently posted…Why I Stopped Paying Extra On My Mortgage (For Now)My Profile

    • Thanks for sharing some words of wisdom 🙂

      I do wonder if the stock market went down how quickly it would take for home prices to react.

      I should probably research that a little bit closer. Thanks for the homework this weekend 🙂

  21. On a side note: The guilty pleasure of running “Code 3” when the daywalkers are all asleep is a very real thing. Its the revenge for everyone else being normal and having gardeners who come onto lawns in MY “middle of the night.”

    If you care, its truly a legal thing. Only with both a forward facing red light AND siren running are you legally exempt from the rules of the road if you collide with someone else. Left the siren off to be a good neighbor and hit a tired Uber driver? Your fault for being nice (cue the sad trombone).

  22. lots of good suggestions here. I would suggest a good old fashioned savings account. Here’s why. if you are in the market for a house you may accidentally stumble upon a great deal or that perfect house you are looking for outside of any timeline you had considered. Having the money in an easy to access account will give you the freedom to go for that deal. Its not about the rate of return now its about being able to buy a house when you want to. Good luck!!
    ReachingTheCrest recently posted…What is Your Decision-Making Process?My Profile

    • Thanks for sharing ReachingTheCrest!!! It’s always fun to crowd source answers and find a variety of answers. Definitely gives me something to think about and research this weekend 🙂

  23. Thanks for all this good information! My husband and I are just starting to think about thing slike this. Our savings has increased significantly the past few months due to a number of factors. We are trying to weigh the pros and cons of different money storage options. I think we are leaning towards putting a majority into savings accounts and also putting some in the stock market. Like you, we want to be able to access some of the money easily.
    Katy recently posted…Mission to Minimalize | update #3My Profile

    • Thanks for stopping by Katy!!! I’m glad the article was helpful and hopefully you read through some of these amazing comments 🙂 Lots of wisdom here. As always thanks for sharing!!!

  24. I would have to echo what FullTimeFinance said in a comment above – check out a long-term CD with a smaller early withdrawal penalty. Often you can come out even or ahead after just 6 months to a year if you need it even with the penalty. If not, you gain that extra percentage.
    MrDoublingDollars recently posted…Why You Need To Stop Consuming The NewsMy Profile

  25. I’ll second Financial Panther’s advice on the 5% savings accounts set up with the prepaid spending cards. I signed up for some of these at the beginning of last year, just before they dropped the max from $5k per account to $1k. But based on FP’s post, it looks like there are more accounts available at the smaller limit where you can get a total of $30k.

    I’m not much for keeping a big supply of cash on hand and don’t want to manage that many savings accounts. But if you need a big chunk of cash that is readily accessible for a down payment, and don’t mind the hassle of so many accounts, this could be a good option.
    Go Finance Yourself! recently posted…How The Fed’s Interest Rate Hike Will Impact Mortgage RatesMy Profile

    • One of my friends is from Montana and he tries to convince me to move out there all the time. I definitely wouldn’t mind if we didn’t have some constraints here 🙂

  26. We also had our cash in a savings account, ready to move when the right opportunity was there. For some items in life, i am willing to accept a lot in exchange for a good night of sleep. In this case: no stick market worry when the right house is found.

    I like the reasons to look for something else: enjoy now already, do not wait till retirement…

    It took us about a year to find what we wanted. I think we visited roughly 60 houses. A lot in the beginning, so we could get the feel with the market.
    ambertree recently posted…FI date update: ouch…!My Profile

    • Thanks for sharing Ambertree!!! It’s definitely a balance between living life today and saving for the future 🙂 Happy to hear you found the right house for you!!!

  27. As everything in life is a balance, I would do 50% of it in ally where you already have it, and the other 50% in a 3 year CD or a total stock market index fund. This way you are playing in both sides of the game. If you win in the stock market you’ll need to save less overall as returns help, and if you lose in the market it wont be on the total saved amount only 50% of the money. 3 years is not too long where you feel trapped and maybe then you will be ready to purchase the home.
    EL recently posted…How to Stop Financial PrideMy Profile

  28. I would just keep it where it is if you might be using it fairly soon. That’s what we have done in the past. You might lose a little bit in interest but I don’t think it will really amount to be a huge deal in the big picture if only left there for awhile. I agree that moving away from the big city would be a good move but then again where I live isn’t for most people either. Trade offs! Take care my man.
    Mr Defined Sight recently posted…Back From Vacation, Back To The GrindMy Profile

    • Thanks for sharing Mr. Defined Sight!!! I wouldn’t mind a little country living 🙂 With the entertainment options available today I’m not sure I would miss the downtown atmosphere 🙂

  29. I’m also thinking of best options to keep saved money safe lately. Our bank also offers close to 1% interest rate (per year). It’s peanuts, I agree, but it’s still risk free and better than nothing.

    PS: Sorry about the sirens. I don’t know about your area, but over here it’s protocol. I’ve ridden with the ambulance in sirens a few times during the night and I’m always glad I ride in the back an no one can see me. Let everyone curse the driver! 😀
    Adriana @MoneyJourney recently posted…Advantages and disadvantages that come with a credit cardMy Profile

    • Thanks for stopping by Adriana!!! I definitely agree that’s it’s peanuts and you’re right it’s better than nothing. I just wish I could find a slightly higher risk free rate 🙂

  30. Great post MSM 🙂 I live in Australia and our housing costs are huge (my little 2bedroom place 8ks from the city was $340k) so saving for a deposit is a nightmare for a lot of people – 15% for deposit and costs is $51k, which for a lot of young people is two or three years effort.

    I was lucky to be a saving nut from a really young age, so when I decided I wanted to buy the money was already there. Now that I have a mortgage, the number one liquid place I was suggest for saving is an offset account. I can get a 3.99% ‘return’ with 100% liquidity.

    Not going to work since you’ve paid off your mortgage, but probably the highest return you’ll get your any ‘investment’ you can access instantly
    LadyFIRE recently posted…Ratesetter: Peer-to-Peer LendingMy Profile

    • Wow thanks for sharing LadyFIRE!!! I can’t say I’m super familiar with Australian real estate but that definitely sounds like quite the hurdle to get into home ownership. Sounds like you knew what you wanted to do early on and have achieved that dream!!! Awesome job!!!

  31. Great post! I’m actually in the same boat and saving up for a downpayment now. Since the move should happen in the next 1-2 years, I’m keeping the money in my savings account. I think it’s the best option at this point since it’s so near term!

    • Thanks for sharing Diana!!! It was definitely a struggle trying to figure out where to put at times but since it’s potentially near term it makes sense to have it readily available 🙂

  32. I’d think that the Ally acct would be the safest option, but something to look into might be the Permanent Portfolio, supposedly the “all-weather” portfolio (equal allocations of stocks, gold, short term bonds, and long term bonds). It is something I am researching, but chances are I would stick with Ally for the safety. It is an interesting alternative, though.

    • Thanks for sharing Seeking The Dividends!!!! I definitely think that Ally makes the most sense for me right now but it’s interesting to see all the options that are out there.

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