If you are saving money for a down payment on a home or other property, you may be tempted to invest that money while you wait for your dream home. However, long-term investments or investments subject to volatility are not the right places to put your down payment funds.
Since this money needs to be stable and easily accessible when you need it, it’s not a good idea to tie up your funds or take on the risks that come with investing. Instead, it’s wise to put it in one of the cash alternatives that are insured by the FDIC or the U.S. government. This is the only way to protect the absolute value of your money – a strategy called “capital preservation.”
FDIC-Insured Bank Accounts
Standard bank accounts are always a safe place to store your cash. These accounts include checking accounts and savings accounts at FDIC member banks. Not only can you access your money during regular banking hours without penalty, but if your bank fails, the government will compensate you for losses up to $250,000. The downside of these accounts is that they earn little or no interest, so you won’t keep up with inflation.
FDIC-Insured Certificates of Deposit
Offered by FDIC member financial institutions such as many community banks, a certificate of deposit (CD) is a special type of contract where you lend money to the bank for a set period of time, such as three months or two years, in exchange for a guaranteed rate of return. Generally, the longer you agree to lock your money in the bank, the higher the interest they will pay you.
This option is best if you don’t need your money for a long time. If you know you won’t be buying a home for at least six months, you might get better terms by purchasing a certificate of deposit.
U.S. Treasury Securities
These are obligations of the U.S. government that are due in a year or less. Since each treasury bond is backed by the full taxing power of the government, they are considered one of the safest places to store your cash.
You buy treasury bonds at a discount and when they mature, you receive the full value. This option only makes sense if you have a good amount saved up already for your home down payment. You’ll need at least $10,000 or $20,000 to make the investment worthwhile.
Money Market Accounts – But Not Money Market Funds
A money market account at your local bank can be a great way to protect your funds while earning higher interest rates based on the amount you choose to deposit. These accounts are often FDIC-insured, protecting you from potential problems that might arise if your bank fails.
On the other hand, a money market fund is a more complex mutual fund investment that buys all kinds of cash-equivalent assets. These products are typically not FDIC-insured and therefore are not a good place to invest your down payment money.
U.S. Savings Bonds
U.S. savings bonds come in two main types: Series I savings bonds and Series EE savings bonds. Both have unique benefits and offer very similar terms. They are not a good option if you need cash soon, as you must hold each bond for at least one year and they come with withdrawal penalties if you cash your bonds in less than three years.
If you can go without accessing your down payment funds for more than a year, these bonds offer significant benefits, as investors are guaranteed not to lose their principal. This level of assurance is crucial when dealing with money you need, such as cash used for a down payment on property.
Source:
https://www.thebalancemoney.com/best-places-to-invest-down-payment-money-357990
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