Becoming a homeowner is a huge financial milestone. But getting there can take years of preparation, starting with saving up at least 20% of the purchase price for a down payment.
But just like with your emergency savings, don’t make the mistake of stashing the money you’re earmarking for a home under your mattress or even in a traditional savings account, says bestselling author David Bach, who is releasing an updated version of his hit book “The Automatic Millionaire” this month.
It’s best to keep your money someplace safe and liquid, he says, particularly if you’re looking to purchase in about three years.
“I’d tell you, put it in a money market account, and the reason is this: There’s nothing more painful than saving for a down payment for a home and having the market go down,” said Bach, who has spent 25 years in the wealth management industry.
“When it’s a short-term time horizon, which is what three years is — three years is almost like tomorrow — you’re better off to have safety and liquidity and see yourself making progress every month and not be losing sleep over it,” he said.
In addition to security, a money market account could earn an interest rate of 1%, compared with the much lower 0.01% on a traditional savings account. These accounts can offer a higher interest rate because they usually require a minimum balance, which can vary widely depending on the bank (and if you dip under the minimum, you may incur a monthly fee).
Bach explains the risk you could be dealing with if you decide to put the money elsewhere: “Let’s say you put it in a mutual fund, put it in a balanced fund, and the market goes down 3,000 points. And you’ve lost a third of the money you’ve invested. People hate that.”
While a money market account is a safe bet for a time horizon of three years, Bach says he’d suggest you do something completely different with your savings if your plans for homeownership are in the distant future.
“If you said to me, ‘David I’m not buying a home for 10 years,’ then I wouldn’t give you that advice. Then I’d tell you, ‘Go use a balanced account, be 60% equity and 40% bonds, be totally diversified,’” he said.
Watch more from Business Insider’s interview with David Bach: