How to Invest to Build Your Down Payment

While many people might park their down payment in a savings account, even the best savings accounts are barely topping one percent, while inflation hovers around two percent. If you park your money in a savings account for a few years, you’ll actually be losing money. To beat inflation and build your capital, try these investments.

CDs

Bank CDs are one of the safest short-term investments after a savings account. They offer a higher interest rate while still carrying FDIC insurance that guarantees you won’t lose your principal. In addition, CDs with terms longer than three years usually beat current inflation rates.

Bonds

Bonds are similar to CDs, but since they’re loans, there’s a slight possibility you won’t be repaid. In exchange, you often receive a higher interest rate.

To reduce your risk, consider U.S. treasuries (which are generally considered perfectly safe), municipal bonds (state and local government bonds considered very safe), or a diversified mutual fund made up of many bonds.

Stocks

If you have at least five years before you buy your home, consider adding stocks to your portfolio. Stocks add risk, but have a higher potential return. Over longer periods of time, the odds are that you’ll be in a much better position than you would have been without using stocks.

Target-Date Funds

One trick to using stocks is to select a target-date mutual fund that matches the year you plan to buy your home. These funds start with a higher percentage of stocks to seek early growth and then become more conservative as your target date approaches. The goal is to build your savings early and then protect your money from market downturns when the time to withdraw it approaches.

If you’re buying your first home, you can withdraw up to $10,000 from your retirement account without penalty. This allows you to take advantage of the tax deductions and tax-free growth you’d usually get on your retirement savings.

For investments in taxable accounts, remember that municipal bond interest payments are exempt from federal income tax, and U.S. Treasury bond interest is exempt from state income tax.

Of course, before you can worry about choosing investments and saving on taxes, you need to have money to save. Read on to discover money-saving tips that will help you buy your first home even faster.