If you are saving to buy a home, here are five good saving options for you down payment.
1. Savings Account
FDIC insured up to $250,000, a savings account is an ideal place to keep your cash while you save for the big day. The best option is a savings account at an online bank for two reasons. First, the interest rates at online banks, while not enough to make you rich, are generally higher than with traditional banks. And second, because you won’t be driving by the bank’s branch every day (they don’t have any), you’ll be a little less likely to spend the money. These accounts are easy to open, and you can get access to your money immediately when you find that perfect bungalow.
2. Certificates of Deposit (CD’s)
As with savings accounts, most CDs are FDIC insured. Unlike savings accounts, however, there are generally penalties if you withdrawal the money before the term of the CD elapses. The penalty can be a helpful deterrent if you fear you may be tempted to spend the money.
Alternatively, you can invest in short-term CDs with durations of 3 to 12 months. Or you can put your money in a no-penalty CD, which as the name suggests, doesn’t charge a penalty if you decided to take the money out early. Keep in mind that the longer the CD term, the more interest you’ll typically earn.
3. U.S. Treasury Bills
U.S. Treasury bills are obligations of the federal government that matures in one year or less. They are considered to be virtually risk-free as they are backed by the full faith and credit of the U.S. government. Treasury bills are purchased at a discount and upon maturity, the investor receives the full face value. To make the investment worthwhile, financial experts suggest purchasing at least $10,000 or $20,000.
If you go this route, I’d suggest I bonds purchased through Treasury Direct. But keep in mind that you cannot redeem these bonds for one year, and there is a small interest penalty if you cash in the bonds before five years.
You can consider shorter T-Notes as well. The yields on a 2-year T-Note, however, are lower than an online savings account.
4. Reward Checking Account
With the right checking account, you can save money in a FDIC insured account and earn some perks at the same time. Some checking accounts offer bonuses to new account holders. For example, EverBank’s checking account offers a bonus rate for the first six months that is currently 1.40% APY (rates do change so check out the details on EverBank’s website). One of my other favorites is FNBO Direct, which pays one of the top interest rates I’ve seen. You can check out the details on our list of free checking accounts.
5. Money Market Account
A money market account is another great way to insulate your money while earning higher interest rates (based on the amount you have to deposit). Money market accounts can be purchased through your local bank and should not be confused with money market funds, which are similar to mutual funds, yet buy cash equivalents as investments.
Money market accounts are almost always FDIC insured if your bank is a member financial institution. Make sure to always confirm that this is the case, however, and know that there are withdrawal restrictions.
As always, one must consider their time frame and risk tolerance. A down payment on a home is not money that can be lost. Investors must realize that parking their money for the short-term in a safe place will give them peace of mind, but most likely a lower return. The key is liquidity, safety, and accessibility.