I am saving for a down payment for a house; should I keep the money in my savings account or move it somewhere different?

I am saving for a down payment for a house. I have $20,000 currently saved, and I am planning to add more. Ultimately, I'd like to save closer to $50,000 or $60,000. It's currently in a standard savings account, but I'd like to move it so I can get a higher interest rate. I'm not sure what my best options are, as I'd like to eventually take the money out within three years. Would a money market account be a good idea?

Co-Published on Investopedia

Co-Published on Investopedia

Congratulations on saving the first 1/3 of your house down payment! Considering you have a 3-year timeline for saving for the house, a standard savings account isn't the optimal choice due to the low interest rates being unlikely to keep up with inflation. A money market savings account or certificate of deposit would be a better place to save the money, and if it is an account at a bank or credit union, it is likely insured by the Federal Government. A money market fund is another option, but they are not insured by the government.

You should also explore the possibility of investing in a fund which invests in very safe investments. Some examples to research and explore follow:

CONSERVATIVE: Short-Term Treasury Bond Fund

Treasury bonds are backed by the full faith and credit of the United States Government, which means they are considered safe investments due to the extremely low chance of default, meaning the U.S. Government going bankrupt. Using short-term bonds means you will also have less risk from interest rates rising (when interest rates rise, bonds go down in value). As an example (not a recommendation), a short-term treasury bond fund is currently yielding 2.9% (Dec 2018).  Another option would be a Treasury Inflation Protected Securities fund, which will have a lower yield but will give you protection against inflation (could be nice to have when considering inflation will increase the price of a house along with everything else).

MODERATE RISK: Short-Term Aggregate Bond Fund

If you want to take on a little more risk, you can use a fund which mixes in some investment-grade corporate bonds with the treasury bonds. These are bonds from companies which have very solid financials, but there is always the chance companies will go out of business. Even if some do, the diversification inherent in a fund will provide some protection. Mixing in slightly higher-risk corporate bonds will push up the investment return slightly. Again, as an example, a short-term aggregate bond fund is currently yielding 3.1% (Dec 2018).

"AGGRESSIVE:" Ginny May Fund

If you are feeling more aggressive, a GNMA fund would be something to explore. These funds invest in mortgage-backed securities which are basically backed by the U.S. Government. Because they are mortgage securities, they are still considered low on the risk spectrum, but an event like the 2008 credit crisis can cause these funds to lose money. As a result, they are more risky than the above two examples but much less risky than investing in stocks. As an example (again, not a recommendation), one GNMA fund is currently yielding 3.8% (Dec 2018).


If you are on the high end of the risk spectrum, you could consider a balanced fund which mixes treasury bonds, corporate bonds, and investments in stocks. This takes us out of the 'very safe investment' category, and is pushing the envelope when you are thinking about a 3-year timeline. You will get a higher potential return, but you will be taking on more risk. If you choose a strategy like this, it is very important to realize you could see your savings drop for a year or two (possibly longer) if a market downturn happens. This should only be a consideration if you are OK with putting off the home purchase for an extra 2-3 years. If a market crash happens close to the time you wanted to buy the home, you may have to wait (and not sell the fund) until the market recovers.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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