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Money Monday: Saving to buy a home

Looking to buy a house in the next five to 10 years? Mr. Money Mustache has some advice.
Photo by Francesca Tosolini on Unsplash

This column is intended for informational and educational purposes only and should not be construed as professional financial advice for your individual situation. Please consult with a financial professional before making any serious financial decisions.

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Hello Longmont! 

I am a dad, carpenter, writer, and retired software engineer who has been living in Longmont since 2005. I used a few simple but powerful life principles to become wealthy enough to retire at age 30, and went on to start a blog called Mr. Money Mustache that has now reached over 30 million people in the past nine years. Now it’s time to take these ideas to the streets of Longmont, so send in your questions about money and life!


What's the best place to build a downpayment for someone planning to buy a house in the next five to 10 years? Is it best to stick to a high yield savings account or put the money in a low-cost index fund in a taxable account? — Ali Rifai

The right answer here depends just as much on your personality type as it does on sound financial strategy. Because in theory, the stock market goes up over time. There are ups and downs, but the longer your time horizon, the more certain this old piece of wisdom becomes. Consider the following stats from the US S&P500 stock index (including dividends  reinvestment where applicable)

  • Over all possible one-day periods, stocks have gone up 53% of the time (and of course down the other 47% of those days)
  • Over one-year periods, stock returns have been positive about 75% of the time (and only down in 25% of all possible rolling twelve-month windows)
  • Over five years, returns are positive 87.5% of the time, negative only 12.5%
  • Over ten years, the numbers become 94% and 6%
  • And over 16 years, the numbers are 100% and 0%. In other words, there has never been a 16 year or longer period where stock investors did not make money - often significant amounts.

Because I always play where the odds are in my favor and don’t worry about volatility, I have always put just about 100% of my money into index funds. When it comes time to buy a house, I might start collecting the cash for the downpayment during the last 6-12 months before the purchase, but I would not just leave the whole stash in a savings account for more than a year - the foregone returns are just too costly.

It helps to think about the worst case: suppose you save and invest, and just before you are ready to pull the trigger, there is a huge stock market crash and your savings are temporarily worth only 60% of what they were before. 

First of all, this usually happens only after a big run-up in prices, so you might still be far ahead of where you were if you had been piling money into a savings account for the past five years.

And secondly, big stock market crashes are usually accompanied by rapid recoveries - see March 23 of this year for a very dramatic recent example. So you could always just continue renting for a while longer, investing into more of those newly discounted shares, and sell out at an even bigger profit in just a year or two, to acquire the home of your dreams.

Disclaimer: This strategy does come with some risk and worry, and if you feel unhappy pursuing it, you could still do just fine with the savings account route. Statistically, you may have slightly less wealth, but the only purpose of money is to help create happiness anyway - so if you’re happier following this method, it is still a win.

Good luck and happy saving!


About the Author: Pete Adeney

Pete Adeney, Mr. Money Mustache, is a fifteen year Longmont resident.
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