Best Ways to Save for Your Mortgage Down Payment

Four simple methods to get the ball rolling on your down payment savings
Buying a home is ajanuaryfeatured_saveforhome huge step in life and begins with a huge hurdle: the down payment. Fortunately, by starting early and thinking things through, you can get a solid jump on saving. Here are some easy ideas to get you started.

Automate Your Savings
At your usual financial institution, open a savings account specifically designated for your down payment/mortgage. Not only will this allow you to conveniently transfer funds from one account to the other, it will also allow you to automate transfers or directly deposit part of your paycheck into the specified account.

Make a Budget
Create a spreadsheet that lists all of your monthly expenses and monthly net income. Not only will this tell you how much you can put into savings, it can also help you discern what monthly mortgage payment you can afford. If the buffer between expenses and income is already too small, this is an early red flag that you will have to start doing some things differently to afford your mortgage.

“Given that income and expenses are closely matched in many households, the only way to get ahead is to bring in more money or change your spending habits (meaning spend less) and avidly look for new savings sources,” says Peter Miller, The Simple Dollar contributor.

Invest Your Funds
If you are looking to buy a house within the year, Kathryn Vassel of CNN Money recommends keeping your money liquid; but if your plans are more long-term, it is a good opportunity to invest in order to boost savings. If you are looking at a 10-year time frame, stocks could be a good option for you, Vassel writes. If you think you’ll buy a house in five to seven years, consider investing in bonds: 50 percent in longer-term bond funds or individual bonds and 40 percent in short-term bonds that mature in one to three years, plus 10 percent in cash. Finally, try higher-interest CDs if you are still two to four years from buying a home.

Research Home-Buying Programs
One of the first steps toward saving for a mortgage is setting a goal. A general rule of thumb for the down payment is 20 percent of the home’s selling price, but many available government programs also offer lower down payments, down payment loans or grants, or housing discounts. For lower down payments, look into GSE loans or loans through the FHA, VA or USDA.

Whether you choose one of these savings methods or all of them, they will help you come up with the down payment for the home you’ve always wanted.

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The Power of Compound Interest

Why it really pays to invest early in a retirement account
Money in a savingsjanuaryfeatured_compoundinterest or retirement account grows over time as it earns interest. But the interest rate isn’t the only factor that determines how much it grows; compounding interest helps your funds grow faster because it lets you earn interest on the money you deposit plus previously earned interest.

Compounding interest gives young investors great power to save for retirement, even if they don’t currently have much to save.

People in their 20s and 30s who are working to build their careers are often tempted to put off investing in retirement for a time when they are more established financially. By doing so, however, they miss out on the big advantage they have over older, wealthier savers: time.

“If you invested $10,000 in a mutual fund and the fund earned a 7% return for the year, you’d gain $700,” according to NerdWallet. “Over the years, that money can really add up: If you kept that money in a retirement account over 30 years and earned that average 7% return, for example, your $10,000 would grow to more than $76,000.”

To test out the power of compound interest for yourself, try the Compound Interest Calculator from NerdWallet. It can show you exactly how far your money could go if you started saving today. Just plug in hypothetical savings amounts at https://www.nerdwallet.com/banking/calculator/compound-interest-calculator.

The earlier you start investing, the more time your money has to compound, and when you do the calculations, it becomes clear that saving a little bit of each paycheck today can add up to a much bigger sum at age 65 than if you wait a few decades to start saving, even if you can afford to save more each month when you’re older. The bottom line is that to truly take advantage of the power of compound interest, you need to start saving as early as possible, and the advantage you gain by doing so cannot be overstated.

Business Insider calculated how much you would need to save each month to reach $1 million by age 65 at a 6 percent return rate, and the results are astounding. If you start saving at age 20, you only need to invest $361.04 each month, while starting at age 30makes the required monthly savings nearly double to $698.41. If you wait until you are 50, you need to put away $3,421.46 each month to end up with the same amount at age 65.

You can see a chart that illustrates the calculated monthly savings required for each age group at http://www.businessinsider.com/compound-interest-monthly-investment-2014-3/#.U6xcEI1dWVh.

“When you start saving outweighs how much you save,” says Business Insider contributor Libby Kane. “Retirement accounts such as 401(k)s and Roth IRAs aren’t just savings accounts-they’re actively invested, and therefore have the potential to make the most of this benefit.”

If you’ve been inspired by the mathematical magic of compound interest, harness that motivation by talking to your financial institution about opening up a retirement account or by committing to making regular contributions to your existing savings and retirement accounts.

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Investing vs. Paying Off Debt

Deciding factors include your financial resources and goals

Some people willinvestvsdebt_featured decide to pay off all their debts before ever investing money, while others will say it’s better to carry livable debt and be able to grow your savings over time. There are pros and cons to either option, depending on your financial situation.

What to consider first
According to an October 2014 article in U.S. News Money by contributor Joanne Cleaver, paying off debt first means losing potential compound interest earned on any investments you would have made during that time. On the other hand, investing first means having to manage your debt and pay more in interest over time. And if you’ve invested your money, you likely have fewer funds to make payments toward your debt.

Cleaver says that understanding your financial situation and what you can handle is the largest determinant. She suggests you find your tipping point for affordability by looking at the interest rates of your loans and calculating how much it will cost you on a monthly basis to maintain the debt. If the number doesn’t fall within your affordability parameters, consider paying off the debt before doing any investing.

To do this, Paul Heising, a financial adviser with California-based investment firm Smarter Decisions, recommends “[organizing] consumer debt accounts according to their interest rates so you can see which are costing you the most,” and to “pay back loans with the higher interest rates first, especially if those rates are over 10 percent annually.”

Advantages of doing both
Other experts recommend striking a balance of paying off your debt and investing, but only with certain, less-risky investments at first. Joshua Kennon, author of Investing for Beginners, suggested such a balance in a January 2016 article on the financial resource website TheBalance.com.

According to Kennon, you should fund any workplace retirement accounts, like a 401(k), and start an emergency fund using an FDIC-insured institution while paying down any high-interest rate loans, like student loans and credit cards. Then, he advises to circle back to investing more money into such savings vehicles as an IRA or Roth IRA, and begin building assets in mutual fund and brokerage accounts.

He listed three main points in his reasoning:

  1. “You minimize your tax bill, both from earned income and on investment income, which means more money in your own pocket.”
  2. “You create significant bankruptcy protection for your retirement assets. Your employer-sponsored retirement plan, such as 401(k), has unlimited bankruptcy protection under the current rules, while your Roth IRA has $1,245,475 in bankruptcy protection as of 2015.”
  3. Reducing debt over time allows you to build up while you pay down, so that when you are debt-free you suddenly have a major stream of cash to do with what you want.

An article by CFP Nick Holeman for investment management firm Betterment suggested a similar plan to pay off debt while investing in certain funds.

Holeman advised making at least the minimum payment on your bills, on time, while taking advantage of any employer retirement savings as you pay off major debt. Then you can build your emergency fund and finally invest further for retirement and savings.

Contributing to your company 401(k), even with debt, is important, said Holeman. Especially if your employer has a match contribution, making your contribution maximum to earn the match can yield a higher return on your investment than can many other investment alternatives.

“If you have debt that’s costing you over five percent in fees, pay it off as fast as you can. Start with the highest-interest debt first,” Holeman suggested.

In the end, the decision between off all your debts first, investing all your money first or balancing a plan of both depends on your financial risk-taking and resources.

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The Secrets to Saving More Money

Knowing which accounts to use can help you save more

Today, there are manysavingsecrets_featured options for where to put your money. From using regular checking and savings accounts to deciding whether to open a money market account or a CD (certificate of deposit) to even opening an account for holiday savings — each offers something to help you save a little more.

Money market accounts and savings accounts
In an article in the Houston Chronicle, finance contributor Leigh Anthony compares these two types of accounts. Both offer interest on all deposits made and are insured by the federal government, making them safe, low-risk investment options.

Both account types also have a federal limit of six transfers per month out of the account. However, money markets act more like checking accounts, giving you the ability to write checks, make electronic transfers, and withdraw money with an ATM or debit card. With savings accounts, you can transfer money, but you may or may not be able to withdraw funds directly without talking to a bank teller, depending on the institution.

“Interest rates on savings account[s] are typically very minimal as there is not a minimum balance required,” reports Anthony. “[W]ith a money market account, the interest rate is higher and may fluctuate based on a schedule posted by the [financial institution].”

A savings account would therefore be more appropriate for putting away cash that you want to save for emergencies or a future large purchase, whereas a money market account would be better for savings that you need to access more often, such as for major home renovations.

CD accounts
Anthony also discusses the difference between a CD and a money market account. Unlike money markets, a CD account has a set interest rate that doesn’t change through the investment term. You can set this term from anywhere between 30 days and five years — and then sit back as your money grows.

Furthermore, according to an article in the Wall Street Journal, CDs are reported as low-risk savings accounts with an interest rate that could be higher than a money market account. The money is (probably) federally insured, “and you’re guaranteed to get back what you put in, plus interest once the CD matures” through its predetermined term. But make sure not to withdraw funds before the maturity term ends, or you’ll face a hefty penalty.

Holiday savings accounts
While some institutions offer actual “holiday savings accounts,” this term is broad enough to encompass savings specific for holiday spending. Many people spend a lot of their money during the holidays for gifts and family meals, and a great way to make sure you have funds set aside for these purchases is to open an account just for holiday savings.

“The key is to think about holiday spending the same way you would other recurring, non-monthly expenses, like annual insurance premiums, quarterly tax estimates and home maintenance. Set up an account, and automate deposits from your paycheck like any other bill,” says CFP® Tom Gilmour of LearnVest Planning Services in a November 2014 article in Forbes.

If you need more guidance on what type of savings account to open, contact us and we’ll be happy to help.

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Saving Versus Investing Over Time

Does one take precedence over the other?

It’s the age-old questionSaveVsInvest_Featured to which everyone wants an answer: Is saving over time or investing your money more likely to make you the big bucks?

While both strategically saving and investing will make you money, investing is more likely to up your financial game over the long term, and is best for helping you reach those faraway goals, such as saving for a wedding or a child’s college education. Savings accounts work better for goals in the near future, such as going on vacation or making a large purchase.

While investing over the long term certainly has its advantages, it can pose many more risks than saving accounts do. With funds ensured by the federal government, money up to $250,000 would be restored if anything happened to your financial institution with a savings account. In addition, savings are ready at hand in the event you need money quickly — a possibility investing doesn’t always provide.

Investing, however, offers the potential for major profit and a higher return than a regular savings account. Over time, your investment may appreciate, which will increase your net worth. So if you sell what you invested in for a higher price, you make a profit. With a savings account, you can earn interest, but that’s generally much less than an investment profit.

Of course, when you invest money, you risk losing some or all of it. The key with investing is focusing on the things in your control.

“The only thing that you can control is the amount of capital you invest. Even during periods of low market returns, the frequent addition of investment capital can have a lasting effect,” says Director of Investor Education Bob Stammers of the CFA Institute. “Consistently adding capital to your portfolio, [when combined with] the long-term returns earned on that capital, is an excellent way to steadily move toward your overall financial goals.”

Even if you’re investing your money, it’s still important to be good at saving as well.

“An average saver will do better than a great investor who doesn’t save,” says CFP Professional and Principal David A. Schneider at Schneider Wealth Strategies in New York City.

In addition, whether you save or invest, it’s best to start sooner rather than later.

“The sooner you start saving and investing, the easier it is on your budget,” says President Carrie Schwab-Pomerantz of the Charles Schwab Foundation. “The sooner you start, the less you have to save because you have time on your side.”

“Every $1,000 saved in your mid-20s grows to over $10,000 at retirement, assuming 6 percent growth every year. But waiting until your mid-30s means that same $1,000 will only grow to $6,000,” explains Chartered Financial Analyst and CEO Shane Leonard of Stockflare. Think of it this way: Investing a mere dollar at age 25 could be more than five times as valuable as doing so at age 45.

Stop by to see what kind of investment and saving options we have for you today.

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Retirement Planning in Your 20s

Five best practices to jump-starting your savingsAprilFeatured_Planning
When you’re in your 20s, you are worried more about starting your career than you are about what you’ll do when your career is over. Still, it’s important to put down some building blocks at this point to lay a solid foundation for your financial future. Here are five tips to get the ball rolling:

Develop financial habits
You will want to become well-versed in the process of saving. Cash flow may be an issue in the present, but your future self will thank you for not letting your expenses get in the way of your retirement savings.

“These years of saving in your early 20s are your prime years. If you deny yourself the opportunity, it will just set you back with retirement planning in the long run,” says Certified Financial Planner Brian T. Jones on Bankrate.com. “You’ve got to have balance.”

To help, you’ll want to develop another habit, one of overall financial organization, recommends Robert Berger of U.S. News & World Report Money. Any simple system for storing digital and hard copies of records will end up saving you a ton of time, hassle and money in the future.

Stick to the basics
When you first start learning about 401(k)s and hearing terms like “diversification,” it can make you turn into a deer in headlights. Don’t let that talk deter you from starting your retirement investments. In the beginning, the simpler the better. There are several options out there that automatically invest you in a portfolio, including a broad range of stock and bond index funds.

Of course, investing won’t get you anywhere if you haven’t saved up anything to invest.

Boost savings as earnings increase
Ideally, this would be each year; regardless, you should boost your retirement savings as you continue up the career ladder.

“Increasing your retirement contributions is easier than you might think,” Berger says. “For tax-deferred accounts, keep in mind that each dollar of additional contribution will only cost you about $0.70, depending on your tax bracket. And one easy approach is to use a portion of your pay raise or bonus each year to boost your contributions.”

Once you max out your contributions to your 401(k), which hopefully your employer matches, you can open a Roth IRA or other brokerage options, but you may need some additional assistance for that.

Choose your advisers carefully
When you get to the point where you want to take your retirement savings to the next level, there are plenty of companies and individuals ready, willing and able to help. Therein lies the challenge for you — sorting the proficient, trustworthy and affordable from the ones who are not so. Therefore, do your research. Ask friends, peers and mentors for referrals, and check out reviews online.

Get your debt out of the way
It’s a lot easier to focus on saving when you have fewer bills to pay. Many bills, such as utilities, cannot be avoided. However, high monthly payments to pay down your credit card debt can be one of the biggest obstacles to retirement savings, no matter what your age. Make it your goal to consistently knock out your debt through the years, maintaining a solid, smart payment strategy. Then, ensure that you don’t add more to your debt.

By starting small and starting early, you will give yourself a huge advantage in the quest to achieve a secure financial future.

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Tips From Popular Money-Saving Experts

Easy ways to save money each day

We all want to save money.MoneySavingTips_Featured While it’s a struggle for many, there are lots of simple ways to sock a few — or more — extra bucks away each month. Take a cue from some of these money-saving experts to find out a few easy ways you can cut back on expenses and start saving for whatever it is life throws your way.

Cook your own meals
If you find yourself going out to eat a lot, it might be a good time to evaluate your cooking skills.

“Cooking for yourself can be fast and easy, as well as surprisingly cheap,” explains Maura Judkis, writer, editor and Web producer in Washington, D.C. “Try online recipe finders for meals that use what you already have in your fridge. Make enough for a few days, and then use the leftovers in sandwiches for work the rest of the week. Eating at your desk could save you more than $100 a month.”

Be specific about your goals
When you’re particular about where you want to be financially, it will be easier to actually reach those goals. For instance, determine where you’d like to be financially when it comes to having money set aside for putting your kids through college, your vacation fund or the account for emergencies.

“Your needs will take precedence over your wants, with short-term needs being the top priority,” says Kiplinger contributing editor Cameron Huddleston. “Then you can set goals to meet those needs — and fulfill your wants.”

Use coupons — on everything
“You already know to look for coupons when shopping for groceries, clothes, toys and home goods, but what about all those other items in your budget? A quick Internet search could help you save big bucks on everything from medicine to dental care to car repairs and pet care,” says Andrea Woroch, a nationally recognized consumer and money-saving expert, writer and TV personality. “Consider this example: I was picking up a prescription at CVS when I decided to search Google for any possible deals. Voila! I found a voucher that will end up saving me $480 on a 12-month supply!”

Get rid of cable
Did you know that cable bills will soon be averaging $123 a month, or $1,476 a year, according to a study by NPD Group?

“With services like Hulu, Netflix and Amazon Prime, you can now watch your favorite TV shows and movies for a fraction of the cost of cable TV,” says Brittney Castro, CNBC contributor and founder and CEO of Financially Wise Women. By cutting out cable and switching to a more inexpensive service, you can have that money to put toward other financial goals.

Utilize your own skills before hiring a professional
You might be more handy than you think.

“When it comes to home repairs, don’t be afraid to try to fix things yourself. Even if you aren’t the handy type, small jobs like fixing running toilets and patching drywall will cost you over a hundred dollars to hire a professional,” says Jefferson, site founder of See Debt Run. “You owe it to yourself and your wallet to try to find a step-by-step guide online, and at least give it a good try to do the work yourself.”

Remember that a little bit goes a long way
Putting aside money in crafty ways will help you save a little bit each month — and even a little bit can add up quickly.

“When you’re able to eliminate a major expense, put half the savings into your new account,” notes Mary Rowland, writer for WomensDay.com. “When you finish paying for your car, for instance, save one half of the car payment each month. Or suppose you save $75 a week on child-care expenses when your kids start school. Put $37.50 per week into a savings account. That will build up really quickly!”

Regardless of how you do it, start saving more and see how quickly your savings account starts growing. Find out how we can help you save money today.

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