Where should you save your down payment for a house?
There are tons of articles and blogs trying to answer this question. I’m not happy with any of them.
I’ll try to answer this my way.
The Rich on Money way.
There are two main factors that will influence where you should invest your downpayment for a house.
The first is how certain you are in what timeframe you will need that money. Are you for sure using it within the next year? Not much of a reason to put it at risk.
Are you unsure if you will purchase something in the next several years, but want the option?
Maybe you should consider putting some of that money at risk instead of just letting it sit there not working for you.
The next factor is your risk tolerance.
Some people understand that by putting their down payment in the stock market or a mutual fund, they run the risk of either having it grow quickly, or the opposite, losing half or more of its value quickly.
Could you live with that tradeoff?
If not, go with the less risky options, even if you are not sure when you will purchase a house.
Also, there’s what I ended up doing in my life.
I’ll explain which one of these methods I ended up using for my money.
It’s one that could have backfired on me big-time, but luckily didn’t.
UPDATE 1: I’m updating this article to reflect new information coming from Fidelity Investments making significant reductions to the costs of their index funds on August 1, 2018.
Index Funds
Let’s have some index fund fun today.
Many in the Financial Independence Retire Early (FIRE) community recommend VTSAX (Vanguard’s Total Stock Market Index) as the investment of choice.
If you are in the Choose FI world, then you’ve heard of the Godfather of FI, Jim Collins.
You may know he is a huge fan of Vanguard as the mutual fund company of choice.
Why?
Does it have the cheapest index fund fees?
Does it have the lowest investment minimums?
It turns out…
It does not.
Then why does he recommend it?
I’ll get to that…
One thing I did the first time I read The Simple Path to Wealth (I ended up reading it about 15 times as his editor on the book) was check all my current investments to find out if I was paying too much in fees.
I’ve always followed the simple advice of Warren Buffett.
Welcome to the Rich on Money Complete Guide to VA Loan Investing!
There are many things you can do with the VA loan benefit.
But can you invest with it?
Kind of, sort of.
The VA doesn’t say you can, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.
You can’t just buy a home and make it a rental property without living in it first. There is an occupancy rule I’ll be discussing.
You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.
Another possibility for investing is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units for a short period of time. When you move on to your next assignment, you’ll be able to turn the entire property into an investment legally.
Let’s start digging into the details!
The first thing we need to understand is the occupancy rule.
Here are the headlines that I saw when I googled “stock market” today:
“Is a global recession led by a US Stock Market crash in the offing?”
“Dow slides as US stock market suffers worst week in two years”
“Chart analysts see bigger market pullback if interest rates continue to shoot higher”
These headlines are going to affect everyone differently. Let me share with you how it affects me. Normally, I would never read it. But today,
I laugh at it.
It’s useless information.
Let me give you a little background on me.
I worked for Fidelity Investments as a stock broker while I was in college before I joined the military. I’m an avid finance nerd and real estate investor.
I’ve studied the markets long enough to know that index funds are the smartest way to invest your money. Trying to beat the market is pointless.
I also know that a lot of what you see in the financial media space is useless information. They try to predict where the market is going. When they get it wrong, they try to explain logically why they got it wrong, which ends up being the perfect definition of hindsight bias.
Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.
Financial magazines, newsletters, cable programs, videos, it’s all meant to capitalize on either fear or greed. A few weeks ago, it was greed. The markets were kicking ass.
This week I did a guest post on one of the most popular military financial independence websites. This website was started by Doug Nordman. He retired from the Navy in 2002 and hasn’t worked since. He currently lives in Hawaii and surfs often when he’s not traveling the world.
Not a bad life.
What he did is what I’m writing about. Working 20 years (or less), and then retiring, never needing to work again!
Here we go…
BLUF: In college I paid off $32k in student loans in a year. On a military salary I paid off a $280k mortgage in seven years. I’ve bought several rental properties with cash. I did this through paying off debt, having a high savings rate, and investing well.
My name is Rich. I’m an Air Force Lt Col of 16 years. I’m married with 2 young kids.
Here is my message:
Don’t work until you’re 65. Not even 55. You can save enough money to retire in 20 years or less. I mean after 20 years of work, NEVER WORK AGAIN (unless you want to). This method doesn’t depend on a military retirement, that’s just a bonus!
I currently make enough money from my investments to live on. I could quit working today, but I’m less than four years from a generous military retirement.
I love all things money. My kids often see me reading finance books and browsing real estate blogs. They hear me talking about money with my wife. They watch us negotiate deals to buy houses with cash, and they overhear our discussions on retiring early.
I explain what I’m doing with money in simple terms to my kids, but I can’t be sure it’s sinking in. They are 10 and 6. It is my job to prepare them to navigate money and life. I wonder how I’m doing.
How does one get a perfect credit score? I’m in the military. People around the office ask me for for financial advice. They know I’m a “money guy” and word gets around that I like talking investing and real estate.
I warn people they won’t like my advice. They usually don’t.
This guy didn’t.
Recently a co-worker told me he’s got $20,000 burning a hole in his pocket, and what I think about investing in the British Pound. With the Brexit, it seems like a sure thing!
I told him this kind of speculation in currency isn’t for everyone. Even those who devote their lives to studying this are wrong more often then right. I warned him this would be a fun way to lose money quickly on something he doesn’t understand. It seemed like he took that to heart.
Guy: “Ok, I got a better idea! What about gold!?!?!?”
To illustrate how un-awesome you are, let me first share how awesome I am.
When I was just getting started out investing in 2001, I put all the money I had, $4,000, into an index fund. I called my bank and said put it in the S&P 500 index. Warren Buffett taught me well.
The savvy salesmen on the other end of the phone who was clearly more experienced than Warren told me I was crazy to invest in that. I could make money twice as fast if I invested in their aggressive growth fund.
I paid off our $280k mortgage in six years, $32k in student loans in 1 year. I flipped houses and purchased rental property with cash while living overseas in the military. I currently own 20 rental properties mortgage free. Read More…
