Monday, May 5, 2008

Reader questions answered: Saving for a Condo

Random reader question time!

Today's super fab question comes from fellow Chicagoan Aideen, who asks:

"I love you website! I am 26 and a former NYer who moved to the windy city. I try to budget and am doing an okay job of it. Do you have any posts on the best ways to save for buying a condo or house. Is socking away money in a savings account the best way or should I invest the money. i'd love to know what other people do."

That's a great question, Aideen. And since I am in the same boat as you, I'm probably not the best person to answer your question. But I am totally curious, so I asked someone who's a little more credentialed on finance - Eric Brotman, CFP, CLU, MSFS, and president of Brotman Financial Group, Inc. - to help us out. Here's what he said:

A: "Where to save for a first home is largely dependant on the amount of time it will take someone to put together the amount needed for a down payment and closing costs.

Normally, the best option is in a money market account, as they tend to pay a higher rate of interest than a traditional savings account. There are several good online options, including ING Direct and HSBC. (Budgeting Babe note: This is what I'm doing, and I'm at Emigrant Direct.)

Another option is a certificate of deposit, with one caveat. The CD must either have no penalty for accessing the funds before maturity, or a maturity date must be selected which is in advance of the anticipated home purchase.

Investing the money for a first home is only a reasonable idea if the time-horizon is at least two years out, and if that is the case, a moderate allocation portfolio with low transaction expenses would make the most sense. First-time home buyers can also access their Roth IRA for up to $10,000 towards the purchase. Checking with a CPA or tax advisor to see if someone is eligible for a Roth IRA is a good first step. It will provide tax-favored growth while the savings/investments are being accumulated, but not everyone is eligible."

Eric Brotman is President of Brotman Financial Group, Inc., an independent financial planning firm specializing in wealth creation, preservation, and distribution. Mr. Brotman began his financial planning practice in Baltimore in 1994, and founded Brotman Financial Group in 2003. He provides investment, retirement, estate, insurance, and business planning for professionals, executives, and business owners. Mr. Brotman's clients benefit from his technical expertise, extraordinary client service, and a knowledgeable team of insurance and investment specialists.

As a side note, Aideen, I was tracking with Eric's answer until he threw out the term "moderate allocation portfolio." I looked online and determined he means that if you choose to invest in a mutual fund or group of stocks, pick one that's not too high risk. You don't want to lose your downpayment fund when you're three years away from buying a house! (If you like this moderate risk option, a lot of people on my site have said that Vanguard is a good place to start investing because it has really low transaction fees.)

I got kind of lost during the Roth IRA part, so I appreciated that he mentioned seeing a professional. I heard that borrowing against yourself is pretty common, but I wasn't sure it was recommended by financial professionals. I'm sure peeps will write in the comments about it. If you have an answer, let us know! I'll also go back to Eric and ask him if that's risky or recommended if you're eligible.

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