Smart ways to save for a down payment

Here are tips from the federal government to help you save up for a down payment:

• Invest in Savings Accounts, Insured Money Market Accounts, and CDs — With these products, your money tends to be very safe because it’s federally insured, and you can easily get to your money if you need it for any reason. But there’s a tradeoff for security and ready availability. Your money earns a low interest rate compared with investments. In other words, it gets a low return.
• Stocks — Over the past 60 years, the investment that has provided the highest average rate of return has been stocks. But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If the company doesn’t do well or falls out of favor with investors, your stock can fall in price, and you could lose your money.
• Bonds — The company’s “promise to repay” your principal generally makes bonds less risky than stocks. But bonds can be risky. To assess how risky a bond is you can check the bond’s credit rating. Unlike stockholders, bond holders know how much money they will make, unless the company goes out of business. If the company goes out of business or declares bankruptcy, bondholders may lose money. But if there is any money left in the company, they will get it before stockholders. Bonds generally provide higher returns (with higher risk) than savings accounts, but lower returns (with lower risk) than stocks.
• Mutual Funds — Mutual fund risk is determined by the stocks and bonds in the fund. No mutual fund can guarantee its returns, and no mutual fund is risk-free.
• Manage Your Credit — Many adults—and plenty of students—have wallets filled with credit cards, some of which they’ve “maxed out” (meaning they’ve spent up to their credit limit). Credit cards can make it seem easy to buy expensive things when you don’t have the cash in your pocket—or in the bank. But credit cards aren’t free money. Most credit cards charge high interest rates—as much as 18 percent or more—if you don’t pay off your balance in full each month. If you owe money on your credit cards, the wisest thing you can do is pay off the balance in full as quickly as possible. Few investments will give you the high returns you’ll need to keep pace with an 18 percent interest charge. That’s why you’re better off reducing your credit card debt.
• Keep Trade-Offs and “Opportunity Cost” in Mind — Unless you’re lucky enough to have an unlimited amount of money, you’ll have to choose how you spend your money. That means you’ll have to make trade-offs and consider the “opportunity cost,” meaning what you give up by choosing one option over another. For example, let’s say you’ve got $100.00: If you put the money in an account that earns 5 percent interest, you’ll have $105.00 at the end of the year. If you spend it on new clothes, you won’t earn that extra $5.00, although you should still have the clothes. But if you wanted to sell them, they’d probably be worth less, especially if they’re used or out of style.

Other ways to gather a down payment:

• Gifts from family or friends — Family and friends can provide you with cash gifts that can become the basis for a down payment.
• Tax refunds — If you are fortunate to receive a tx refund, set aside the majority of your return towards your savings for a home.
• 401k — If you have a 401k or retirement plan, you may want to use those funds for a down payment on a house. But remember you have to pay back the loan plus interest.