My husband and I are receiving $10,000 each from his mother as a gift after she inherited her father's trust. We both have IRAs, he has a 401k, I have a 403b and make required contributions to the MA Teachers Retirement. We have a rainy day savings. We have low interest rates (1.8%) on our 2 cars. He has no student loan debt. I have $16,000 at 2.8% and $27,000 at 6.8%. How should we invest our $20,000 with the idea that we want to use it as a down payment on a house. A house which we are not planning to even look into buying for at least 3 years, maybe as long as 5 years. We've considered just stashing it in our IRAs and then removing the principal amount later when we need it. Or a short term CD which would get us only slightly better return that stuffing it in the mattress. I suggested that we use half of it to pay down my student loans that are at 6.8%. Reducing the principal and thus the interest we pay on it. Thoughts or ideas on what we should do?
Chris Farrell Jul 5, 2013 Economics Editor
You’re in good financial shape. Your household balance sheet will be even healthier no matter what you decide to do with the money. You really can’t go wrong. I have three quick reactions to help make a decision.
First, when you have a particular goal in mind such as a down payment on a home with a three-to five-year time horizon it pays to invest conservatively. Stick with safe investments that protect your principal from market fluctuations. You won’t do much better than stuffing the money in a mattress, but you’ll be assured of having the down payment when you need it. (And, if you change your mind about buying a home, you still have money to invest in another opportunity.) With this approach the strategy is to focus on adding to the savings from your $20,000 base, or whatever sum you choose.
I am not a fan of tapping into an IRA for a home. The law allows you to do it, but it’s hard enough to save for retirement without draining an IRA for a home. If you have your IRA investing in a diversified mix of stocks and fixed income securities you’ll do much better than owning. A home isn’t a good investment. It never has been. Yes, a home offers plenty of tax benefits plus the prospect of appreciation. These gains are mostly offset by the costs of ownership, including yearly maintenance. Depending on the economic study, the real gain to home ownership ranges between zero percent and 2.5 percent.
Don’t get me wrong. Owning isn’t a mistake. It’s just that the gains to owning a home are mostly measured in lifestyle returns--the intangibles--good reason for sticking with conservative financing when buying.
My third observation: I like the idea of putting, say, $10,000 toward the principal of your student loans (with the rest saved for a down payment). My guess is you would be out of student loan debt quickly with this tactic. There is nothing wrong with having student loan debt and your student loans are manageable. The main benefit of this strategy is your household finances would be even stronger than they are already.