My wife and I aspire to own a house someday. Our goal is to be “in the game” around this time next year. In the game means that we’ll be looking for a good deal, knowing that it could take a while before we find something. The biggest barrier for us is saving for a down payment and trying to figure out where to put the money. Current inflation is over 8% for the year. Putting the money in a “high yield” savings account giving 0.44% interest just doesn’t cut it. With that in mind, here’s how to save for a house when inflation is high, starring Frugal Jon.
Before I get into that, I’d like to give a shoutout to The First Time Home Buyer’s Guide by the folks over at Bigger Pockets (affiliate link). They have no affiliation with the blog, but the book has been a great resource for me. I’ve learned a lot about the home buying process and some of the pitfalls to avoid along the way. I highly recommend it for anyone who’s looking for their first house.
No One Can Control the Market
We’ll start with something that’s totally outside of our control: the current housing market. Everyone knows that the market has been crazy over the past couple years. Record low mortgage rates combines with not enough house inventory has resulted in insane prices. It’s definitely discouraging for first time home buyers. We’re managing this frustration with patience. We can’t know which way prices will go over the next year or two. There’s no use losing sleep over what we can’t control. However, we can put ourselves into a strong financial position so that we’re ready to pounce on any good deal that comes on the market.
Since we are comfortable where we’re renting right now, we aren’t in a rush to buy something. And we’re resisting the urge to set a deadline on when we need to be in a house. Don’t set a deadline was one of the biggest lessons in The First Time Homebuyer’s Guide. Setting a deadline can result in taking any house on the market, even if it’s a little too expensive or doesn’t have things that you need. Recognizing that we can always rent allows us to have the patience to wait for the house that works for us. Even if that involved moving into a larger space before then.
How to Save for a House: Starring I Bonds and Inflation
We’re trying to save a large amount of cash in a high-inflation environment. That is….not ideal. In a good inflation year, money sitting in a “high yield” savings account will still lose value over time. As of March 2022, the annual inflation was 8.5%.Any money that has been sitting in my “high yield” savings account lost 8% of its spending power in that time (interest rate: 0.44%). It is painful to see the pile of cash that’s supposed to go towards a house get no-so-slowly whittled away by inflation. But since we’ll need the money within the next couple years, we can’t risk it in the stock market. Index fund investing is a long term game where short term fluctuations in the market are a non-factor. So what are we doing with the bulk of our down payment?
Enter I Bonds. They’re bonds issued by the federal government that earns an interest rate based on inflation. The yield is changed every six months. The important part is they are designed to counterbalance the effect of inflation in a safe investment. The only way these can lose money is if the US government collapses. The US government is guaranteeing that they will pay a set interest rate for six months, come Hell or high water. And that makes it very tantalizing for our house fund.
When we bought the I Bonds, the interest rate was 7.12%. $100 worth of I Bonds will be worth 103.56 after six months. At that point the new interest rate will kick in. CNBC is reporting that this new interest rate will be 9.62%(!!) percent for the next six months. So after one year, the $100 I Bond will be worth $108.54. This is where we’re keeping most of our house fund so it doesn’t lose most of its value to inflation.
The Limits of I Bonds
Observant readers probably noticed that I wrote “most” in the previous paragraph. Why not put all of our house fund into I Bonds? Well, with all good things, there are limits. The first is that there is an annual purchase limit of $10,000 per person. You can buy an additional $5,000 worth of I Bonds with your tax return though. The next is the reason we aren’t continuing to put new house find money into I Bonds: the minimum time period rule. Any I Bond you purchase cannot be sold for an entire calendar year. With this is the rule that any I Bonds sold within 5 years do not get the previous 3 months worth of interest. This is to incentivize you to keep the I Bonds as a long term investment. However, we may need the money next spring. It would be difficult to buy a house if a good portion of our funds are locked up in I Bonds and not accessible! I feel comfortable knowing that the bulk of our house fund is safely in I Bonds.
Being Hopeful and Patient
“Hopeful and patient” is the mindset that I’m trying to live by with the home buying process. Patience is a necessity as we’re saving our way towards a good down payment. It will be imperative to have patience when we’re actively looking for a house as well. Being hopeful is equally important. Getting discouraged by the current housing market won’t help us towards our goals. Keeping our spirits high will give us a good mindset as we get into the trenches of looking for a house. We have our list of wants and our list of needs with regards to a house. And most importantly, we’re willing to wait until we’re in the right financial position to make the move.
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