Buying a home is no small change to your personal financial situation. Homes are significant investments, requiring not only mortgage payments but also recurring spending for tax, insurance, and utilities as well as massive expenses for maintenance and moving. Worse, home prices are continuing to increase while interest rates are remaining low, so holding your money in a basic savings account likely won’t provide enough value to help you afford your home. Considering all the outgoing money required for buying and maintaining a home, when preparing to buy a home, you should consider revising your strategy to save sufficiently.
However, there are differing opinions on the best way to grow savings for home purchases. Undoubtedly, your money works the hardest when it is properly invested, but the right investment strategy for you might change depending on your financial situation, needs and wants. Here are a few potential strategies to help imminent home buyers like you invest soundly.
Long-Term and Balanced
If you are interested in buying a home soon — or if you are eager to earn a steady supplemental income to pay for home-related expenses — you should consider a balanced investment strategy. Some financial managers advise creating a portfolio that is half stock funds and half bond funds. The stocks tend to be more volatile, earning you more money in a shorter period, while the bond funds are more stable, providing reliable income at a lower rate. As time progresses, you should slowly shift your money into bond funds, so you can be certain of your savings when you are about to make a major purchase — i.e. your home. While it might seem counter-intuitive, a long-term strategy is better for short-term savers because there is less risk and less loss, so you can preserve most of your income for your imminent purchase.
To simplify this investment strategy, you might consider investing entirely in real estate investment trusts (REITs). These are companies that own or finance properties, like business and retail parks, hotels, and occasionally residential spaces. REITs have the characteristics of both stocks and bonds: They offer plenty of growth potential while remaining reliable and consistent. Because REITs don’t typically follow the price moves of stocks and bonds, REIT investment helps to diversify a portfolio. Plus, by observing the behavior of your REITs, you can become more familiar with the real estate market and feel more comfortable investing in your first property.
Short-Term and Aggressive
Alternatively, if you can afford to wait a few years to make a home purchase — or if your regular expenses are covered but your long-term savings took a hit — you should consider aggressive investment opportunities. Short-term trading is extremely lucrative — and extremely risky. It requires you to invest entirely in aggressive stocks, which have a tendency to fluctuate wildly. Aggressive investment strategies tend to be better suited to younger investors who have time to endure negative fluctuations and regain growth. This means you shouldn’t expect to make a quick windfall that will buy you a house in a few weeks; instead, it should grow your investment over the course of several years.
Short-term investors must be much more active with their investments than “buy-and-hold,” balanced investors. You will need to adjust your strategy perhaps every day to ensure your portfolio appropriately responds to market conditions, which means you should spend some time becoming familiar with price trends and patterns before you put all your money in an aggressive portfolio. You should be able to recognize buy and sell indicators, and most importantly, of all, you should be comfortable with risk. If you rush into short-term investing without experience and strategy — or else plenty of time — you will likely lose your investment.
Mix and Match
The most important investment strategy for someone preparing to buy a home is this: Do what’s comfortable. If the idea of extreme risk makes you break out in hives, you should invest in well-known, trusted assets, like REITs or mutual funds. If you get impatient waiting for your money to grow in a balanced fund, you can try a more active investment, such as equities or commodities. You shouldn’t be afraid to mix and match aggressive and balanced strategies — but you also shouldn’t forget your ultimate goal: buying a home.