10

I have no credit, no loans, and am a contractor for $40/hr at a company and I expect to work here for quite a while (job security should be above average).

Every week, I allocate $300 to my Mortgage Preparation Fund. I keep it in a high-interest savings account (3.73% p.a., but goes down to 2.73% if I withdraw anything from that account in that month, but I do not have plans to withdraw any time soon).

I was wondering if there are better places to put my money in. Also consider that I put in $300 every week, so it keeps growing weekly, so investments that allow partial additions every interval or so would be good.


Additional details :

  • Concurrently, I'm also setting aside some of my salary to my Emergency fund, luxuries, and some other small things that I plan to spend on soon (car, wedding in the next 5-10 years maybe, etc).
  • I don't have a target house yet, or a target price range. All I am focusing on now is to grow my mortgage preparation fund as much as I can, so that when the time comes, I'm ready.
  • I live in Australia, if that matters.
  • I expect to use the funds for a downpayment 7-10 years from now. So, I have 7-10 years to try and save up as much as I can with the help of investments.
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    where are you finding 3.7% on a savings account? – warren Oct 29 '14 at 18:53
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    @warren In Australia, it's pretty common. I believe in the US and other countries, interest rates are 1% or so? – Mark Gabriel Oct 30 '14 at 0:33
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    more like 0.1% where I live in the US – warren Oct 30 '14 at 13:33
5

Good job. Assuming that you are also contributing to retirement, you are bound to be a wealthy person. I'm not really sure how Australia works as far as retirement, but I am pretty sure you are taking care of that too.

Given your time frame (more than 5 years) I would consider investing at least a portion of the money. If I was you, I would tend to make that amount significant, say 75% in mutual funds, 25% in your high interest savings. The ratio you choose is up to you, but I would be heavier in the investment than savings side. As the time for home purchase approaches, you may want more in savings and less in investments.

You may want to look at a mutual fund with a low beta. Beta is a measure of the price volatility. I did a google search on low beta funds, and came up with a number of good articles that explains this further. Having a fund with a low beta insulates you, a bit, from radical swings in the market allowing you to count more on the money being there when needed.

One way to get to the proper ratio, is to contribute all new money to the mutual fund until it is in proper balance. This way you don't lower your interest rate for a month.

Given your time frame, salary, and sense of responsibility you may be able to do the 100% down plan. Again, good work!

  • Australia has law-required superannuation, wherein the employer must give an additional 9.25% of the salary into the retirement account. So yeah, the retirement fund is pretty okay. As for the mutual funds suggestion, I'm not yet familiar with mutual funds, so I'll make sure to study them this week. Thanks! – Mark Gabriel Oct 29 '14 at 15:50
  • Coming back to this question almost a year after, I really haven't followed the advice here. I changed my priorities to get a car ASAP, as everyday travel serves to be draining. Starting October 2015, I'll have my funds go back to saving up for the house. I'll try the 75-25 division on mutual funds and the high interest savings account! – Mark Gabriel Sep 19 '15 at 13:39
  • The key here is that you did not go deeply in debt, so good job. By paying cash for things, you can stub your toe and get off track but it is not tragic. – Pete B. Sep 21 '15 at 19:42
  • It's the same to invest in a well-diversified fund with low beta than to invest part of your money to a well-diversified fund with high beta and part in risk-free assets. So, I wouldn't worry about the beta of the fund, and instead, would select the lowest cost stock index fund (or a number of funds, if you have a hard time finding one fund with good geographical diversification). – juhist Jan 9 '16 at 21:11
3

The big question is whether you will be flexible about when you'll get that house.

The overall best investment (in terms of yielding a good risk/return ratio and requiring little effort) is a broad index fund (mutual or ETF), especially if you're contributing continuously and thereby take advantage of cost averaging.

But the downside is that you have some volatility: during an economic downturn, your investment may be worth only half of what it's worth when the economy is booming. And of course it's very bad to have that happening just when you want to get your house. Then again, chances are that house prices will also go down in such times.

If you want to avoid ever having to see the value of your investment go down, then you're pretty much stuck with things like your high-interest savings account (which sounds like a very good fit for your requirements.

  • Although with a 7-10 year goal in mind, I would think that mutual funds or ETFs would be good. I'll research more on both of those. Thanks. – Mark Gabriel Oct 29 '14 at 16:29
  • @MarkGabriel: the key is to look for index funds because those have lower costs than actively managed ones. – Michael Borgwardt Oct 29 '14 at 16:52
2

You should never take advice from someone else in relation to a question like this. Who would you blame if things go wrong and you lose money or make less than your savings account. For this reason I will give you the same answer I gave to one of your previous similar questions:

If you want higher returns you may have to take on more risk.

From lowest returns (and usually lower risk) to higher returns (and usually higher risk), Bank savings accounts, term deposits, on-line savings accounts, offset accounts (if you have a mortgage), fixed interest eg. Bonds, property and stock markets.

If you want potentially higher returns then you can go for derivatives like options or CFDs, FX or Futures. These usually have higher risks again but as with any investments some risks can be partly managed.

What ever you decide to do, get yourself educated first. Don't put any money down unless you know what your potential risks are and have a risk management strategy in place, especially if it is from advice provided by someone else. The first rule before starting any new investment is to understand what your potential risks are and have a plane to manage and reduce those risks.

  • 1
    Regarding your first paragraph : I understand that my financial knowledge is limited and it would do me good to learn from the advice of the experts, and I will take all of them with a grain of salt. I understand that no investment actually assures a profit and given that, I have no one to blame for deciding on a certain investment. It's just that more knowledge gives me more power to decide on a better route than I would have gone through if I didn't ask. Last thing, learning, for me, is the biggest investment I can make, and that I can attribute to you guys. – Mark Gabriel Oct 30 '14 at 3:29
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The highest growth for an investment has historically been in stocks. Investing in mature companies that offer dividends is great for you since it is compound growth. Many oil and gas companies provide dividends.

  • So you propose stocks, and I assume I must diversify? Also, to avoid a higher brokerage rate, do you suggest that I keep 4-6 weeks worth of salary before buying a new stock, then repeat the process? – Mark Gabriel Oct 29 '14 at 15:44
  • Investing your mortgage in coca-cola is really bad advice. – Matt R Oct 29 '14 at 15:54
  • @MattR Investing in stocks is risky but yields the most return, coca cola is just an example of a stock. If you are saying it is a bad stock, I can remind you Warren Buffet invested in it in 1988, and it is just as good company today, just look at their financial data. – FreshTendrils Oct 29 '14 at 18:44
  • Investing in stocks will give the largest return. That being said, investing your entire future house fund in a single stock is a bad idea. Coca-cola has a negative return YTD and only about 2% return last year (not including dividends). You would be far better and far safer investing in mutual funds than a single stock. – Matt R Oct 29 '14 at 19:01
  • Yes I agree, but Warren Buffet, Trump and others agree a focused portfolio is key, which means investing in a small amount of stocks that you know well. Coca-cola is just an example, it can be any stock. – FreshTendrils Oct 29 '14 at 19:43

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