October 1, 2004
Seeking Greater Yields
Q: I currently invest 10% of my salary in my 401(k) plan and 10% into savings. I’m looking for other options in which to invest that would yield greater profits as I am looking to buy a home in the next three to five years. Any suggestions?
–M. Scott, Chicago
A: Your saving habits are good, and it’s great that you’re planning to buy a home. You’re doing the right thing by starting to put money away early. This will give you time to order your credit report and work on improving your credit score before it’s actually time for you to apply for your mortgage loan.
The money you’re contributing to your 401(k) plan should be reserved for your retirement. You shouldn’t think about taking a loan from your 401(k) because there are plenty of “low money down” mortgage products that you should be able to qualify for within three to five years. As for your savings, use half of the money to buy six-month and one-year CDs. Since you’re buying a house, you’ll want to keep the majority of this money in an investment vehicle that can be turned into cash quickly. Short-term CDs will earn you a higher rate of return than your savings account and, as they mature, you can roll them over into another CD that may be earning even higher rates at that time. Currently, the average interest rate on a one-year CD is around 2.1% — about one percentage point higher than most savings accounts. That’s the safest way to earn a bit more interest.