Saving For Retirement Or House

Cyrus is at a crossroads about saving to buy a house or investing, now that he's debt free and has an emergency fund.

QUESTION: Cyrus just finished Baby Step 3 and wonders if he should go to Baby Step 4 or start saving for a house in a few years. He’s 25 and doesn’t anticipate buying a house for 5 years or so, and he’s even looking at condos. What does Dave think of that?

ANSWER: I think it’s great to have a goal of buying a house. You’re talking about doing it well into the future, so I’d look at starting some type of investing. We call saving the down payment Baby Step 3b, but that’s usually for someone who wants to do it pretty quick, so they will hold off investing and just pile up money for a huge down payment on a house for a couple of years. Then they would buy and start investing with Baby Step 4.

You could do some of both. You could go to Baby Step 4 and instead of doing 15%, you’d do 10% and save an additional 10% in a money market account for the down payment. Anything in real estate, you just have to look at what’s around it, and what the track record of that neighborhood is. You can buy condos in any city that have done well, and you can buy some that are lousy.