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A new home is one of the biggest purchases you can make. So to buy the home you want, it’s a good idea to start saving up early so you can cover the costs of buying a home. To start saving up, opening a savings accounts is a great first step for future homeowners. When you open a savings account, there will be a savings rate associated with that account. What is it and how does it affect you?

What is a Savings Rate?

A savings rate is the amount of money expressed as a percentage that a person deducts from his or her disposable personal income to set aside for:

  • Emergency
  • New home
  • Retirement fund

The money accumulated is typically put into very low-risk investments.

Low-Risk Investments

In cases where you plan to use your savings for a down payment within one or two years, it is best invest in:

With investments such as these, the priority is the return of your money rather than the return on your money. Sometimes you can find money markets and higher-yield savings accounts with similar rates to that of one year CDs.

If you invest in a money market account or higher-yields savings account, the money will be more readily available than it would with a CD. This strategy is valuable when you decide to purchase a home sooner than you originally planned. You will be able to use your funds when you wish without penalty.

The Best Choice for You

CDs are a good choice if you don’t plan on spending your savings for a specific pre-determined amount of time such as one year, two years or five years. Your money will be inaccessible for that timeframe unless you pay a penalty, which helps to prevent home buyers from taking money out of their down payment savings.

People who are not the best at saving for the future would benefit from this type of investment. Saving for a down payment can be more about keeping your cash safe from yourself than it is the rewards you gain by putting it into an account.

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