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Best way to save for a house?

stephasaurus 10 June 29, 2015 at 06:05 PM
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My friend told me he wants to save up for a down payment on a house & spoke to a financial advisor at Edward Jones who said he should open a Roth ira. Edward Jones charges 5.75% on everything he puts into the account plus $40/yr. Are those fees pretty standard? They seem high, but I don't know much about investments so I thought I'd ask for opinions here.

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#2
why would he give away nearly %6 of his money they also have other fees 2% on investment amount
Commissions on Stock Trades



Commissions on Reinvested Dividends 2% on reinvestment amount


No access to online trading

The biggest drawback to investing with Edward Jones is the fact that your financial advisor is paid on commissions. So they earn money when you:
Buy or sell stocks
Buy bonds
Buy mutual funds that charge a sales load your advisor has no incentive to recommend no-load mutual funds since they won’t make a commission from the sale.Additionally, since they act as a transfer agent for the mutual fund company (by setting up a separate account with the mutual fund company that represents your holdings), they’re much more likely to recommend certain fund companies.If they offer these fund companies preferential treatment, they’re paid part of the revenue share annually, per mutual fund position by the preferred mutual fund company.


This compensation system can lead your advisor to give you a biased investment strategy advice.

use vangard
https://investor.vanguard.com/mutual-funds/fees


complaints edwardjones

http://www.consumeraffairs.com/fi...jones.html
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#3
Those fees are extraordinarily high. That 5.75% fee is what's called a front-end load. This simply means that he will pay (lose) 5.75% of his money every time he buys a fund. In other words, he'll be paying (again, losing) 5.75% of his money for nothing - before it is even invested. Contrast that with Vanguard's most common expense ratios (annual fee on the funds' assets) of 0.05%-0.18% - almost nothing. While this isn't exactly comparing apples to apples, the point is Edward Jones is a full-service, high cost brokerage, while ultra-low cost brokerages, such as Vanguard, are unbelievably cheaper.

When is he looking to buy this house?

How much is he wanting to have for a down payment?

How much does he have saved so far?

If your friend is looking to save money for a house, opening a Roth IRA for this sole reason would be adding a lot of unnecessary steps and energy in order to simply save up for a down payment.

If he's just looking to save up for a down payment, he should save his money in a plain old savings vehicle, such as a savings or money market account.

If he's looking to invest his money for retirement, he should consider opening a Roth IRA with an ultra-low cost brokerage, such as Vanguard, Fidelity, T. Rowe Price, or Charles Schwab. He should go with an ultra-low cost brokerage because fees are a massive (and often overlooked) determining factor in how much money someone will have in retirement.

It sounds like your friend is confusing savings and investing. Savings will get his to his goal. Investing might get him there faster, but it might get him there later too - a lot later than he might want. With investing comes risk. If he's trying to save for a house, saving the money in a plain old savings vehicle would almost always be the smartest route.
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#4
What is the time frame? If you want to buy within 5 years, you aren't going to get much in the way of interest during that time unless you hit the jackpot going with a risky investment. So barring going the risky route, and needing to withdraw in a short time-frame, I'd just bank it at the highest rate CD I could find. Even if you had $10,000 right now, and could find 1%, you are still only talking about $100 in interest a year. So you can do the math for lower amounts.

If you want to buy a house, don't wait for a down payment. Interest rates are only going to go up. The effect of a 1% increase in your financing rate will wipe out anything you might save up for a few years.

Here is some good info about using a Roth IRA for a home purchase.

http://www.rothira.com/blog/shoul...uy-a-house
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L1: Learner
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Original Poster
#5
Thanks for the info. He would like to buy in about 5 years, but sooner if he finds a good deal. His goal is to have around $60k for a down payment & has $20k now.
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#6
by not spending a cent more than necessary for the next few years
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#7
A Roth is a retirement account not a home savings account.
Quote :
Is Using a Roth for a Home Purchase Wise?Now that you know you can withdraw funds from your Roth IRA for a home purchase the next question is should you?Do You Have Other Funding Options?Unless you specifically opened up the Roth IRA to set money aside for your home purchase then you might want to consider other funding options. Wiping our your initial investments today will set back your retirement savings by many years. You end up losing out on the growth in the account. There is less time for compound interest to work in your favor, and your nest egg ends up being smaller in retirement. If you are having to tap an IRA to fund your home purchase because you have no other options you need to reconsider. A home purchase is a major decision (as is gutting your retirement). You need to be setting aside money monthly to save up for a down payment.
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#8
As said above, savings/money market. Easy peasy.
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L1: Learner
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Original Poster
#9
I think he's at the point of knowing it isn't good to keep money in a savings account due to low interest & inflation, but unsure what other options might meet his needs.
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#10
Quote from stephasaurus View Post :
I think he's at the point of knowing it isn't good to keep money in a savings account due to low interest & inflation, but unsure what other options might meet his needs.
But this is money for a house. Is there really a desire for risk within a 5 year savings period? I'm not seeing a good case for market investing. A savings account is a great way to stash short term money for something like a home. You can't always chase the interest rates.
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#11
Quote from stephasaurus View Post :
I think he's at the point of knowing it isn't good to keep money in a savings account due to low interest & inflation, but unsure what other options might meet his needs.
5 years isn't that long for this to be an issue imo.
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#12
Quote from stephasaurus View Post :
I think he's at the point of knowing it isn't good to keep money in a savings account due to low interest & inflation, but unsure what other options might meet his needs.
Again, it sounds like he's confusing savings and investing. He's only taking into account the possible negatives of a savings vehicle. He's not taking into account the possible negatives of investing the money, such as losing money. He's also not taking into account the positives of saving the money, such as being guaranteed to not lose his principle.

Interest rates are low now, but they won't be low forever. Too, inflation is far lower than most predicted it would be right now: 0%

It sounds like he's speculating all negative onto saving the money and speculating all positive on investing the money. I'd strongly encourage your friend to learn more about investing before he goes that route for any reason - retirement included. Too many inexperienced people get into investing and, driven by emotion, weight the potential positives far heavier than they weight the potential negatives. Education can help balance these two.
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#13
He needs a better brokerage if they're telling him stuff like this. When I was looking into saving up for a home in 2010, USAA setup my savings into mutual funds with conservative risk. vaultaddict is right, it's best to save a ton of money every month.
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#14
Quote from wes View Post :
He needs a better brokerage if they're telling him stuff like this. When I was looking into saving up for a home in 2010, USAA setup my savings into mutual funds with conservative risk. vaultaddict is right, it's best to save a ton of money every month.
That's because the "adviser" doesn't get paid a commission if this guy keeps his money in cash. Wink
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#15
Best way to save....
Two options IMHO... either way is fine IMHO...
1. put money into a 0.90% interest money market account (there are many)
2. put money into a self directed Vanguard account (mutaul fund)... my favorite is an index fund.
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