8. How To Save for a Down Payment (and Other Big Purchases) Flashcards
(15 cards)
What is the safest way to save for a down payment or other big ticket item?
Cash
Financial advisors recommend cash as the safest method for saving for short-term goals.
How does inflation impact saving for a down payment?
Inflation can cause a small increase in the amount needed to save, extending the time to reach the goal
For example, with 2% inflation, saving $24,000 may require $25,000 over two years.
How long does it typically take to save $24,000 by saving $1,000 a month in cash?
24 months
With inflation, this may extend to 25 months.
What happens to the value of U.S. Treasury bonds during saving?
They can decline in value by 3% or more
This decline can push your savings goal further into the future.
On average, how long does it take to save $24,000 by investing in U.S. Treasury bonds?
25 months
This is one month less than saving in cash, despite inflation.
What is the average time to save $60,000 by saving $1,000 a month in cash?
67 months
This is longer due to the impact of inflation over a longer time horizon.
When saving for more than two years, which is generally better: cash or bonds?
Bonds
Bonds provide returns that help offset inflation.
What is the suggested ‘switching point’ for saving strategies between cash and bonds?
Around three years
Cash is better for less than three years, bonds for more than three years.
How does investing in stocks compare to investing in bonds for reaching savings goals?
Stocks often do better, but can also perform worse in market crashes
On average, stocks can take less time to reach savings goals.
What is the average time to reach a $60,000 goal by saving $1,000 a month in stocks?
54 months
However, significant downturns can extend this time.
What is the primary factor that should influence your saving strategy for big purchases?
Time horizon
Shorter periods favor cash; longer periods may require bonds or stocks.
What is a potential risk when saving in stocks for a big purchase?
Job loss or financial needs after a market crash
This could prevent consistent saving.
What should you do if you reach your savings goal earlier than expected?
Purchase the item immediately
If delayed, consider investing to preserve purchasing power.
Fill in the blank: When saving for something that will take less than ______ years, use cash.
three
This is based on historical data.
True or False: Saving in cash is better than saving in bonds for periods longer than five years.
False
Bonds generally outperform cash in longer time horizons.
