Personal Finance

I live in an expensive city and likely won't buy my own place for at least 10 years - how should I start saving for a down payment?

Joey Frenette

Published: October 14, 2024 9:46 am

With rent prices in the city continuing to soar, the dream of homeownership seems to be slowly slipping away for many. Undoubtedly, unless you’ve enjoyed significant wage growth in recent years or you’re really cutting back on the spending, saving enough for a down payment can feel quite daunting. Either way, there are ways you can still move forward on your savings despite transitory setbacks such as the inflationary environment we’ve been slogging through in recent years.

In this piece, we’ll check in with a Reddit poster who’s renting in the big city but still has the longer-term dream of buying their own home. With inflation coming back down, the poster’s 10-year plan of saving enough for a down payment seems more than achievable. That said, it’s going to take some compromise (perhaps embracing a more frugal lifestyle) and some smart long-term-focused financial decisions.

Key Points About This Article

• Investing wisely and budget-cutting can help you stay on track with your long-term savings goals, even in the face of higher living costs.
• A time horizon of 10 years (or more) is long enough to justify owning stocks.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

Does it make sense to invest in stocks with a 10-year plan of saving for a down payment?

Of course, it’s seldom good practice to invest in risky securities (think equities and real estate investment trusts) for a shot at greater growth if you’re looking to buy a home sometime soon. However, in the case of the Redditor who’s giving themselves at least a decade to build up enough for a down payment, I do think there’s an opportunity to grow their wealth in the stock market.

Indeed, if you’re three or fewer years away from cashing out the investment portfolio to fund a down payment on a house or condo, betting on risk-free securities — think Certificates of Deposit (CDs) or short-dated bonds — makes the most sense. That way, you won’t be put in a situation that requires you to sell off your stocks and REITs after a nasty market crash or sell-off. Indeed, market crashes happen, even if it seems like the coast is cleared.

However, if you’re playing the long game, with a 10-year horizon or more, stocks may just help you reach your long-term financial goals much sooner. Of course, you’ll need a strong stomach to bet on stocks and the discipline to hold on (or even buy more shares) when we’re eventually propelled into a stock market drawdown.

The case for investing in stocks to build a down payment.

Over the last 10 years, the S&P 500 has gone on to gain more than 203%. Meanwhile, the Nasdaq 100 exploded more than 422% higher in the same horizon. These are incredible, hands-off market gains that could help one meet their financial goals.

Just because the past 10 years have been profoundly rewarding does not mean the same can be expected over the next decade. Just ask any financial advisor, and they’ll tell you that the past does not indicate what’s to come in the future.

It’s impossible to tell what’s ahead for stocks. That said, even if the S&P 500’s next 10 years prove less bountiful, stocks still stand out as one of the best ways to grow one’s wealth over a long-term timespan.

Sticking with the S&P 500 for the next 10 years makes sense.

Either way, the Redditor should check in with their financial advisor to see which stocks or REITs are right for them as they move forward with their 10-year plan. If they can cut costs, pay themselves first, and consistently add a position in an index fund that tracks the S&P 500 — iShares Core S&P 500 ETF (NYSEARCA:IVV) —, perhaps the “bumps” in the road can be smoothened.

The thing is, nobody knows when the corrections and sell-offs will happen. However, the key is to keep gradually buying over time, regardless of what the chart looks like or where pundits see markets heading next. By ignoring the forecasts and sticking with your 10-year investment plan, perhaps the Redditor will be able to break into the housing market within the next decade.

If you’re in a similar situation (a 10-year plan to save and invest), visit a wealth planner. In any case, it’s my humble opinion that they’ll point you toward the stock market.