{"id":28103,"date":"2021-11-29T09:24:22","date_gmt":"2021-11-29T17:24:22","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=28103"},"modified":"2026-04-06T02:04:17","modified_gmt":"2026-04-06T09:04:17","slug":"buyer-invest-in-401k-or-save-for-a-house","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-invest-in-401k-or-save-for-a-house\/","title":{"rendered":"Invest In a 401k or Save For a House? Here\u2019s How to Decide, Based on Your Situation"},"content":{"rendered":"

Part of the American dream is homeownership<\/a>. Quite a lot of modern America was populated by people searching for a piece of land of their own. There isn\u2019t a Wild West where you can claim a house anymore, but if you\u2019re reading this, you\u2019re probably considering buying a home. At the same time, you know saving up for a house is a challenge … and you\u2019re not really sure if you should be doing so, especially if you\u2019re also thinking about investing in a 401(k).<\/p>\n

So where should you put your money<\/a> \u2014 invest in a 401(k) or save for a house? What is your ideal retirement strategy? Is trusting the stock market will go up over time the right path, or is opting to invest in the solid tangible asset of a house a better bet?<\/p>\n\n\n\n\n\n

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For a lot of people, investing in a house<\/a> feels like a better decision because your mortgage payments could potentially replace your rent payments, and that can feel better than the numbers on a computer screen showing your 401(k) ticking up over time.<\/p>\n

But what you need to consider is if it\u2019s useful for you<\/i> in your specific situation<\/i> to divert savings from one big area of life (retirement) and into another. Here\u2019s how you can think about this decision.<\/p>\n

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Source: (Christina @ wocintechchat.com \/ Unsplash)<\/figcaption><\/figure>\n

Invest in 401k or save for a house: Things to consider<\/h2>\n

In a perfect world, you earn enough money to both max out your 401(k) and save up for a house \u2014 but if you need to prioritize one over the other for now (and most of us do), then there are a few factors you should consider.<\/p>\n

How much will you need to save for a house? <\/b>Is it $10,000 or $50,000 to meet your down payment needs and have a manageable mortgage? This will depend on where you live and the type and size of house you want to buy.<\/p>\n

How long do you plan to live in the house? <\/b>Is this a house you\u2019ll live in for the next 25 years, or will you be likely to sell in a few years to upgrade, downgrade, or to relocate for work or personal reasons? Or, on yet another hand, is this house purely an investment property<\/a>?<\/p>\n

How many years until you plan to retire? <\/b>Are you going to be able to let your home\u2019s value increase over time and choose a good market to sell in, or will you be selling the house rather quickly and with minimal equity growth?<\/p>\n

Does your employer match your 401(k)? <\/b>And if so, at what rate, and what is the maximum percentage or amount that they\u2019ll match? If your employer is matching your contributions and you lower or stop them, that\u2019s free money you could be throwing away.<\/p>\n

What are the lifestyle implications if you do or don\u2019t buy now?<\/b> Will buying improve or diminish your quality of life?<\/p>\n

How liquid are your assets?<\/b> By keeping a large percentage of your income in a 401(k), will you negatively impact your life? Will buying a house make you house-rich but cash-poor?<\/p>\n

What other options are available to you?<\/b> Can you rent cheaply or live free somewhere? Do you have other investment opportunities?<\/p>\n

How much will you need to save for a house?<\/h3>\n

This will depend on how much homes cost in your area, how much house you want (how many beds\/baths and square footage), the type of loan you are getting, and more.<\/p>\n

If you live in a low cost of living (LCOL) area and are single, you won\u2019t need to spend as much for a comfortable space for one as you would if you live in a high cost of living (HCOL) area and have a partner, three kids, and a dog.<\/p>\n

Additionally, your loan type will determine the minimum down payment you will need to have saved before you can qualify for a loan. Minimum down payments can range<\/a> from as low as 0% up to 5% or even higher, depending on your loan and financial position.<\/p>\n

If you already own a house and are looking at an investment property, you may be able to use some of the equity in your current house and convert it to a down payment for your investment property.<\/p>\n

Jami Romstadt<\/a>, a Toledo, Ohio<\/a> agent who has opted to buy investment properties herself, explained how she\u2019s leveraging homeownership to make her investment dreams come true;<\/p>\n

\u201cWe don’t own outright; we have a mortgage on my current home, but I am able to use the equity in my current home to purchase my first [investment] property.\u201dHow many years until you plan to retire?<\/p>\n

The younger you are, the more you can put your 401(k) money to work for you \u2014 it\u2019s not necessarily a good idea to pull more money out earlier! The impact of compounding interest is incredible over decades, so if you\u2019re in your 20s or 30s, you may actually earn more<\/i> over time from compounding interest than from housing market value increases.<\/p>\n

For example, if you\u2019re 30 and you have $30,000 to invest in a home or 401(k), the very conservative 7% compounding interest adds up<\/a> over 35 years. That initial $30,000 would have compounded into $345,184.56 in your 401(k) by the time you retire at 65, assuming no additional contributions were made.<\/p>\n

However, if you\u2019re 55 and you have $30,000 to invest in a home<\/a> or 401(k), the same conservative 7% compounding interest rate over 10 years doesn\u2019t equal nearly as much. You\u2019d have a total of $60,289.84 in your 401k by the time you retire at 65, assuming no additional contributions were made.<\/p>\n

It may be a good idea for you to talk to a financial advisor about the possible repercussions if you divert some of your savings or take money out of your 401(k).<\/p>\n

How long do you plan to live in the house?<\/h3>\n

It costs money to buy a house; there\u2019s a \u201cbreak-even\u201d point at which the money you save from renting \u2014 and the wealth you\u2019re gaining in equity \u2014 matches what you spent to get into your house, but it takes a few years to get there (three-to-five years is typically a realistic ballpark.) If you aren\u2019t planning on living there for a long time, it might be better to rent and wait to buy after you move to wherever you are going next.<\/p>\n

Does your employer match your 401(k)?<\/h3>\n

Many employers match 401(k) contributions, generally with a limit to how much they\u2019ll match. If your employer does match, then you could miss out on hundreds of dollars each year if you don\u2019t invest up to the match amount, even if the match amount is low.<\/p>\n

For example: a common match amount is 6% of your salary<\/a>. So if your salary is $50,000, then 6% is $3,000. If you contribute the full $3,000, your employer will match some percentage of that \u2014 often up to 50% \u2014 which would be a free $1,500 each year.<\/p>\n

One option might be to save just<\/i> up to the matching amount and then divert the rest of that possible 401(k) savings into a down payment fund, but any employer matching is a benefit you should probably take full advantage of while you can.<\/p>\n

Jake Oyler, a Financial Advisor at Colwyn Investments<\/a>, works with clients to help them figure out their best option and advises, \u201cIf the company you work for has a 401(k) match program, you should contribute at least the amount that the company will match. If you don\u2019t contribute at least that much, you are leaving free money on the table.\u201d<\/p>\n

Remember, too, that your 401(k) contributions are pre-tax, whereas mortgage savings are post-tax, so you can usually increase your balance more rapidly in a 401(k).<\/p>\n

If your employer doesn\u2019t match your 401(k) or you\u2019re self-employed, it may make more sense for you to invest in a house, whether you live in it or choose to rent it out<\/a>.<\/p>\n

Romstadt has chosen exactly this route after considering starting her own 401(k) program when she became an independent real estate agent.<\/p>\n

With her investment property, she explained that she is \u201cletting the renters basically pay the house payment, and then turning around and investing that income once the house is paid off.\u201d<\/p>\n

What are the lifestyle implications?<\/h3>\n

There are non-financial benefits of being a homeowner, and those should certainly be taken into account \u2014 this isn\u2019t just<\/i> a financial decision. What will homeownership add to your quality of life that isn\u2019t currently available, and how important are the additions?<\/p>\n

Will having a home of your own bring you peace of mind that you aren\u2019t relying on the goodwill of landlords to have stability or repairs done? Will it be better for your family to settle in and make a home theirs with a swingset out back and the ability to mark up the walls measuring your kids\u2019 growth spurts?<\/p>\n

Do you have mobility or any other constraints, and will being able to modify your house make life more comfortable? Do you have loved ones whom you\u2019d like to have move in with you?<\/p>\n

If the house is an investment properly, what will the monthly rental income do for your budget once it hits the break-even point? When is<\/i> that point for the sort of investment property you\u2019re considering, given your current financial situation?<\/p>\n

\n I don’t want my clients living their entire being to be in this house that they stretch themselves so then they can’t do anything else but buy this house. So sometimes I do have to talk them through the logistics of what they’re stepping into. I don’t want their house to be their entire world. I want them to be able to go out to dinner and go out of town and<\/i> have a house. I help them think through that bigger picture.<\/q>\n
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