Should you dial back your 401k contribution so you have more money to put towards a downpayment on your first home?
I am currently in this predicament and nearly everything I read on the internet has differing opinions.
If you are in the same boat as me you probably feel the same frustration I do when trying to make this important decision. Part of the stress and anxiety comes from the fact that buying your first home is one of the biggest financial decisions you can make. This is set in contrast to the fact you also need to be saving for retirement so you can afford to still live in a home later on in life.
There is a constant battle of what you should be doing NOW, and what you should be saving for the FUTURE.
I am giving you permission to stop being so hard on yourself and start thinking logically about what will make you happy and what is best for your family.
In this post, I want to outline some of the things my wife and I talked about when we finally decided to start looking for a house.
Buying A Home Vs Saving For A 401k
Some people will say that if you have to reduce your 401k contributions to save for a house you aren’t ready for a house. I think these people are misguided and likely don’t have student loan debt hanging over their heads like a dark cloud.
You can’t control the future…
That is hard for me to say because I am a huge fan of planning, goals, and having a clear strategy. But no matter how hard you try, how smart you are, and how effective your strategy is life happens.
So you need to evaluate what is best for you and your family right NOW.
When Buying A House Makes Sense
Here are a few situations where I think it makes sense to dial back your 401k to save for a house.
- You know you will live in the area for a long time 7+ years
- You are expecting your first child and are in a cramped apartment or house
- You are in a market where house appreciation is pretty steady
- You have a clear idea of how much of a house you can afford and aren’t reaching
- You know that owning a house is a HUGE responsibility
- You are not trying to fit in like your friends and have that pressure force you into a house buying decision
When Saving More In Your 401k Makes More Sense
- You aren’t sure where you will be living in 3 years
- You have bad credit
- You struggle to pay your rent each month
- You want to buy a house so you can fit in like your friends
- You haven’t consolidated your student loans to a smaller payment or lower interest
- You don’t have an emergency fund saved up
- You have less than $10k in your 401k.
- You aren’t matching your employee contribution
You might be thinking what does all that have to do with owning a home. Let me explain.
If you are going to be moving in a short period of time you will likely not have enough equity in your home to sell it for a profit. You will need to live somewhere else when you move and if you don’t have another down payment you are creating a cycle of putting money into homes and not taking any out.
If you have bad credit the chances of you getting a lower interest rate on a mortgage means you will pay higher than normal mortgage payments. That extra money is probably better served in a retirement account.
If you struggle to pay your rent each month you must understand that owning a home will mean a lot of extra payments you probably aren’t thinking about. Home ownership is expensive. If rent is tough, a mortgage around the same price is going to be tougher.
Don’t try and follow the social norms. It creates extra pressure and can put you in a bad situation with your money if you are following the crowd. You have to do what is best for you.
If you aren’t doing what you can do pay down some of your other debts, piling on a mortgage isn’t a good idea. If you have a handle on your credit card and student loan debt, then you are likely financially responsible enough to get into a house payment as well.
It’s critical you have an emergency fund when buying a house. What if the water heater goes out? Do you have money to fix it? When you are renting you can just call up your landlord, but when you own your house, you are the landlord.
Finally, if you are going to take money from your 401k it makes sense to have a little saved in there so it can grow while you save for a house. If you haven’t even started to fund your 401k or only have a couple thousand dollars in there then you are stretching your money too thin.
If you do take money away from your 401k make sure it’s your contribution and not what you need to put in for your employer to match it. Leaving money on the table is NEVER a good idea.
Wrapping It Up
Again, every millennials situation is different but I hope this helps you understand if you should take money from your 401k to save for a house.
Depending on how your 401k is set up and how long you have been contributing to it, you can use that money to fund the downpayment of your house. But that is a post for another time. If you have a ROTH IRA or ROTH 401k you can ask your financial planner or HR manager to look into more information for you.
At the end of the day it’s important to be honest with youself and ask yourself a few of the questions above to know if home ownership is in the cards for you in the near future, or if it’s better off in the next 5 years while you save up for your retirement.
About The Author – Alex
I am on a journey of personal growth. I love learning about investing strategies and ways to actively improve my life. Follow along and connect with me if you are looking for a path to financial freedom and becoming the best version of yourself.