Dear Dr. Don,
I am a recent college graduate and have been employed since I graduated from school. I am frustrated by today’s low interest rates. I have been saving and have a considerable amount of money just sitting in a money market account receiving little or no interest.

I would like to purchase a home in the next three to four years. What should I do with the extra income to get a decent return on investment and have the money available to me in about four years or so?

I am not certain what my best options are for investing in the short term (three to four years) outside of MMAs and CDs.
— Brian Bungalow

Dear Brian,
In these (post) recessionary times, it’s good to hear from a recent college graduate who’s employed and able to start investing for future life goals, like owning a home. For short-term financial goals (such as saving up for the down payment on a house), you don’t want to take much risk in your investments. The potential loss of principal outweighs the potential gain from the riskier investment.

That said, having money sitting in a money market account earning next to nothing doesn’t make much sense either. You don’t want to invest in longer-term investments only to watch their prices sink if interest rates trend higher.

A nice middle ground is to invest in a short-term bond mutual fund. A mutual fund screening tool can help pick out a fund that meets your needs in investing.

In terms of today’s CD rates, you could look at a three-year CD yielding about 2.41 annual percentage yield. Finding a bank that offers a bump-up or step-up option would give you the ability to increase the yield on your deposit without changing the term.

If your employer matches all or part of your contributions to a 401(k) plan, and will let you borrow against the plan for housing, you could accelerate the savings plan by saving within the retirement plan. Your plan provider can explain any loan provisions associated with the plan.

Typically, a loan immediately becomes due if you leave that employer. You’d have to feel pretty confident that you expect to stay in the job for some time to find this approach attractive.

If you’re more of a risk taker, you could look at options to buy a home with a low down payment and start building equity sooner rather than later. You didn’t spell out where you’re living currently or how much money you have set aside, but an FHA loan only requires a 3 percent down payment.

Money you were spending on rent can go toward principal, interest, taxes and insurance, also known as PITI, in a market where interest rates are low and housing prices are depressed. Who knows where interest rates and housing prices will be four years from now?

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