Ask Wellthi: Should I Lower My 401(k) Contribution to Save for a Second House?

Ask Wellthi here, your AI-powered stand up finance assistant, because money talks, but it’s much more fun when it tells jokes!

Reddit user into_the_unkown3 has a question, and we have answers, but don’t consider it financial advice!

The problem: “I (34f) just bought a condo for $600,000 with the mortgage at $3k/month. I’m currently investing 10% into 401k with a salary of $140k/year. My company matches up to 6% for 401k. Living in a condo isn’t ideal for the rest of my life so I’m looking to buy a single family home +$1m within the next 5 years (hopefully) and potentially use the condo as an investment property. Any advice on how I should start saving for a single family home? I’m thinking of adjusting my 401k to 6% for company match to use the extra funds towards a down payment for the single family home. Appreciate any advice!”

Ask Wellthi says…

Congrats on buying your condo – that’s an exciting milestone, and you’re on the right track to building your wealth and financial independence.

Let’s dive into your plans for upgrading from your condo to a single family home valued at $1M+ within the next five years. Having a plan is essential, especially when it involves real estate investment, as it’s a significant financial decision.

Now, you’ve mentioned adjusting your 401k contribution from 10% to 6% to save more for the down payment. While that can seem tempting, it’s essential to consider the potential long-term impact on your retirement savings. A 4% decrease might not seem like much, but it could significantly affect your nest egg over time. According to the 401k calculator on Citizens Bank, if you continue contributing 10% for 31 years, even at a modest rate of return your savings could be 30%-40% higher compared to investing the lower amount, or about $500,000 if your salary doesn’t change.

Meanwhile, raising sufficient funds to qualify for a second $1M mortgage in just 5 years time could be tricky, and will likely require more than diverting 4% from your 401(k) to reach the heightened down payment often required for second homes. Most banks will also limit your debt-to-income ratio to 43%, so your total monthly mortgage payments on both properties and other debts such as credit cards will be capped at around $5,000 on your current income (plus in some cases up to 75% of your anticipated rental income on the condo.) Then don’t forget about additional expenses, such as home owner’s insurance, taxes and repairs, which can add up.

However, every situation is unique, and it’s crucial to balance your short-term and long-term goals. If you are determined to purchase a single-family home within five years, consider a multi-faceted savings approach.

Firstly, think about creating a dedicated savings account for your home down payment and contribute a specific amount each month, sort of like a “bill payment” to future you. For this, you could use high-yield savings accounts that offer better interest rates than traditional savings accounts.

Secondly, consider investing in low-risk, liquid investment options like short-term bond funds or money market funds. These will allow your money to grow while still being accessible when you need it for your home purchase.

Finally, given your interest in using the condo as an investment property, you might want to consider refinancing it. Lowering your monthly mortgage payments could free up cash to save towards your single-family home. Additionally, you could rent it out to generate extra income.

Remember, your financial journey is uniquely yours, and there’s no one-size-fits-all approach. Consult a financial advisor to ensure your plans align with your overall financial health. You’ve got this, and Wellthi is here to help every step of the way!

Go Deeper

How to Create a Savings Budget for Buying a Second Home (The Balance)

Ask Wellthi: Is it better to start a business or buy a home first? (Wellthi)

Five Things to Know About Buying a Second Home (Forbes)


Talk to a Financial Advisor at Citizens Bank