Your home is probably the biggest financial commitment you will ever make ~ and it certainly feels that way when you are saving for your down payment. Even for a couple with two incomes, coming up with a 25% deposit on a home can take years and involves all sorts of sacrifices. One of the problems is that inflation is working against you while you are saving ~ house prices generally go up all the time, despite the recent problems we've had. However, if you put all the money you save into the bank, you’re going to get very little interest ~ less than 1% ~ or none at all.
On the other hand, you don't want to put your money into risky investments ~ you want it to be there when it's time for you to buy a home. That's what makes saving for a house such a dilemma. How do you keep up with inflation, while making sure that your money is secure?
One approach is to put your savings into certificates of deposit (CDs). These are just like a savings account, except that you can’t take your money out until the CD expires ~ this is known as the term of the CD. For example, if you are planning to buy a house in two years' time, you can put your money into 2-year CDs. Just like savings accounts, the federal government insures CDs, so you won't lose your money if the bank goes bankrupt. While most CDs only give you around 1% a year, you can find CDs that pay considerably more ~ for instance, look at this 2 in 1 CD account at CIT Bank.
If you are comfortable with a little more risk, consider buying treasury bonds. There is no chance that the government will default on these ~ so they are completely safe from that perspective ~ but there is a chance that the price will go down if interest rates rise. This is because it if your bonds only pay a low interest rate compared to the current interest rate, they become less attractive to other investors. Right now, however, interest rates are unlikely to rise in the short-term ~ in fact, the Federal Reserve says they will not start to raise interest rates until unemployment drops below 6.5% ~ and they are hinting that they might drop this to 5.5%. So, if you have a short-term savings goal, then treasury bonds may be an option.
Finally, if you want to take slightly more risk, consider investing in an index-linked fund. This type of fund tracks the overall value of a particular stock market index, such as the S&P 500, rather than investing in individual stocks. While index-linked funds can still go down in value, they are much more stable than if you invested all your money in a single company ~ or even a few companies. You can also get a good return on investment ~ or instance, if you had invested in one this year, you would have made more than 20% on the money that you put in.