Updated on 09.15.14

# How I’m Investing For Our Dream Home

As I’ve mentioned frequently on here, my wife and I have defined a very specific long term goal for ourselves – we intend to buy a piece of land in the country and build a house on it before our oldest child’s sixteenth birthday. In order to have the financial resources in place to do this, we had to develop for ourselves a plan to make it happen. Here’s that exact plan, from scratch – I thought it might be worthwhile to paint a real picture of an investment plan, from scratch to plan in execution.

Step 1: Clearly Specify The Goal

We started off by getting a large number of samples of the cost of the land and house we desired. What do these cost today? We took an average of all of the values we found, then figured that they would increase in value 5% a year for the next fifteen years. This is our target number – a rough estimate of how much our dream will cost us.

Using that number as a starting point, we figured that we would like to be able to finance 50% of it out of pocket, move there, then sell our current home, paying off most of what we owe.

Our target dollar amount is \$450,000. We have fifteen years to get there.

Step 2: Devise The Plan

Once we had our target number, we started doing some math. We assumed we can get an 8.5% annual return on our overall portfolio – maybe a slightly conservative number, but hopefully realistic.

With an 8% annual return, we wanted to see how much we would need to invest each week to get that amount. Our math showed that if we invest \$300 a week into a portfolio that returns at 8% annually, we will have \$440,783 at the end of fifteen years.

So, we defined our commitment: we will invest \$300 a week into an investment portfolio.

Step 3: Coming Up With The Money

The next problem was finding this money. Over the last couple years, we’ve committed ourselves to a lot of financially responsible moves and we live a lifestyle that has a large separation between what we bring in and what we spend. We ran the numbers and found that we could commit ourselves to this once we had an emergency fund in place.

Why not just put that money into prepaying your home loan? There are two reasons. First, our home mortgage has a very low fixed interest rate – below 6%. Second, an investment gives us some flexibility – if we choose to go in a different direction, that investment will always be there for us, growing over time. Our assets aren’t tied up in our house.

Step 4: Defining The Portfolio

So how are we going to invest? I’m not a speculative investor by any means and our target return is well within a reasonable goal, so we made the decision to invest in an array of low-cost index funds through Vanguard. We want to diversify pretty widely, so here’s our tentative split:

20% large-cap domestic stocks
20% medium-cap domestic stocks
20% small-cap domestic stocks
30% international stocks
10% bonds

We will likely own ten distinct funds: 2 large cap funds, 2 medium cap funds, 2 small cap funds, 3 international funds, and 1 bond fund. We plan on investing directly with Vanguard, which was successful for us in the past as we invested a bit during the run-up to buying our current home.

Step 5: Our Specific Plan

Each week, we move \$300 from the primary checking account into a savings account specifically set aside for investments. At first, we just let this amount build to \$3,000 – the minimum amount required to buy most Vanguard funds – and when we reach that number in the account, we buy the minimum \$3,000 worth of a fund. Here are the funds in the order we plan to buy them:

Vanguard 500 (VFINX; large-cap domestic)
Vanguard Emerging Markets Index Fund (VEIEX; international)
Vanguard Mid-Cap Growth Index Fund (VMGIX; mid-cap domestic)
Vanguard Small-Cap Growth Index Fund (VISGX; small-cap domestic)
Vanguard Total International Index Fund (VGTSX; international)
Vanguard Small-Cap Index Fund (NAESX; small-cap domestic)
Vanguard Mid-Cap Index Fund (VIMSX; mid-cap domestic)
Vanguard Large-Cap Index Fund (VLACX; large-cap domestic)
Vanguard European Stock Index Fund (VEURX; international)
Vanguard Total Bond Market Index (VBMFX; bond)

Currently, we’ve made our initial purchase in the Vanguard 500 and are now saving up for our second fund.

When this purchasing is done, which will take 100 weeks, I’ll then switch into rebalancing mode. I’ll continue to put away the \$300 each week, then at the end of each month, I’ll deposit the monthly total into whichever of these funds has the lowest total balance. This is effectively an ongoing rebalancing, ensuring that I stay somewhat close to my original plan of having 10% of my investment in each fund. I do not plan to chase individual funds that are doing spectacularly well – my only tinkering will be with additional investments.

I plan on sticking with this arrangement until we approach our overall goal, then move the entire thing to something very solid – like a savings account – when we begin to make moves towards buying the land and the house. Since this investment is not a requirement to maintain my standard of living, I don’t feel a strong need to move into more conservative investments in the years approaching the goal – I’ll stick with this until we’re about to buy, then I’ll liquidate the entire thing.

That, in a nutshell, is our plan. Obviously, there are many life changes that could disrupt this, and when they occur we’ll re-evaluate where we are at. For now, though, this plan guides us directly towards our greater goals.

1. Margaret says:

Make sure you consider the tax implications of liquidating your investment. It might be worth doing it over 5 years or more to reduce the tax bite.

2. s says:

Also, if the place your moving to will result in your children changing schools, you might want to consider that in the plans as well. Changing schools at age 16 can be very rough – basically switching just for senior year of high school. Your other kids could also have a hard time with it (presumably being around 12 and 14). Just something to consider.

3. s says:

Also, if the place you’re moving to will result in your children changing schools, you might want to consider that in the plans as well. Changing schools at age 16 can be very rough – basically switching just for senior year of high school. Your other kids could also have a hard time with it (presumably being around 12 and 14). Just something to consider.

4. Johanna says:

I see how having 10 funds with 10% of the money in each can make rebalancing easier, but there is a lot of overlap between some of the funds you’ve selected, so beware of thinking that you’re more diversified than you actually are.

5. Matt says:

Six weeks ago you said you had basically no money in stocks and that you didn’t think we’d see the bottom of the market for another year. Has that changed? Why?

6. Kat says:

I would also over estimate the time it will take to find the property, architect you like, design and build a house. Along with the fees.
Since it is your dream home, it might take you longer than a year to design and build it. Especially since you will have to consider how the house will work with children in it and how it will work once they are gone. Most of your time in the house will be when they are gone.

7. Rick says:

Man, you must make a lot of money to be able to save \$1200 a month for a house, on top of everything else you’re saving for: two car funds, two 529s, and retirement. If I saved \$1200 a month, I’d be saving 50% of my entire income.

8. maryland terps says:

The research shows that small cap index funds lag most active managed small cap funds (via morningstar). You may want to check out Bridgeway Funds which beat the market & have low costs. They keep the funds small & close them before assets affect performance.

9. Dave says:

Margaret, since these are index funds, it will be long term cap gains, so I doubt it will matter.
Johanna, Trent outlined that he wanted 20% in large cap domestics, so having 2 funds at 10% each should accomplish this goal.

And Trent, you might consider the tax implications of a bond find. They are awfully tax inefficient. Also, I wouldn’t liquidate it all at once, but over several weeks/months. You wouldn’t want the market to take a 10% hit right before you’re about to sell.

10. Johanna says:

Yes, Dave, I know. I’m just pointing out that the two particular large-cap funds he’s chosen are very similar, so he’s not any more diversified than he would be if he’d put all 20% in one or the other. Not that there’s anything wrong with that, since Vanguard makes it so easy to get around their account fees these days. But since it will take him two years to save up enough money for all ten funds before he can even try to meet his target asset allocation, it might be worth considering ways of doing it with fewer than ten funds.

I’m also slightly puzzled by the choice of international funds, since two of the international funds (emerging markets and European) are a subset of the third (total international). Why not substitute the Pacific index fund for the total international? I suspect because it looks less attractive based on its performance over the last ten years – which of course has little to do with how it will perform over the next ten years.

11. jb says:

I agree with Johanna, so many of your funds overlap so it is actually harder for you to manage your asset allocation. Consider holding fewer funds that do not overlap.

Additionally, holding fewer funds with more assets in each fund will can result in lower costs as well. When you have over \$100K in a single fund with Vanguard you can convert to Admiral shares, which have significantly lower fees. You can’t do this with \$50K in 2 overlapping funds, even though you’re holding essentially the same assets.

12. Grant says:

Does Vanguard have an automatic withdrawal plan? After you get the 10 funds set up, can’t you just automatically have \$120 withdrawn from your bank account each month and put into each of them? It seems like a lot of needless maintenance/hassle to have to do this manually every month for the next 10-15 years.

13. Amanda says:

As I value this site very much, I hate to see Trent (or anyone) go down the path of a sort of “false diversification”..it’s already been mentioned on these comments, i.e. large-cap u.s. stocks are also “international” stocks due to the scope of the corporations & on & on. So many mutual funds repeat companies that you’re not buying more companies or “diversification”… you’re buying more fees and less diversity. Please do read: John Bogle’s “Common Sense on Mutal Funds: New Imperatives for the Intelligent Investor”. This will save you a ridiculous amount of money & time.
Great post though & good luck.

14. MossySF says:

Others have already mentioned the overlap for Large Cap & International. One more area of overlap: Balanced Index funds are highly correlated with Growth Index funds so MidCap Growth + MidCap Index and SmallCap Growth + SmallCap Index give little diversification benefits. Value + Index or Value + Growth would accentuate the differences to capture the different segments better.

Simpler Option 1:

Index 500 – 20%
MidCap Index – 20%
SmallCap Index – 20%
European – 10%
Pacific – 10%
Emerging Market – 10%
Total Bond – 10%

Simpler Option 2:

Total Stock Market – 30%
SmallCap Index – 30%
Total International Stock Market – 20%
Emerging Market – 10%
Total Bond – 10%

The second option will not match exactly your 20/20/20 domestic allocation but it’ll be close enough.

15. Trina says:

Trent – It’s exciting that you have a concrete dream and plan to work towards, however you invest your money! My husband and I had a similar dream house plan, and through frugality we saved enough to build our dream home 12 years ago, and pay off our mortgage 2 years ago.

One thing I wish we’d done differently – built a smaller version of our dream home. Our goal now is to retire early (by age 55 or sooner, we’re 44 now) and it’s abundantly clear that taking care of a 3500 sf house will be tiring and expensive as we age. I love our land so, that I hate to leave it, but we want simplicity more than luxury. As our kids gradually leave home, the house seems bigger. It’s totally possible to build a smaller home comfortable for a family, but small enough to stay in. However, when we move, we’ll have some nice equity to put into our travel fund! Good luck to you!

16. SJean says:

Interesting post. My first thoughts were also about the children switching schools around age 16, which shows I still identify with being a child more so than a parent. A good friend of mine had parents who moved before her senior year, and in order to graduate on time, she had to stay behind and live with another family! Obviously this is drastic though.

I’m glad you have such a solid goal and a plan to achieve it. Nice work.

17. perro says:

one thing to remember is that if you DID decide to pay off your mortgage.. you can keep tax free up to \$250k of a gain on the sale of the home.

Unforuntately, with investments you are going to be in a pretty high tax bracket.

I love being an accountant :)

18. PJA says:

What’s wrong with your current place?

19. BRF says:

Sounds like a great plan but I agree with the others about the kids–I would have been very upset if my parents had dragged me to the country when I was a teenager! Maybe your kids will be different and love the whole idea. Maybe a vacation dream house would be better, then you can take the kids out in the summer with all the family.

20. Minimum Wage says:

I’d have a really hard time finding the money since I don’t even make \$300 a week.

900,000 dollars for a house in Iowa!

I thought it was a cheap state, think of what 450,000 left invest could grow to, better yet with a bit of carefull with that much you could retire, I’ve read many stories of people who’ve left the workforce in there late 30’s to early 40’s perhaps that would be a better choice than another Mc Mansion

22. PF says:

McMansion? I don’t think 450K is going to build a custom mcmansion in 15 years, even in Iowa! Clearly, this is a modest home they are planning to build on rural property.

You cannot build a custom home on rural property where I am for \$450K right now. Given the fluctuations in the prices of building materials, it’s really hard to say what things might cost in the future, but saving as much as possible for it is always the best policy!

Good luck Trent.

23. guinness416 says:

I manage and predict construction costs/budgets on giant projects for a living, and construction material/labour escalation is a beast unto itself and often higher than inflation (see eg: http://www.djc.com/news/co/11176940.html ). Might be worth checking in on construction escalation every so often as you tweak your plans.

24. Johanna says:

Here’s another option:

Balanced Index Fund (bonds and large-cap stocks): 33 1/3%
Extended Market Index Fund (mid and small-cap stocks): 33 1/3%
Total International Index Fund: 33 1/3%

Compared to your target breakdown, this is a little heavy on bonds and international stocks, and a little light on small-cap stocks. You can get closer by playing with the weightings a bit, but if you keep the weightings all the same, you can still do your trick of rebalancing automatically by adding your weekly \$300 to whichever fund has the smallest balance.

25. Dan says:

While I agree with most of what you have said, saving for and investing iteratively in the funds means that for the 100 weeks while you are executing your plan, you are way out of balance and thus exposed to more risk than you may desire.
You should think about finding a balanced (or target retirement) fund with your desired allocation. (Target Retirement funds, don’t have to be held in a retirement account.)

Another option would be to use a service like sharebuilder, zecco, or other similar ones to build a balanced portfolio from day-one using ETFs. The fees are low (similar to vanguard) and you could buy little bits of each ETF every month to keep your portfolio balanced.