Saving For Your First Home
Consider the median home price in America right now is $212,400. At just 5% down, that means you need more than $10,000 at closing for a typical home — and depending on the lender, your credit and local real estate market, you could need much more than that.
If you want to buy a house in the near future, that means building up some serious savings. Here are 10 simple steps to help you do just that:
•Create a monthly budget. You build savings by spending less than you earn. Therefore, any financial goals begin and end with your monthly family budget. It’s important to be both honest and realistic about your spending habits out of the gate, and then stick with your fixed plan as much as possible. Electronic bill pay is a great tool here, because then your payments take care of themselves. Another option is to print out a list of your monthly expenses and check them off — both to make sure they get paid, but also to have the satisfaction of knowing you are on track.
•Quarantine your savings. Many people have trouble saving money because they simply see a lot of zeros in their bank account and assume that they are comfortably on track when they are not — or that they have wiggle room to spend. The simplest way to avoid this is to create a dedicated bank account just for your housing fund, and then quarantine it from any spending. You’ll still have your regular checking account and debit cards to pay the rent or the cable bill, but that special savings account is off-limits no matter what.
•Make savings automatic. Once you have a dedicated savings account, tell your payroll department that you want a fixed amount sent there every payday via direct deposit and the balance sent to your checking account as usual. The savings will happen regularly this way, and you won’t even notice as long as you’ve built a good family budget. The idea, as personal finance gurus like to say, is to pay yourself first so there’s no excuses.
•Save 100% of any windfalls. Getting a $3,000 tax refund or a nice year-end bonus? While it’s tempting to splurge a little even as you save a little, building up a down payment requires a lot of restraint. That applies both to your day-to-day expenses, as well as one-time infusions of cash. After all, if you’ve built a good budget, then you don’t really “need” any of that money … so it’s perfect for saving.
•Save in big chunks. Sure, you can save a few bucks each week by eating store-brand peanut butter instead of Jif. But you can make the biggest impact by cutting out the biggest expenses. Skipping your annual beach vacation won’t be easy, and that rusty old car with the broken mirror may be a bit embarrassing to drive for another year … but snatching big bills where you can instead of pinching pennies is an effective way to build up savings quickly.
•Downsize before you upsize. Moving to a one-bedroom apartment from a two-bedroom apartment can drop your rent by 20% to 30% in most areas. If you don’t have kids, it may be a smart move to live small before you move into your new home and then reallocate the unused rent into your housing fund. And an added bonus is that a smaller place will mean fewer boxes to move once you finally do find your dream home.
•Work more. Spending less is the obvious way to save, but working more and bringing home more money is also a great way to supercharge your savings. If you are eligible for overtime or additional work, take every opportunity that comes your way. And if you’re not, consider taking a second job on the side even if it’s only a few days or a few projects each month.
•Save less for retirement. If you have a 401(k) match, it’s still a good idea to save enough in order to qualify for that employer-sponsored contribution. But typically, matches stop at 6%, so saving for a house may mean capping your retirement contributions there and instead allocating the additional cash toward your down payment. Remember, a house is also an asset … so you are simply saving for the future in a different way. Another option for first-time home buyers is to actually use retirement savings in your IRA to fund the purchase. In many cases, you can withdraw $10,000 without penalties from your retirement fund to help fund your home purchase.
•Ask for support. Much like going on a diet, staying on a strict savings plan is much easier with the support of the people around you. If your buddies are always inviting you to happy hour or your sister-in-law invites you shopping each weekend, the temptation and stress are going to be an issue. Make sure your friends and family know how your behavior is changing so they can meet you halfway.
Don’t punish yourself. The math of saving for a house may be straightforward, but the emotions of saving are very complex. If saving feels painful or frustrating every single day, you’re much less likely to be successful at it. So, rather than let the frustration build up after you deny yourself every discretionary expense, take comfort in a simple pleasure once in a while. Cut down on eating out, but consider cooking a fancy dinner once a week at home with premium ingredients. Cut down on going to movies, but perhaps subscribe to Netflix instead. The idea is to save money, not to spend zero, and you will find it much easier to save if you’re actually enjoying your life while doing so.
- Matt J
- M. Jackson
- T Gorball
- Tony G
- M Jimison