The size of a typical down payment is the biggest obstacle that many potential homeowners can face. It’s a challenging goal to save up enough money, but not impossible — as long as you consistently practice effective saving strategies for long enough and don’t give up.
To speed up your path to a down payment for your dream home, you need to:
- Figure out how much you need to save
- Boost your income.
- Keep a close eye on spending
- “Pay yourself first” by automating savings transfers.
- Prepare to sacrifice “the now” for your future.
While there’s no right or wrong way to save money, following proven strategies can set you on the right path. This article will break down the five ways listed above to make sure you go from an “aspiring homeowner” to a “first-time homebuyer” as quickly as possible.
How to determine your down payment savings target:
The first step is to calculate and set your eyes on a precise amount to save. In this case, you need to determine exactly how much money you need to make the down payment on your house.
For this, you first have to know the cost of the house you plan on buying. If you don’t have a particular property in sight yet, knowing some info (like the neighborhood, square footage & amenities you’re looking for) can help you come up with a somewhat accurate estimate of the cost.
From there, here’s everything that should add up to your savings target:
The actual down payment
This one’s obvious, but the value could vary depending on the percentage of upfront cash you’d pay for your mortgage. These percentages can vary by lender and loan type, varying within a range of 3.5 – 20 percent. You can use Google’s mortgage loan calculator to know the exact amount of downpayment you need to save for your personalized contract terms.
Closing Costs
A common mistake that to-be homeowners make while setting a saving goal is failing (or simply forgetting) to account for closing costs. Typically, it ranges between 2 – 5 percent of the total loan amount.
It’s a decent sum of money, and you can’t make your downpayment without it — which means it can significantly delay your goals if you don’t include it in your saving target ahead of time. Not to mention, it’s also a massive letdown to find out about it right as you thought you were finally ready to move into your new home.
Finally, moving expenses (and other related costs)
Lastly, you also have to move into your new home once you’ve finally hit your savings target. While it’s the most exciting part about being a new homeowner, it’s also pretty costly.
If you’ve been saving every penny for your downpayment in the last few years, you probably won’t have extra funds for moving and the house’s initial maintenance costs — unless you add it to your savings target.
With all of those amounts summed up, you’ll have an all-inclusive target to save up for. It might seem daunting at first, but the following strategies will help you achieve it.
Keeping a cap on your spending
Some sacrifice is necessary for personal growth and progress. Here, the idea is to sacrifice some of your present comfort for your future growth & needs.
You’ve probably gone on a few spending sprees in your life; that’s exactly the opposite of what you’ll be doing for the next year or two.
The basic rule of saving is to have more money coming in than going out. So, the bigger that difference, the quicker you’ll hit your target. Achieving this requires a strict check on your spending and freezing all unnecessary expenses. It means only spending on needs (not wants) and saying no to non-essential costs like going to the movies, dining out, food deliveries, family outings, etc.
You can also save a considerable chunk of money by canceling unneeded subscription services, switching to cheaper cellphone and internet plans, and slimming down other recurring bills along those lines.
The rigorousness of your spending slowdown will have a huge effect affect on how fast you meet your goal. Tracking all your expenses for a month is also a good idea to get a clear image of where your money goes and the costs you can limit or avoid.
Boosting your income
Cutting down your expenses only takes care of one side of the savings equation, and depending on your salary, it might not be enough to get you to your savings target fast enough. So, you should also actively look for ways to boost your income.
It could be something as simple as asking your employer for a raise if you feel confident about your performance. You can also pick up a side hustle to have multiple income streams. Some worthwhile part-time gigs can be anything from online freelance services, uber driving, delivery driving, dog walking, dog sitting, to plain old garage sales and eBay flipping.
Pay yourself first by automating your savings.
Most people have a pretty bad history of spending habits, and if you relate to that issue — it’s probably going to play its part in your saving mission. So, why not take advantage of automation by setting up automatic, periodic transfers of a certain amount to your savings account.
Having these recurring transfers on autopilot will keep all your temptations, decisions, and habits out of the way of the consistent growth of your downpayment fund. Set it up now!
Consider serious sacrifices
Buying a home is often the biggest purchase most people make in their entire life. And sometimes, making a giant leap requires taking a few steps back. In this case, it might mean temporarily downgrading your standard of living to reach a massive milestone in the near future.
The most significant chunk of your monthly budget is probably rent, making it the biggest opportunity to cut expenses. So, if boosting your income and going on a strict spending diet isn’t enough (or just doesn’t get you to your goal fast enough), temporarily moving into a smaller house in a cheaper neighborhood might make sense.
If you haven’t started a family yet, you can also move into a shared apartment to split your rental costs with a roommate.
You can even consider moving back in with your parents for the time being for the ultimate cut down on rent costs. For young millennials, it’s pretty common to move back in with parents to save money.
Speaking of which…
Bonus Tip for Gen Z & Millennials
If you work a 9-5 job, you’re probably contributing a certain percentage of your paycheck to an IRA, a 401(k), or a retirement plan that your employer matches. While that’s always a smart financial move, you can consider temporarily diverting those funds to your downpayment fund.
Depending on your current contribution percentage, it can help you reach your goal much faster. In the long run, it means you’d be able to move into your own home quicker, avoiding future rental spending & rent increases — so it evens out (to some degree). However, this is probably not advisable if you’re relatively close to your retirement.
Good luck! Now get saving & get earning – buy the home of your dreams.