Saving for a Down Payment
When planning on getting ready to buy a house, you will likely need more money than you think. Costs may or may not include a down payment, closing costs, an appraisal, inspections and moving expenses.
Here are some top tips to get you on your way to saving money for a down payment and these other potential costs:
Start with a goal. Find out how much you will need to save and set a timeframe for the savings.
Take the time to set up a monthly budget. It is important to your potential for savings, your life as a homeowner, and your long term financial stability. We have all heard stories of outrageous government spending. Government projects that go far over budget, and hammers and toilet seats at the Pentagon that cost hundreds of dollars. These stories outrage most people, and they wonder how it happens. The same principles apply to you own budget. The more specifically you track and account for each dollar coming in and going out, the better you can be as a steward of that money. If you are not watching, it can be easy to over spend, just like the government.
Cut and/or downsize your recurring bills. When creating a budget, do not be afraid to cut things that are not necessary, shop for things that are big budget items, or even downsize your current living situation. Look for things to cut anywhere you can even if they seem small. For big things, you may know your insurance agent as an old family friend, but make sure you are getting the necessary coverages you can for the lowest premium on your car(s). Shop around for any services that are big recurring bills like phone service, cable or satellite service, or any other large monthly bill. If possible, downsizing for 6 months or a year could save you 100s of dollars per month in rent. An important thing to note regarding cuts is that the cuts can help your savings, but they can also help your buying power for a house. As a general rule, $55-$80 per month can translate into $10,000 of buying power for a house.
Be flexible. Bad things happen, and you need to be ready. Start with an emergency fund so when bad things happen, you won’t have to raid your general budget or borrow money. Once you have enough savings to handle an emergency (usually $1,000 for most people) keep the rest of your savings separate from your general budget. Set up an account specifically for your housing fund apart from your general budget account and your emergency fund. Most people see money accumulate in their single account, think they are in good shape, lose track of the budget, and spend their savings. Do not do that!
Just like someone who diets, do not be overly hard on yourself if your discipline slips. Having a friend or a family member that supports you as an accountability partner can help with this as well. Be sure that the person is someone who is financially fit and responsible, so their advice and support is sound. It is also a good idea to let your family and friends know what you plan is. Your family and friends knowing of your plan will help ease tension when you say no to a happy hour, dinner, weekend away, or a vacation.
Automate your savings. If you get your pay via a direct deposit, see if your employer is capable of splitting your direct deposit. Have enough deposited into your general account to cover your general monthly budget, and have the remainder deposited into your separate savings account. If this option is not available through your employer, set up an automated transfer from your general budget account to your savings.
Windfalls are a great way of saving in big chunks. Put your tax refund entirely in your savings account. If your relative that you lent money to finally pays you back, put it in savings. If you get a bonus from work, put it in savings. While saving for a house, restraint can go a long way. This is the time for super discipline. Save these windfalls and skip the big expenditures. Now is the time to skip the vacation, put off buying a new car, and defer big purchases that are not necessary.
If you are currently saving money in a retirement account or 401k through your employer, slight changes could boost your savings for a home. Check on the percentage that you put away and how much your company matches. A percentage contribution greater than the percentage that your company matches could be reduced to increase your take home pay. For example, your employer matches dollar for dollar a contribution up to 4% of your gross pay, but you contribute 7% on your own. 3% of your gross pay goes unmatched by your employer, so you could temporally reduce your contribution to 4%, thus increasing your take home pay. This increase in your take home pay could be saved for your housing fund!
Following some or all of the top tips above will not only put you on a path to save for a home, it will significantly increase your financial fitness preparing you for life as a homeowner. Things happen, and you need an emergency fund for those budget busters. As a homeowner, there are more things that can potentially happen that require savings or an emergency fund, and following these top tips can prepare you not only for a down payment, but sound fitness for a life as a homeowner.