How to Save Money for a Down Payment on a House
Posted On Monday, January 09, 2017
Let's talk about down payments. Coming up with tens of thousands of dollars for a down payment can seem like a monumental challenge, especially if you're already bogged down with other responsibilities like student loans, car payments, rent—and, well, life as we know it.
While there are loans that require very a little down payment, most banks are looking for down payments closer to 20% with the national average coming in at around 10%. With the median home price over $200,000, that could mean coming up with somewhere between $20,000 to $40,000 or more. Gulp.
But fear not. There's good news! Saving money for one of your life's biggest goals, a house, doesn't have to be daunting. In fact, with a little bit of forethought, planning and discipline, you can build up the necessary funds to secure the home of your dreams.
Here's exactly how to do it.
Establishing a timeline is your very first step that sets all other things into motion. Obviously, the sooner you'd like to meet your down payment goal, the more you'll have to buckle down and commit to serious savings. If you allow yourself a more long-term timeline, you'll have more time to save and less stringent belt-tightening along the way. Remember, slow and steady wins the race. Saving thousands of dollars is harder to do (not impossible, just harder) in a year or two than it is in five years.
1. Establish a timeline.
If your goal is to save enough money for a down payment on your home, thinking ahead and planning for the long-term can ease the pressure and financial crunch of cutting back too much too quickly. You're also more likely to be successful when you set reasonable restrictions on your spending without cutting out too much out of the lifestyle you're accustomed to.
If you don't already have a budget, you need to start one. How else will you know what you have to work with when it comes to money coming in and money going out? It just makes sense. Try not to think of it as an additional burden in your life, but instead as a tool to help you monitor and achieve your goal. Lay it all out in front of you, and while you're doing that, take a good look at your discretionary spending. You'll need to take note of that.
2. Implement a budget.
Once you're budget is established or if you already have one already in place, you now need to build your down payment into your budget expenses. Whatever workable amount you come up with to set aside each month to put toward your home's down payment, treat it exactly like you would all of your other "bills". You've got to set aside money for it and "pay" it each month, and do it in a timely manner.
Establishing this will also help you to discipline yourself for the future and help you to be able to realistically afford your monthly mortgage, which is the next big expense after you've saved for your down payment and purchased your home. This approach is also a solid way to build your credibility and substantiate your fiscal responsibility now and in the future. Banks look at those things, you know.
If you don't already have a savings account set up, then do it. In fact, designating a separate account specifically for your down payment savings is recommended. There's less temptation to use that money for other things if the need arises and money doesn't get muddled, mixed up or complicated. These funds are for your down payment on your new home and that's it. Simple as that.
3. Set up a savings account.
It's helpful, as well as efficient, to automate your savings each month. Making it automatically come out of your paycheck or your checking account and into your down payment savings each month is wise. There's less temptation, less potential for missing a month, and less work for you.
It's also beneficial to start small and increase the amount over time. That way you're not overextending yourself and your funds or feeling frustrated in your approach. You can always increase the amount as time goes on and when you're able to afford it.
Yes, cutting back is part of the process. Let's face it, most of us have a lot of superfluous expenses in our life. Peruse your outgoing dollars and see if there's anything that you can cut out or at least cut back on. Which expenses are truly needs and which are purely wants? If you're serious about socking some money away for your future dream house, then you won't mind giving up a few things in the here and now.
4. Cut expenses.
If you're having trouble finding things to completely cut out of your budget, then try to at least lower some of your regular monthly expenses. Shop for lower rates, research competitive pricing, and switch companies if you find something cheaper when it comes to your service providers like cable, internet, phone and other things that fall into this category. Consider downgrading your current plan if it's more than what you really need or what you really use. Also, it never hurts to call your current service provider and try negotiating a lower rate or monthly payment. Oftentimes, they're willing to work with you or help you find a better deal than what you already have. It can't hurt to ask!
Once you've found expenses that you can cut back or eliminate, take that money and move it right into your down payment savings. You're already used to spending it, you just need to redirect it. Before you know it, even those small changes will add up to big savings over time.
We love this savings hack mentioned in an article on Forbes.com entitled: How to Save Money for a Down Payment Without Pinching Pennies (it's also well worth the read, by the way). Whenever you buy a want (versus a need) put that same amount you just spent into your savings account. So that means you're actually paying double the amount for one splurge (first for the actual splurge and then that same amount has to go into your savings). That in and of itself is a pretty good way to keep you mindful and fully aware of your discretionary spending. As a bonus, you're also moving yourself forward toward your savings goal each and every time a splurge happens. Win-win, really (though your wallet may not think so....).
5. Equally match savings to splurges.
Any time you receive an unexpected windfall throughout the year, bank it right into your savings account. Money that comes in out of the blue is a nice boost to your regularly planned savings. Think about the money you received as a Christmas present, a birthday gift, work bonus, or your tax refund, just to name a few. That money can quickly snowball into a significant amount that propels you even closer to your savings goal.
6. Set aside unexpected money.
We all love unexpected surprises, but be sure to capitalize on them in the best way possible. You'll thank yourself later.
We hope you've found these savings tips helpful as you start to put away money into your savings for a down payment on a home. Let us know how it's going for you!
If you'd like to explore more on this topic, check out these related real estate posts from Century 21 Action Topsail:
Do you have any tips and tricks you'd like to share on saving money for a down payment? We'd love to hear them!