The transition from renting an apartment to owning a house can be too wide for many people. For first-time buyers, the biggest problem is saving for a down payment. It can be too much for their current savings and drastic measures need to be taken most of the time.
Financial experts are expecting home prices to rise every year and it’s forecasted to do so annually. Saving for your home down payment becomes more challenging and you might not even know where to start or what options you have. Here are some things to help you save for your new home.
Create a Budget Timeline
For starters, you can break down your intended down payment amount into yearly or monthly goals. Let’s use the scenario wherein you need to come up with $20,000 as a down payment in 2 years time. In 24 months you need to save at least $833 per month.
You can use this budget timeline to monitor your progress if you’re right on track with your savings or if you need to catch up. It’s advisable that you create a separate account just for this. It will be easier to track and it won’t be too confusing to distinguish which money is for your down payment and which is for your daily expenses.
Modify Your Current Accommodation
To move out of your apartment into a house, you need to slash down one of the biggest expense right now: your rent. Transfer from your current apartment into a smaller one if possible. You don’t need to live in a big apartment when you’re trying to save for a house down payment. It might involve sacrificing your comfort, but your main goal is to save money at this point. Just by changing your apartment you can save as much as 30% from your current expenses.
Another area where you can earn money using your apartment is to rent out a free room. If you have a spare room, rent it out to someone else to help defray expenses like rent and utilities. You can put the savings you get from this into your bank account towards your home down payment.
For radical measures, you can even downgrade some of your gadgets or your car to a cheaper version. In the case of downgrading your car, don’t trade it for a car that easily breaks down. The last thing you need is to spend money for repairing or just maintaining your car. Large trade-offs like these are what you should consider if you want to aggressively save money. Think of it like a couple of last options if you find yourself falling behind on the saving timeline.
Create a Budget
If you haven’t done it yet, create a budget for your savings. A budget will give you a good overview where your money is going and if you can do anything to reduce that. From your budget, you can find some expenses that are easier to cut down. For example, your cable subscription might cost a lot for channels you didn’t even know existed. If you’re tied up with work, then a high-end cable subscription isn’t a very feasible idea. The same applies to your internet plan. If you’re using to browse simple websites or just to check your emails then you don’t need the fastest internet plan out there. You can cut back on these areas and save money. You can apply this line of thinking to other miscellaneous expenditures like entertainment and gym memberships.
If you’re already slashing your expenses left and right to squeeze the most savings out of your budget, then you should start asking yourself whether you need this expense or if you just want it. Minimize your usage of credit cards and shop using cash instead. Shop in physical shops instead of online stores where you can simply use your credit card to pay for your purchases.
While you’re minimizing these expenses, don’t deprive yourself from all forms of enjoyment as well. You can still include entertainment or miscellaneous expenses in your budget; just don’t make them very frequent. Continue to eat out or go on a night out with your friends – just have these appointments once or twice a week. There are plenty of other inexpensive ways to have fun with your peers without draining too much from your budget, just be creative.
Tap into Your Retirement Savings
You may have already started contributing to your 401k plan. If you’ve already done so, try to reduce the amount you contribute into this. Redirect these funds instead to your house down payment to speed things up a bit. If this is your first home, the early withdrawal penalty will be waived as you and your spouse withdraw $10,000 each from your IRA fund.
You should consider getting money from your retirement savings only when you need it. The main reason why you’re saving for your retirement as early as now is to take advantage of compound interest. If your money is reduced, then it won’t be able to fully grow as it should be. You’re significantly reducing the money you will get when you retire just to pay off a new house. Weigh these options first before withdrawing from your IRA.
Know Where to Put Your Money
Since you’re creating a separate account for your house down payment, put your money in a low-risk investment like a high-yield savings account. Compare interest rates between online banks and credit unions since they offer higher rates than traditional banks.
There are a couple of distinct differences between credit unions and banks which you should be aware of before transacting with them. Credit unions are generally a group of people who pool their money together and accept additional investments from outsiders or they can let non-members borrow their money at a modest interest rate. This is how they generate profits. Since they’re a smaller group, they can provide better service and tailored terms for you. However, don’t expect service 24 hours a day, 7 days a week. As mentioned, they’re a smaller business so they are usually open just on weekdays at office hours.
If you’re going to go with an investment with a higher return, always keep in mind that a high-paying investment has a big risk to lose money. Regarding the return rate of your money, it’s not that important compared to having it available when you need to withdraw it. Just make sure that it’s in a safe place regardless of growth and you should be fine.
These financial tips for saving for a home can also be applied for any other financial goals or obligations you may have. The important thing is to maintain a level of discipline and if you’re going to do an aggressive saving plan, be sure to stick with it. It won’t make sense if you try to save for your home down payment but give up halfway just because you’re tired of saving or you’re too far behind your budget timeline. Always motivate yourself with your end goal in mind. It might be difficult now, but when you make that down payment, it’ll all be worth it.