4 Steps to Saving for a Down Payment
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Saving for a down payment on a house can be a daunting prospect. It can feel nearly impossible to someone living paycheck-to-paycheck. But there are simple steps to make saving $10,000 or even $50,000 seem much more manageable.
1. Get Motivated and Build Up that Down Payment
Potential buyers should look at houses for sale on real estate websites and visit a few open houses for inspiration and to gain a greater understanding of current home values. Buyers can use an online calculator to determine the actual cost of owning a home, including how the size of the down payment affects the monthly mortgage costs. This gives them a target amount to save to get the home they desire, with a payment they can afford.
If potential buyers expect their mortage payments to be higher than they’re paying in rent, they should set aside the difference each month. Practicing paying a mortgage helps buyers prepare for living on less. Plus, they can use the extra to pay off debts or save for their down payments.
2. Pay Off Debt
Other than the pride of saving, there’s no point in putting money in a low-interest savings account or money market while paying huge late fees and high interest rates on credit card debts or loans. Smart consumers should pay these off as soon as possible, starting with the debt charging the highest interest. Prospective buyers could also shift their debt balances to lower-fee credit cards to limit their money wasted on interest payments.
Some savers might even want to cut up credit cards to avoid the temptation of overspending. They should keep enough credit cards to prove to their future lenders that they can get credit. Once the card balances are paid off, prospective buyers should put the amount they were spending on interest and fees each month right into the bank as savings.
3. Move Money Into Savings
People who want to save a down payment should open a savings account strictly for their home buying costs. If they set up automatic deposits from their paychecks or transfers of money from their checking accounts into savings accounts, money will start adding up without requiring them to remember to visit or call the bank, or make transfers online after every pay period.
Prospective homebuyers should start with an amount that seems slightly out of their comfort zones. For example, if $50 per week seems like a manageable amount to save, try transfering $60 weekly. Chances are, future homebuyers won’t miss the $10. If relatives give cash as gifts for birthdays and anniversaries, potential home buyers should immediately put that money into the house fund, too.
4. Examine Every Expense
People trying to save money should also get a handle on where they’re spending their money. For at least two months, they should write down where every dime goes. Money logs make it easy to recognize silly spending patterns: buying bottled water at the gym every day, paying $60 for a simple hair trim that didn’t require major styling, paying for high-priced parking or buying rounds of drinks at the bar.
Many people could do some fairly painless trimming while ignoring other savings advice that may sound unbearable:
- If bringing a bag lunch every day seems like torture, no one has to do it. But maybe bringing lunch once per week or buying just a sandwich and bringing along yogurt and an apple would be acceptable. Soda drinkers could buy a case at the grocery store instead of spending $1.50 daily buying drinks from the office vending machine. While this might not seem worth the trouble, $1.50 per day adds up to nearly $400 each year.
- Examining data, voice and text use on cell phones can reveal patterns of wasted money. If month after month you are dramatically under the plan allowance on phone calls and paying overage fees for data use, you might be able to find a better plan.
- Savers can cancel subscriptions for rarely used subscriptions such as magazines, newspapers, cable channels and online game subscriptions.
- Nix unused gym memberships and opt for free exercise alternatives including running outside, taking long walks or streaming free workout programs.
Saving a big down payment doesn’t have to be intimidating or spoil all the fun in life. Most people can save funds just by paying down their credit cards, pretending they already pay a mortgage and closely examining their spending to look for bad habits or things they don’t really need.
Are you currently saving to buy a home? What ways are you using to save for a down payment? How do you stay motivated to save for that purchase?
Photo courtesy of: James Thompson