Making plans for different areas of your life—health goals, career ambitions, or financial goals—can help you stay focused and keep you working on something that's important to you. A common goal? Saving to buy a house.
Many people want to one day be homeowners, but don't know how to make it a reality. The home buying checklist is long, and coming up with the money for a down payment on a home – the initial deposit you make on your property – is no small effort. It depends on a number of factors – mainly your income, debts and responsibilities.
It is possible to save for a house in a year. The trick is to take effective steps that prevent you from skimping or cutting corners while saving and have a firm goal in mind. Here are some affordable ideas for saving money for a 12-month down payment.
Determine how much money you will put in
Before making a plan, you need to have a target in mind. Most of the time, a down payment on a home is a percentage of the total cost of the home, which varies depending on the market in your zip code. While it is possible to purchase a home with a minimum down payment of 3.5 percent or even no down payment (if you qualify for certain loan programs), it is recommended to save 20% of the total cost of the home, according to Katharine Perry, CFP , financial advisor at Fort Pitt Capital Group. If you want to go the extra mile, she suggests saving 30% of the amount, so you can reduce 20% and have 10% left over to cover extra or hidden fees, like closing costs.
If you're looking at a million-dollar home, 30 percent ($ 300,000) may seem absurd, and that's okay. This 20 or 30 percent goal is not a general figure, but it is the amount that will set you up for the greatest financial success. What you want to avoid is making a small down payment and then having to pay a ton in interest or mortgage insurance every month for the decades it takes to pay off the house.
This requires some self-motivation, however. Robert E. Tait, a mortgage loan officer with Lema Mortgage Elite Services, says some programs require less than 3.5 percent. Regardless of how big or small your down payment is, before you sign on any dotted lines, be sure to research and read all the fine print to make sure you're not locked into sky-high interest rates.
Know your specific figure – and track it
Percentages are great, but how can you calculate your individual savings goal for a down payment without knowing what house you'll be buying? It's not an exact science, but personal finance author Stefanie O'Connell Rodriguez recommends researching home prices in your desired area. Once you have an idea of the cost of a home you're likely to buy, try an online mortgage calculator tool to estimate the monthly mortgage you can afford. “From there, you can identify an appropriate price range for your home search and calculate how much you need to save for a down payment,” says Rodriguez.
If your research shows that you can expect to pay $$200,000 for a house, you will need $$40,000 for a down payment if you are following the 20% pattern. This means you want to save $ 3,333 per month to reach your down payment goal in one year. That's a large amount of money for most people, so you may need to rethink how long it will take you to reach your goal and how many sacrifices you'll have to make to get there.
“Being specific about how much you need to save for a down payment can help ground your homeownership goal in tangible financial terms,” explains Rodriguez.
Create an automatic deduction in a separate account
One way to resist spending money on frivolous items is to act as if you never had money in the first place. Perry suggests creating an automatic deduction from your bank account the day you get paid.
“The best part about doing this is that you won't even see the money in your account if it's withdrawn the same day you get paid, so you won't miss out,” adds Perry. But don't just move it to the typical savings you use for everything. Instead, create a separate account just for your down payment. This can help focus your efforts because you'll be able to see exactly how much you've saved for that specific goal.
Consider a Money Market Account
Jordan Sowhangar, a certified financial planner and wealth advisor at girod, doesn't recommend putting down payment savings into risky investments. You want to access the money within a few months, so you must be strategic about what type of short-term account will give you the most benefit. Sowhangar's best recommendation is an online money market account or a short-term CD that allows withdrawals in three or six months.
“These same vehicles also often have 'new money' promotional rates associated with them that allow you to earn even more than they would generally be offering as an incentive to save your money with that particular institution,” says Sowhangar.
Why is this beneficial? Simply put, this means more money in your pocket. “It's an easy way to earn some extra money to save, similar to how you normally would,” explains Sowhangar. As with anything, make sure you understand all the restrictions and rules with this type of account so that you aren't unpleasantly surprised when it's time to withdraw funds.
Capitalize on unexpected gains
You may not be familiar with this specific term, but you've probably had an unexpected experience. Coined by the financial industry, Sowhangar says windfalls are extras that are given or earned that are not part of regular monthly income. These include a holiday bonus at work, a sizable birthday check from grandparents, a larger-than-expected income tax refund check, and other instances where you receive extra money.
Instead of thinking of windfalls as fun money you can use for a vacation or shopping, think of them as a fast track to your down payment. Sowhangar says putting windfalls directly into savings is more successful and profitable than smaller savings efforts, like forgoing a morning trip to Starbucks or refusing to dine out for a year, especially if you have an ambitious deadline. of economics. “These are unexpected and therefore easier to part with in terms of not spending them,” explains Sowhangar.
Here's the big caveat: it's all or nothing. Sowhangar says saving just a portion of a windfall allows you to immediately rationalize spending the rest — and possibly even reduce the amount you want to set aside. Keep your eye on the prize – a down payment – and put every penny you can into it.
Reduce retirement savings (temporarily)
The key word here is temporary: retirement savings shouldn't be compromised over the long term. Better Me financial expert Jim Brown says pressing pause on this fund may initially sound like an unconventional financial misstep, but it can allow you to pool down payment funds and redirect monthly rent payments toward building equity. in the real estate market. You're saving for your future anyway.
The 2023 retirement account contribution limit is $6,500 for an IRA and $22,500 for 401(k) plans. “If you're maximizing your retirement plan contributions to an IRA or 401(k) plan, you may be able to get a down payment within a year by simply allocating all or most of that cash flow to your short-term home. purchase target,” says Brown.
Make sure you pay attention to any employer correspondence as it may be in your best interest – no pun intended – not to resign all retirement savings. If your company matches your 401(k) plan contribution up to 3% and you earn $100,000 per year, you can limit your contributions to $3,000 and still receive the matching benefit. “The difference of $ 16,000 – $ 19,000 contribution limit, $ 3,000 contribution to earn the employer match – can be applied directly to the down payment on the purchase of your new home,” explains Brown.
Look for Bleeders
Grey's Anatomy, New Amsterdam, or House fans know exactly what a bleeder is – something that drains the life out of you, immediately. When it comes to finances, Tait says we all have bleeders who take money from our accounts that we often forget about. These are often automatic subscription services such as Netflix, Spotify, gym and so on. You can quickly look through your statements and see how many of them you have set up. Then be critical about how much you really need them.
Tait suggests asking yourself questions like, “Am I really using this?” “Can I give this up for a year?” or “Is there another way to save?” Since some of these companies allow home setups, you can pay with a friend and split the cost. The goal is to stop the bleeding before it stops you from getting your house keys.
Share goals with others
Not only is there strength in numbers, but verbalizing your year-long plan to trusted family and friends will also ensure they keep you accountable, especially if you have a support network. These people will step up when you need them and create strategies to help, too. With their support – on your birthday and holidays – you can express that you would like money to buy your dream home instead of a gift. Or you may have a grandparent who is proud of your progress and decides to match what you save. Whatever the case, Tait says it's better to be loud than quiet when pursuing an audacious goal.
