When it comes to buying a house, your down payment can make all the difference. Being able to offer a larger amount up front will reduce your monthly mortgage payment, which in turn can help you live more comfortably.
Most financial experts agree that you should aim for a down payment of roughly 20%, though the number of new homeowners that actually hit that mark has steadily decreased over the years. Sure, that may be a hard pill to swallow, but with the right planning, a strict budget, and some due diligence, you can cut a few financial corners and work toward allocating more money for your down payment.
Keep in mind that when it comes to your timeframe, the quicker you want to buy means the more you need to save. By setting a goal of saving for a down payment in a single year, you’re setting yourself up for a major challenge. Are you up for it? Good! Here are four tried-and-true tips to help turn your dream into a reality.
1: Get a ballpark estimate of what you can afford
When it comes to saving for a down payment, the first step is to figure out how much you’re willing to spend — and how much you’re willing to save. Most financial experts suggest your monthly mortgage payment shouldn’t exceed 28% of your pre-tax monthly income. So, if you’re making roughly $150,000 a year before tax, you should limit your search for mortgages that would equate to around $3,500 a month.
It’s also important to remember that a home also comes with a host of other bills: property taxes, utilities, maintenance, and homeowner’s fees, to name a few. When planning, it’s always important to factor in a little wiggle room — that way you won’t find yourself in a tough spot when something unexpected happens.
You can use a free online calculator like this one to help get a rough estimate of how much you’ll need based on your income. That said, it’s worth taking the time to sit down with a financial advisor to go over your options before you dedicate yourself to a strict savings plan.
2: Set up automated savings
Once you have a general idea of how much you need to save for a mortgage, you can help set up a few safeguards to help you reach that number. It can be hard to always keep your goal in mind — that’s why it’s important to set up automatic deductions through your bank. By literally taking the situation out of your hands, you can help stick to your specified budget without ever having to lift a finger.
Take the time to review your budget to see exactly how much you can allocate toward your down payment every month. Since you’re saving on a deadline, it’s worth aiming for a more optimistic goal (say, 10% or 15% of your monthly check), but remember not to stretch your account too thin or else you risk dipping into your savings and therefore negating the purpose of automatic deductions in the first place.
3: Cut costs, cut corners, live more frugally
The three biggest expenditures in any household are rent, food, and transportation. Therefore, starting with the Big 3 and looking for easy ways to cut costs is a smart and effective way to help free up some loose funds. Since you already have a predetermined time frame of one year, you can try to be a little more conservative in your spending: look to cut back on weekly meals, try to cancel those superfluous subscription services (we’re looking at you, Hulu), and see when and where you can opt to save a little more. Most importantly, gain an understanding of where your money is being spent and be intentional about minimizing extraneous expenses.
Depending on the size and scope of your budget, you may also want to consider downsizing to help cut costs and save a little more each month. Sure, you may feel the pinch of a smaller space right now, but the amount you’re able to save will help make up for it down the line.
4. Maximize the Potential of Every Dollar Saved
You may be tempted to play the stock market to help increase your short-term savings. While this can definitely help boost your savings, it can just as easily hurt you.
When aiming to save a significant amount of money in a short time, it’s better to err on the side of caution and stick to tried-and-true saving tips. Instead of playing the market, factor in your various cash windfalls (yearly tax refunds, quarterly bonuses, etc.) and focus on allocating them toward your savings.
You may also want to evaluate your retirement plans. If necessary, decreasing payroll deductions to your employer plan can free up cash for short-term needs. However, be sure that you don’t give up the free employer match and be diligent about bumping those contributions back up as soon as you have the down payment saved. Another last resort may be utilizing the Roth IRA provisions for first time homebuyers. Consult with your financial advisor regarding whether this is right for you, and only make sacrifices here if absolutely necessary because the impact over many years can be significant.
Remember to set goals for yourself. While you are saving up money, there will be other demands on your finances. These can include medical expenses that are not covered, major auto repairs, or even the temporary loss of a job. None of these will magically go away just because you have a goal of saving money for a down payment on a house. You need to be ready if and when they happen.
Still have questions? We’re here to help. Reach out to FJY Financial today for more savvy saving tips.