Are you considering making the jump from renter to homeowner? Owning a home has so many benefits compared to renting (financial and non-financial), so give yourself a pat on the back for wanting to become a homeowner - it’s a big step!
You can make your dream of homeownership a reality, it just requires some financial planning and preparation. Even as we get into the holiday season, you can still save for a down payment and enjoy life without feeling like you’re completely restricting yourself.
In a recent survey from Cultural Outreach, most NextGen (including millennial and Gen Z) first-time homebuyers state down payments as their biggest financial hurdle. Coming up with a large sum of money to put down can feel overwhelming and, at times, unattainable. But starting is the hardest part of any journey, saving money included.
Before you start working towards a down payment, make sure that your finances are in order. That means eliminating bad debt (think consumer debt like credit cards) and having an emergency fund of at least 3-6 months’ worth of expenses saved up first. You want to feel confident in your financial profile when you start to make the plunge into homeownership, so it does not feel like a shock. Freeing yourself from debt and having the financial security of an emergency fund will help you get there.
Here are some immediate, manageable tips to help you get started on your savings journey, whether you are saving for a down payment, emergency fund, retirement, or anything else.
1. Make A Budget!
Take a thorough look at your monthly expenses and start budgeting if you are not already. You cannot generate money out of thin air, but you can move money from other places and reallocate it to a down payment fund or savings fund.
Start by eliminating any unnecessary or unnecessary-for-right-now expenses. Remember, this is temporary! And with the social limitations of the shelter in place ordinances time we are living in, you’re probably spending less these days anyway.
Think about things like:
- Eliminating gym membership: $60/month
- Eating out less or not going out for special occasions for a while: $200/month
- Trim your clothing budget: $100/month
- Buy generic brands at the store: $150/month
That is already $510 each month that you could be saving towards a down payment! That’s over $12,000 saved across two years. You can think even bigger and save thousands of dollars by opting out of the summer vacation this year. Now let’s get creative and think of even more ways to save.
2. Modify Your Retirement Plan
It may seem scary to imagine stopping saving for retirement. But you do not need to completely stop putting money in your retirement account. Depending on your monthly income, put that money in a down payment savings account or reduce your monthly retirement savings in favor of down payment savings. This, too, is only temporary! Saving for a down payment can only take a couple of years. And when you are drinking a glass of wine in your new digs, you can go right back to putting that money into your retirement account and kick your feet up.
A note. We do not recommend borrowing from or cashing out your retirement account. That can have negative effects on your taxes and incur withdrawal penalties.
3. Make Money by Selling Your Stuff
Do you have a lot of extra things collecting dust and taking up space at your current home? Has quarantine proved that you don’t actually need that exercise bike? Now’s the time to do some streamlining that will eliminate clutter and put some extra money in your pocket.
4. Save Your Windfalls
Do you receive an end-of-year bonus? Put that money directly into your down payment savings account for a little extra padding. If you get an annual pay raise, take that extra percentage, and create an auto-payment directly into your down payment savings account. That is money that you will not even feel missing because it’s not taking away from your baseline income and could add up to thousands of dollars each year.
So where should you be putting your down payment savings? The down payment itself is not an investment, per se, so putting your savings into a money market savings account with a good APY (annual percent yield) will suffice. You will earn some compound interest, but the money will be secure and accessible. Do some calculations or talk to a financial advisor or real estate professional to set a goal for yourself and create a plan (Use our Mortgage Calculator Tool to figure out how much house you can afford). Maybe you want to save $40,000 over 24 months to cover your down payment. Whatever you save will earn a little bit of interest and you will have even more when you are ready to buy a home!
Whenever it feels overwhelming, check out some personal finance motivation online, listen to a financial podcast, and remember, there are lots of people out there on the same journey as you. Stay inspired and motivated, but also give yourself some leeway through this. With some planning, budgeting, and goal setting, you will be well on your way to saving that down payment and purchasing a home!