Guest article provided by: dividendpower.org
Buying a house is a major financial event in a young couple’s life. It is an important step with many considerations, like location, schools, commuting, affordability, etc. However, buying a house involves a financial commitment over many years. Moreover, a home down payment is necessary to obtain a good mortgage rate and avoid paying private mortgage insurance (PMI). Therefore, the dollar amount can be substantial. For example, a $350,000 house, approximately the average national price, requires about $70,000 for a 20% down payment. Below are some tips for saving a home down payment.
Make a Goal
Most newlyweds or single people buying a home must first make a goal to save for the future. They likely do not have $70,000 lying around for a 20% down payment. Hence, they must make dollar and duration goals. For example, suppose the objective is to save $70,000 in five years for a home down payment. This amount requires putting away $14,000 per year or $1,166.67 per month. This value may be high for some. In that case, add time. Alternatively, people can lower the target to 10% or 5% of the home price you are willing to pay. Sometimes lenders require only a 3% down payment, and VA loans usually do not require one at all. However, remember a lower down payment will oblige you to pay PMI.
Make Your Savings Automatic
May people say to pay yourself first for a retirement plan, like a 401(k) or IRA. The same thought holds true for saving for a home down payment. Put aside one-twelfth, or 8.33%, of your annual savings target each month into a separate account. Alternatively, if you are paid bi-weekly, put aside 1/24th or 4.17% of your take-home pay into a savings account. For example, the goal is to save $3,000 annually and set aside $250 per month or $125 per pay period.
The process is easy. Suppose your employer pays you by direct deposit into your checking account. Set up an automatic transfer to a separate savings account on the same day each month or bi-weekly.
Most people will not miss the money, assuming they have enough for their basic necessities each month. The money is separate from that required for daily needs.
Save Your Tax Refunds and Raises
Reaching the goal for a home down payment faster is possible by saving unexpected money each year. One source is tax refunds. According to the Internal Revenue Service (IRS), the average tax refund was $3,039 last year. So let’s assume a tax filer receives the same amount each year over five years, and thus they get back $15,195 over five years.
The $70,000 goal is more attainable now. In fact, you need only to save $54,805 in that time. This dollar amount results in $10,961 per year or $913.42 per month.
Similarly, raises can be used to plus up your savings rate and reach the goal faster. For example, if your salary increases by 3%, increase the savings rate by 3%. The $1,167.67 per month in year one becomes $1,202.70 in year two. Your monthly savings rate becomes $1,314.22 or $15,770.67 annually in year five, assuming a similar yearly raise.
Lower Your Expenses
A no-brainer is to lower your expenses. The amount a person can save is net income minus expenses each month. First, examine the easy items because you may be able to cut tens to hundreds of dollars of costs each month. Below are some tips to make it easier to lower expenses.
How many streaming services do you own, and are they all needed? Can you live without cable or a lower internet speed?
What are you eating for breakfast? If you stop at Starbucks or Dunkin Donuts daily for coffee and a breakfast sandwich, perhaps it’s time to reduce that to one weekly visit.
What about lunch? Can you bring lunch from home each day? It’s much cheaper.
What about the cell phone plan? Cheaper plans are available, but it may mean less data each month. Alternatively, can you add yourself to your parent’s plan? Additionally, bundling cell phone and internet services often reduces the total cost.
Lowering your expenses by $5 per day means saving an extra $150 per month. So after the easy things, switch to the more challenging items.
Next, look at your different insurances. The first place to start is car insurance. This amount can be a significant monthly or bi-annual expense for young people. One method to lower the cost is to increase the deductible. Shopping around to other carriers may help too. Other insurances to review are renters and health. However, these are important, and make sure you have the coverage you need.
An important place to look is travel and restaurants. It’s tough to cut back here, but maybe skip a trip or reduce the frequency you and your spouse eat out. The average American spends $2,375 on dining out and takeout. Lower that by 10%, and you are adding $237.50 to the yearly savings target. Furthermore, the average vacation costs roughly $3,838 per week for two people. Skip a holiday journey, and that is a large sum to add toward saving for a home down payment.
Move Back Home
One alternative is to move back home. The amount of savings can be substantial because of no rent payments. The average monthly rent is approximately $1,751, or $21,012 annually. Combine that with savings on utilities and other items, and the dollar value likely increases to $24,000 per year. The $70,000 goal is attainable in two years.
That said, moving back home may not be for everyone because it may require a significant adjustment for many people.
Final Thoughts
Savings for a home down payment is an important pursuit requiring both long-range planning and discipline. The process will probably take two to five years, depending on the price range of the house, income, savings rate, and goal. The tips mentioned above should make reaching the objective dollar amount easier in a shorter time. However, remember, initial costs for a house are typically more than first-time homebuyers expect—plan on saving a little more than just your target down payment.
Author Bio: The author is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.