The Smart Way To Save for a Down Payment on a House

Even if you’re not close to settling down, still exploring where you’d like to live, or building your credit, it remains likely you’ve thought about saving for a house when you become ready to establish yourself. We’re going to talk about the steps you can take to begin saving for one of the biggest purchases you’ll make in your lifetime.

Get clear about how much you need to save

It’s hard to set a goal of saving if you don’t have a clear idea of how much you need to set aside each month. If you evaluate how much of your budget should be allocated to housing- usually around 25%- then you have an idea for your future house payment.

Take 25% of your monthly income and write that price down. Then use a mortgage loan calculator to estimate the amount of home you can afford. Let’s say the mortgage calculator tells you that you can afford a home that’s $160,000 based on your current income, and an average rate of 4.5%.

Your next step is to save for a 20% down payment to finance a mortgage in that price range. This would equate to about $40,000. You do have the option to make a smaller down payment, but you may have a higher interest rate in doing so. Not to mention, if you’re currently building your credit, you may have issues with getting a mortgage without a substantial down payment.

Set a date

Just as we eat an elephant one bite at a time, we break down our savings goals based on basic mathematics. Let’s say you’d like to purchase a home in 5 years, leaving you to raise $8,000/year to reach your down payment goal. That equates to a monthly savings of about $667/month.

Create a solid method for saving

Avoid any risky investment vehicles for savings, like stocks, since you are going to need to access your funds sooner, rather than later. Anything that involves the risk of losing money in the process will only pose a risk to your ability to purchase a home in the timeframe you’ve set for yourself.

Budget Accordingly

Now it’s time to devote a portion of your budget to this savings. You’ll need to make your budget realistic, and manageable. Ask yourself if this means you’ll need to earn more income to make this happen, or if you’ll need to cut back on other expenses.

When you do this, you will be able to reach your goals while harnessing the kind of budgeting skills that homeownership commands of you.

Automate your savings

To combat the urge to spend money that you technically want to save, you should consider automating your methods for saving. Setting up an automatic transfer of money as you get each paycheck would be a great way to automate your savings. You never have to see the money come into your account- just remove the decision-making aspect of saving, and act as if you never received that money in the first place.

Incorporating the windfalls

When your birthday rolls around, and you get a few cards in the mail with some gifted cash, why not throw that unexpected money into your savings? If you get a bonus check from work or a tax refund, consider the dent you’ll make in your down payment journey by contributing it to your savings account.

Buying a home takes intentional planning on your part, and primarily relies upon your financial health. Use this saving opportunity to develop the kind of financial discipline you’ll need for this new chapter in your life.