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Budgeting to save money towards the purchase of a home can feel like a daunting task. The key to any large job is separating out the most important parts to manageable steps. The following tips can help you cut the time needed when saving for a down payment to buy a home.
How Much are You Planning to Spend?
You should talk to a mortgage lender first and determine what you can afford. The lender will advise you about the best type of loan for your situation along with the necessary down payment. From here you can calculate your necessary down payment.
For example, if the lender says you can qualify for a $225,000 home and you will need a 5% down payment, then that would mean your needs are $225,000 x .05 = $11,250. Your situation and needs may change slightly from the time you first talk to the lender and the time that you actually buy a home, but it will give you a reasonable goal to shoot for.
Hacks to Increase Savings
Once you have a goal, you can begin saving for a down payment. The following tips will give you multiple ways to stash money away in anticipation of the big purchase.
- Keep all refunds – if you typically get a federal tax refund, or a state tax refund, save most of the money instead of spending it.
- Change adds up – designate a jar, bucket or some other large storage bin in your home for any coins. Once a month, count up all the coins and deposit to your savings account.
- Automated transactions – this is likely one of the best ways to save money. Have a set amount deposited from each paycheck to your savings account.
- Use your car payment – If you have a car payment now, and the car will be paid off before you buy the home, save the monthly car payment instead of getting another car right away.
- The Bill Plan – some people choose a specific denomination, like a $1 bill, or a $5 bill or a $10 bill. Every time you get one of these bills in your hands, put it away in the savings account.
- Apply bonuses and raises – If you get a bonus at work, or if you receive a significant raise, put the extra towards savings. This works well with the previous tip about automated transactions.
Applying multiple ways of saving money, even if individually they may seem small, will quickly add up over time.
Getting Interest to Work for You
After saving some money and getting a bit of a balance, it will be time to pick an account that has interest. The additional interest will help you reach the savings goal faster. The following accounts are suggestions for where to invest the money.
- Money Market Account – these accounts usually have a better interest rate than the average savings account at a local bank or credit union. There are limits to the number of withdrawals per month, but this account is for saving not spending.
- Certificate of Deposit – If you think it will be 12 months or longer before you can save enough for the down payment, the certificate of deposit can earn you a higher rate than the money market account. Keep in mind that the funds in this account are not easily accessible.
- Retirement accounts – if your employer offers a 401-k plan with matching funds, this can be the fastest way to save up the money for a down payment. HOWEVER, taking the money out of the retirement plan can delay your eventual retirement. Also, if you leave the job before repaying the loan, the balance of the loan will be deducted from the balance of your 401-k account.
Concluding Saving For A Down Payment
Saving for a down payment may take a year or two, but it can help you build solid financial discipline that will aid you in the future. By sacrificing and saving for this down payment you will establish financial habits to help you save for family vacations, purchase of a car, or a nest egg to help with home maintenance and repairs.
Additional Home Buyer Resources:
Mortgage Broker or Bank: What’s The Difference via Conor MacEvilly
How Much Is Needed For A Down Payment via Karen Highland
No Down Payment Mistakes To Avoid via YouTube
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