A house is one of the most significant purchases anyone can make. It’s a huge decision that needs thorough planning and significant savings. Setting aside money to buy a house can be challenging if you’re still starting your career. However, it’s possible as long as you’re patient and consistent.
Do you want to get started on your savings journey? Here are some tips on how to save for your first home.
1. Crunch your numbers
The first step is determining how much monthly amortization you can afford. Having a clear number upfront can motivate you and keep you on track. A great piece of advice is to spend 28% of your monthly gross income on your monthly amortization. The mortgage payment includes interest, insurance, taxes, and the principal.
If you want to compute how much mortgage payment you can afford, multiply your income by 0.28. So, if your income is $5,000 monthly, you can allot $1,400 for monthly payments. Make sure you don’t exceed this figure to pay your bills realistically. Remember, getting a house beyond your means could lead to financial troubles.
2. Save up for the down payment
A 20% down payment is ideal, so you can avoid paying private mortgage insurance (PMI). It’s an additional fee that protects lenders if a lendee ceases payments. You can go lower than 20% if that amount is out of your budget.
It’s best to ensure you won’t go below 10%. If you do, you might be inundated with additional fees that could lead to further debt. Set a goal to finish paying off the down payment in two years. This time frame will allow you breathing room to save for other expenses like retirement or kids’ tuition.
3. Open a separate account
To effectively save up for your home, it would be best to open a separate savings account. Accessing this account is inconvenient, so you won’t be tempted to withdraw often. However, you can still dip into it in case of emergencies. Set up your bank’s auto-debit feature to ensure that a fixed amount will go to your savings every payday.
Remember that investing your house savings in stocks or bonds will be too risky. While there’s a chance you can earn from them, there’s no guarantee. You might end up losing the money you’re saving for your home. So, stick to a savings account for now.
4. Cut down on expenses
You’ll be surprised at how much you can save by cutting down on unnecessary expenses. Research shows that Americans spend almost $18,000 a year on nonessentials. You can add this significant amount to your dream home fund.
To give you an idea, here are some things you can live without while saving for your home:
- Coffee from cafes
- Streaming services for movies and TV
- Expensive gym memberships
- Dining out
- Branded items
- App subscriptions
- Ride-hailing apps for nonessential trips
- Food deliveries and take outs
- Subscription boxes
- Online impulse purchases
- Costly salon trips
- Cinema hangouts
- Smartphone upgrades
While adjusting to a more frugal lifestyle may be challenging, it’ll do you good in the long run. Focusing on your goal will help make the transition easier. You’ll find alternatives to the nonessentials and realize that living without them isn’t so bad. A better budget system allows you to track expenses, so you won’t go overboard.
5. Hold off saving for retirement
Financial experts recommend stashing away 15% of your income for your retirement fund. However, when you’re saving up for a home, it would be best to hold off saving for your retirement fund. Remember, this is only a temporary set-up. You can always rebuild your nest egg after saving for a down payment.
In the meantime, funnel your supposed 401k or IRA investments towards your home down payment. You’ll be able to save up faster and dodge paying additional fees.
Aim to finish paying the down payment in two years so you can regain focus on your retirement savings. Don’t cash in the retirement funds you have already saved to avoid penalties and taxes.
6. Find other sources of income
Today’s generation is fortunate to have access to many side hustle opportunities. Other income streams, like a small business or freelance work, allow you to have extra cash for your home purchase. The key is to bank on your hobbies and talents, so you won’t get burned out.
You may want to try these side hustle ideas to earn extra cash.
- Affiliate sales and marketing
- Drop shipping
- Travel consulting
- Selling on Etsy, eBay, or Amazon
- Ghostwriting or copywriting
- Being a Lyft or Uber driver
- Managing social media
- Tutoring English online
- Airbnb hosting
- Taking photos
You can do these side hustles on the weekends or after work, so having a full-time job won’t be a problem. It’ll entail some sacrifice, but the rewards will be worth it. Remember to funnel all earnings from these money-making activities to your home purchase fund.
Yes, It’s Possible to Save for a New Home
When saving up for a new home, review your financial status first. Focus on saving for the down payment, so you can better manage the subsequent mortgage payments.
Getting an expensive mortgage can lead to financial woes in the future. It’s best to be realistic about your financial capacity so you can pay all your dues consistently.
Purchasing a house requires some lifestyle changes and sacrifices on your part. You may feel hesitant or even sad about letting go of some luxuries—and it’s okay. Do it one day at a time, and you’ll find yourself happier, healthier, and wealthier without them.
Starting a small business or freelancing can also help increase your savings. You can leverage your talents or skills to earn more money. The internet is a treasure trove of side hustle opportunities you can use to your advantage.
The journey toward buying your first home can be challenging at times. There might be a few bumps on the road. However, knowing that you can have coffee in your breakfast nook in a few years can give you all the motivation you need.