Many people often debate whether they should renew the lease on their apartment or sign a contract to purchase their first home. Saving money for a down payment on a home can seem like an unsurmountable obstacle. While it seems like it has become increasingly difficult for anyone to save money these days, by reducing living expenses and making a few sacrifices you can start saving for a down payment today.
- How much to save? For first-time buyers, a 20 percent down payment can increase the chances of qualifying for the loan by giving them a bigger stake in the property, says Scott Halliwell, financial planner with USAA. FHA loans, or those insured by the Federal Housing Administration, require much smaller down payments, as low as 3.5 percent of the purchase price. But those mortgages also require buyers to pay for private mortgage insurance, which can cost 0.3 percent to 1.5 percent of the loan amount per year.
- Cut out the small stuff. It may seem obvious, but the first step to saving a down payment should be to cut down on luxuries that can add up. That could include things like cutting down on daily coffee runs (saving about $1,000 a year), bagging your own lunch (another $2,600) and cooking more meals at home, Evans says.
- Try carpooling. You’ll save on gas, garage fees and wear and tear on your car as you share driving responsibilities. The car pool doesn’t have to be made up of co-workers either. Many cities have carpool and share-a-ride programs to join.
- Make eating out a treat. Sure it’s fun to go out to eat dinner, but restaurant bills can be a real drain on the monthly finances. Even cutting down one visit to a restaurant a week will help save money — if a dinner for two runs about $80, by month’s end there’s a potential $320 saved.
- Pay in cash. Leave the credit and debit cards at home and use cash instead. The quickest way to avoid buying something is not to have the ability to pay for it. Using cash also helps you stick to a budget because once the cash is gone, you’re done spending.
- Live off of one spouse’s income. In the way that new parents often have to temporarily adjust to having only one paycheck, some couples can set aside one person’s paycheck for the house fund. Of course, not all couples can afford their monthly expenses this way, but the practice could lead couples to discover savings strategies that may stick even after the home is bought, he says.
- Turn your hobby into a paycheck. Some people have success saving by generating a new source of income that is solely for the purpose of buying a home, Corbett says. That might include teaching tennis, waiting tables on the weekends or finding freelance work.
- Make it automatic. Once you calculate how much you can set aside each month, have the money diverted automatically from your paycheck into a savings account. A traditional savings account or money market fund will work for people who are planning to buy a home soon, say in the next year or two.
Using these tips can get you into the right mindset to start saving for a down payment on your first home today. When you’re ready to