You’ve heard it said before that buying a house is an investment. Like any investment, houses cost money. We’re not just talking about the monthly payment; that’s the easy part to budget out.
But before you can get there, you need to have money saved up for the various expenses that go into purchasing a house. And by far, the biggest of these expenses is the down payment.
The size of a down payment varies depending on what sort of mortgage you get. While there are a handful of special programs that have zero down payment offers for certain qualified buyers, most mortgages require some minimum amount. Some go as high as 20%, but most settle somewhere between 3% and 8% of the total sale value of the home.
For many, saving up for this down payment can be a difficult task. The average down payment on a new home is currently between $15,000 and $20,000 – much more than a typical family has just lying around.
So, how can you save up this much money to afford a down payment of your own? It takes time, and it takes discipline, but it can be done.
Here are six ways that you can use to start saving for a down payment today.
Reduce Your Expenses
The most obvious way to start saving money is to stop spending it as much in your day-to-day life. Most people waste a lot of money, and they don’t even realize it!
That $5 coffee you grab on the way to work every day, the snacks you grab on the way home, the cute candles you purchased on a whim at the farmer’s market. Every one of these small purchases eventually adds up to hundreds and hundreds of dollars being spent each month on things that just aren’t necessary.
When you can afford them, treating yourself like this is not a problem. But when you’re trying to save money for a big expense like a down payment, it becomes crucial to discipline yourself in this way. The hardest part is not spending that saved money on something else immediately afterwards!
And if you’re thinking to yourself that you really don’t have any expenses to cut, then it’s time to ask the question of whether or not you can afford to buy a new house in the first place.
Eat Out Less
This really goes with the “reduce expenses” segment, but it’s such a big problem for so many people that it deserves its own section. Without a doubt, the biggest “extra” expense for most Americans comes in the form of going out to eat. It’s so much easier to go somewhere than to cook at home, and for most of us it tastes better too.
The problem is that restaurants – even cheaper restaurants such as fast food drive-thrus – cost so much more than shopping and cooking for yourself at home. What could have been a $150 grocery bill for the week quickly doubles or even triples when restaurants become your normal go-to meal.
If you’re worried about your time or cooking ability, there are ways you can cook at home that are quick and relatively easy. Invest in a crockpot and find meals that just require you to throw everything together and hit “start.”
Get boxed, frozen meals; they’re not any less healthy than much of what you get in a restaurant, and they’re also a quick and easy way to get started cooking for yourself. Whatever you need to do to stop the cycle of watching all of your paycheck go towards the local restaurants, the better.
Switch to Low-Interest Credit Cards
If you’ve ever paid attention to your credit card statement, then you already know just how much money you’re throwing down the drain in the form of interest on those high balances and interest rates. The average American has thousands and thousands of dollars in credit card debt, and that amounts to hundreds of dollars each year going to pay nothing but interest.
If you haven’t done so in a while, now might be a good time to start looking at the various credit card offers that might be available for your situation. Many of these offers are for cards with extremely low interest rates, or even 0% interest, for a period of time.
Switching to one of these cards can help you save money by significantly reducing the amount that goes to interest. This results in a smaller monthly payment, which can help reduce your monthly expenses and put more money into your down payment savings stash.
Use an Automated Savings Plan
One problem for many people is that, even with the best of intentions, it’s hard not to spend money when it’s sitting in your account. You can resist this temptation by setting up an automatic saving plan.
This plan works by automatically transferring a pre-set amount of money from your checking account to your savings. Figure out how much you can afford to tuck away each pay period, and then set it up so that the money is automatically withdrawn the moment it hits your account. With less money in your checking account, you’ll be less likely to waste money you shouldn’t spend.
Borrow From a Relative
It’s not unusual for parents and other relatives to want to help out and give money that can go towards the down payment. While this might seem like a windfall, you need to know before you accept anything that there are rules that come with accepting gifts for your down payment.
We’re not going to go unto all the rules now, but suffice it to say that all down payment gifts have to be disclosed completely. Any attempt to hide the gift and present it as yours can result in you losing your mortgage.
The mortgage company will only offer you a loan if it has a clear picture of your financial situation, and if it doesn’t feel confident that you can afford the house – or, just as importantly, if it doesn’t feel confident in your honesty– it will have no problem turning you down.
Get a Second Job
If reducing expenses, cutting down on take out and paying less in credit cards isn’t growing your savings account fast enough, one sure-fire way to help out is to greatly increase the amount of money you’re earning in the first place. The best way to do this is to get a second job.
It doesn’t have to be anything crazy or full-time – even just ten hours a week or so can bring in hundreds of extra dollars each month. If your time frame allows you a couple of years to save up for this own payment, those extra dollars each month will be enough to cover most, if not all, of the extra cash that you need.
Saving up for a down payment is a long-term process, and it can be difficult and require a lot of self-discipline. However, it’s all worth it when you turn the key in the lock and enter your new home for the first time.
This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at his website NextGen Wealth.