Home ownership is a goal that many aspire to achieve. The home ownership rate in the United States is 63% and almost 70% in Canada. One of the requirements to owning a home is having a down payment. The larger the down payment ideally, the lower the monthly mortgage payments should be. Securing a sizable down payment can significantly reduce financial stress in the future. Start by managing your finances with Personal Capital or Mint.
It is a good idea to get pre-approved for a loan when you start looking to buy a house. Use LendingTree to get the best rate, since they automatically compare rates from top lenders.
Here are a few tips for saving up for the down payment:
Pay off high cost debt
- High cost debt can significantly reduce one’s ability to save money. Debts with double digit interest rates like credit cards and some car loans can make it difficult to save as more income is used to service the loan. Before starting to save for a down payment it is advisable to get rid of high cost debt. The best approach is to focus all efforts to paying these debts off as quickly as possible. There are two benefits to doing this. The first, is that you will have more money to put towards your down payment after you get rid of these debts. Second, as you lower your total debt outstanding your total debt service ratio will go down as well. The lower your total debt service ratio (TDSR), the less of a credit risk you will be to lenders when applying for a mortgage pre-approval.
Avoid lifestyle inflation
- Lifestyle inflation is probably one of the biggest silent killers of wealth accumulation. Lifestyle inflation occurs when one increases their spending as their income increases. Fancier vacations, expensive vehicles and rental apartments etc. The quickest way to save money overtime is to keep your standard of living the same (or close to it) as your income increases. If you redirect your raise (as soon as you get one) to your savings account, you can increase your savings rate with little impact to your current life spending.
Save windfall income or use it to pay off debt
- Windfall income can quickly help boost savings or pay off debt. Strive to save at least 50% of windfall income towards a down payment or use it to pay off high cost debt. Either option will help you reach your goal of home ownership faster. Examples of windfall income include tax refunds or financial gifts from family and friends.
Lower rent costs
- Housing costs whether renting or owning make up the largest expense for most households in America at around 30%-50% of take-home pay. If home ownership is a major financial goal for you then lowering your current rental costs as much as possible can help you reach that goal faster. Some ways of doing this include: getting a roommate, temporarily moving to a less expensive part of town, moving back with parents or negotiating with your landlord when renewing your lease.
Claim credits and deductions on your tax return
- As much as tax refunds are a great source of windfall income, they are monies that are entitled to you during the calendar year and paid back to you at tax time. By waiting until tax time to get a refund you are giving the government an interest free loan of which they return back to you at a lower purchasing power due to inflation. An effective way to avoid this is to claim all credits and deductions you are entitled to on your W-4 form (United States) or TD1 (Canada). This will result in the government withholding less taxes each paycheck, leaving you with a larger take home pay and more money to go towards your down payment. It is important to mention that claiming credits and deductions is only effective if you plan on redirecting the extra income each paycheck towards your savings account or paying off high cost debt. For some having a slight increase in their take-home pay every paycheck may cause them to spend more than if they received a larger refund at tax time. If this is the case then it may still be beneficial to overpay the government and wait for a larger refund.
Avoid buying a new vehicle
- The average American spends $479/month on car payments over a 7 year period for a new vehicle. That comes up to $40,236. Even if half of this money was saved it would go a long way to a sizable down payment. Vehicles also depreciate over time which means that the money invested in them result in a negative return. An alternative is to save up some cash and buy a used $5k-$10k vehicle and avoid car payments altogether. If you are tight on cash but need a vehicle to get around, finance a used vehicle at lower payments but make sure your total transportation costs do not exceed 10% of your take home pay. This includes car payments, Allstate Auto Insurance, gas, maintenance and repairs. If you live in a larger metropolitan area, look into ride shares or Uber as low cost alternatives.
Get a side hustle
- Even with our best efforts, we may not be earning as much money as we would like from our full time employment. In addition to asking for a raise or switching employers we also have the option to pick up a side hustle that can help increase income. Side hustles are a great way to increase income stability, employment skills and professional network. Even earning an extra $200-$400 a month from a side hustle translates to $2,400- $4,800 a year. Some great side hustle gigs include: tutoring, Uber driver, blogging, selling items on eBay and consulting services. Consider starting a blog or follow our several ways to making money online.
Ditch the perks
- Depending on how quickly you want to save for a down payment cancel memberships and subscriptions that are eating at your savings. Cable, gym membership and expensive cell phone bills can be cancelled and replaced with more cost effective alternatives. Consider getting online streaming service like Netflix or Amazon Prime, find active ways to exercise outside of the gym and lower your phone and data usage.
Reduce or eliminate discretionary spending
- Discretionary spending are those expenses we incur for our wants. Examples include eating out, entertainment, vacations, buying lunch at work instead of packing a lunch etc. The average American spends about $8 a working day eating out. This translates to $176/month or over $2k a year. By eliminating one or two discretionary items from our budget, it is possible to increase savings.
Live on half and save the rest
- This approach works best if you do not have kids or can be extremely frugal or both. If you want to save a large amount of money in a short period of time, save half of your paycheck if you are single or live on one income if you are a couple. If you are financially capable of doing this it is probably the quickest way to save money.
Switch to online banks
- Open a savings account with an online-only bank and enjoy higher interest rates compared to regular banks. Online banks are great for both checking and savings accounts because they have no monthly fees and offer competitive interest rates to store your money.
Automate your savings
- The best way to save money on a consistent basis is to have the money taken out before you can use it. Pay yourself first by automating your savings so that a fixed amount of money is taken out of your paycheck as soon as you get paid.