Are you thinking about making the leap from renter to homeowner? Owning a home has so many financial benefits compared to renting, so give yourself a high five for even considering the pursuit - it’s a big step!
Purchasing a home is totally possible, it just requires some financial planning and preparation. In a recent survey from Cultural Outreach, most NextGen (NextGen includes both the Millennial and Gen Z generations) first-time homebuyers state the down payment as their biggest financial hurdle.[1] Coming up with a large amount of cash to put down can be overwhelming, but starting is sometimes the most difficult part of any journey - saving money included!
Before you start thinking about a down payment, make sure that you have a healthy financial profile. That means eliminating bad debt (think credit cards) and having an emergency fund of 3-6 months worth of expenses saved up first. You want to feel comfortable with your finances when you start to make the plunge into homeownership. Freeing yourself of debt and having the financial security of an emergency fund will help you get there. This way you won’t feel extra stress as you start to save for a down payment, you’ll already have developed good financial habits!
Here are some easy, manageable tips to help you get started on your savings journey, whether you’re saving for a down payment, emergency fund, retirement, or anything else!
1. Cut Unnecessary Expenses
First thing’s first, you need to take a thorough look at your monthly expenses and start budgeting if you’re not doing so already. We can’t help you make money appear out of nowhere, but you can take money from other places and reallocate it to a down payment savings fund.
Start by eliminating any unnecessary or “extras” expenses. Remember, this is only temporary! And with the social limitations of the current stay-at-home ordinances, you’re probably spending less these days anyway!
Consider cutting things like:
- Gym membership: $60/month
- Eating out for special occasions: $200/month
- Clothing budget (just a reduction): $100/month
- Buy generic brands at the store: $150/month
That’s already $510 each month that you could be saving towards a down payment! That’s over $12,000 across 24 months! You can think even bigger and save thousands of dollars by opting out of the summer vacation this year. Now let’s get creative and think of even more ways to save.
2. Modify Your Retirement Plan (Just Temporarily)
It may seem frightening to think of pausing your retirement savings. You don’t need to completely stop putting money in your retirement account, but, depending on your monthly income, consider putting that money in a down payment savings account or reduce your monthly retirement savings in favor of down payment savings. Saving for a down payment can only take a couple of years. When you’re sipping a cappuccino in your new digs, you can go right back to putting that money into your retirement account and kick your feet up.
A note - we do not recommend borrowing from or cashing out your retirement account. That can have negative effects on your taxes and incur withdrawal penalties.
3. Sell Your Clutter
Do you have a lot of extra things collecting dust and taking up space at your current home? Now’s the time to do a bit of streamlining that will eliminate clutter and put some extra cash in your pocket. Second-hand online sales platforms are really popular and super easy (and safe) to use.
4. Start a Side Hustle
The employment field in the U.S. is definitely shaky right now, but people are getting creative and you may be able to find ways to make some extra cash. Maybe you work in finance or science and could consider taking on tutoring math a few hours a week? With the transition to virtual school for most American kids, this would be a welcomed service to many families! Teach music lessons over Zoom. Help out with digital marketing. Write articles! There are lot of digital employment opportunities that you can pursue just a few hours a week to help put a little extra in your pocket each month.
5. Save Bonuses and Raises
Do you receive an end-of-year bonus? Put that money directly into your down payment savings account for a nice little chunk of cash! If you get an annual pay raise (normally around 3%), take that extra income and create an auto-payment directly into your down payment savings account. That’s money that you won’t even notice is gone and could add up to thousands of dollars each year!
So where should you be putting all this money? The down payment itself isn’t an investment, per se, so putting your down payment savings into a money market savings account or CD with a good APY (annual percent yield) will do the trick. You’ll earn a bit of interest, but the money will be secure and accessible. Enable an auto-transfer each month and automate your down payment as part of your monthly expenses. Crunch some numbers or talk to a financial advisor or real estate professional to set a goal for yourself and create a plan. Maybe you want to save $40,000 over 24 months to cover your down payment. Whatever you save will earn a little bit of interest and you’ll have even more when you’re ready to apply for a mortgage!
Whether you’re saving for a 3%, 5% or 20% down payment, creating a manageable plan and sticking to it plus some out of the box thinking will help you get there. You can do this! Send us a message if you want help creating a savings plan and talk about different loan options and which one may be right for you!
[1] 2020 Next Gen Homebuyer Report, Cultural Outreach