Monday, April 8, 2019
Saving for a Down Payment: 10 Tips
They say that making your first million is always the toughest. The same is true when it comes to buying your first home. The reason is simple, you are starting from scratch. You are probably also at the smallest earning level you will ever be and chances are you in or were somewhat recently in some sort of youth-related debt (education, etc.). This is why having a strategy when buying your first home is important. Like anything in life, savings goals need a plan. Today I am going to give you 10 Tips to saving for a down payment. Your first home will be the base for which all other housing in your life is grown, so let’s get it rolling.
1) You must be dedicated
Think of it as working out or going on a new diet. When it comes to saving for your first, or any, down payment you must have tunnel vision. Everything you do, every dollar you spend, every hour you work, should be thought of in the light of buying this home. It is too easy to take a day off, a week off or even a month off. This wastes time and of course money. When it comes to saving money, you must avoid “cheat days.” Sadly, this may include being a recluse while you accomplish the task. Think of the greater good always and that should keep you going during those tough days and nights.
2) Analyze your situation
If you are barely able to afford your rent every month, owning a home might not be in the cards right now. One of the toughest things for people to do is analyze their own situation. Why this is tough is because sometimes the answer you conclude is not very pleasant. One unpleasant conclusion is that you just don’t make enough money. No one likes to admit they are in a crummy job, but the sad truth is that many people are. Wage levels are at an all-time low and oddly, spending levels are at an all-time high. You are going to have to come to some stark realities when you analyze your situation, so don’t be afraid to admit faults. The sooner you see what’s wrong, the sooner you can devise a plan to make it right!.
3) Budget, of course
As mentioned in the last point, you need to analyze your situation. An amazing tool to do that with is a budget. A budget will show you how much you make, after taxes folks, and how much you spend. You might think you know how much you spend but I bet you would be surprised. We all know what we spend on the necessities, I hope, but many of us do not know what we spend on the variables. If you end every month right on the borderline of your budget there are several conclusions that can be drawn. Firstly, you might not make enough money. Secondly, you may be spending too much money on crap like restaurants, shopping, entertainment, and other non-essentials. Chances are it is a little bit of both. A budget is what provides absolute clarity in your spending.
4) Set a timeline
When setting a goal, you must have a timeline. If you do not, you will not stay on track. Ideally, saving for a large purchase or paying down debt would be funded in 3 years or less. This obviously does not include funding your retirement or paying off a mortgage as they are long term goals. You should ideally put between 10-20% of the home’s value as your down payment. If you take 3 years to save for your down payment, that means you are taking 36 months or 156 weeks. That also equals 78 bi-weekly pay periods. If you determine you need $25,000 for a down payment, that means you need to save $320 every pay period for 3 years. If there are 2 people in on this goal, that would be $160 each. You see how breaking the goal down into small steps makes it seem much more accomplishable. The math is simple for whatever amount you need, in whatever timeline you give yourself. 1 year, 2 years or 3, it doesn’t matter. The key is to set a date and stick to it.
5) Your debts MUST be gone
We have this odd concept in our society today that everyone can have everything at once. I will say this to you all and I hope you understand me. If you have debt, you should NOT be buying your first home. The reasons are quite simple. First, saving for a down payment will be extremely tough when you have money leaving you every month and going towards debt. Interest is a real problem and any money that is used on costly interest is taking away from your savings plan. Also, having debt lessens your chance at getting a mortgage to begin with. Lenders look at your debt service ratio when deciding to give you a mortgage or not and if you have too much money going towards existing debts, they are less likely to fund your mortgage. Finally, having debt puts undue stress on your financial plan. Owning a home is full of surprises. Taxes, repairs, utilities all eat away at your money budget so having debt makes handling your monthly home owning obligations that much tougher. Therefore, starting with a clean debt slate is best, before adding on the biggest debt you will ever have.
6) Cut back on luxuries
No pain, no gain, right? A sure-fire way to save more money every month is to cut back on the things that you don’t really need. We all have things we can get rid of and taking a year off those will work wonders for your savings plan. Some things we can stop spending money on while saving for our down payment are:
- Dining out
- Memberships (gym, clubs, etc.)
- Alcohol or other vices
- Costly cell phone nonsense
- Anything that doesn’t keep you alive and saving money
Saving money is tough for most people because they view it as neglecting their daily lives. I look at it as providing for your future self. One thing is for sure, once you see those savings numbers start to grow, you will be hooked on the idea. Try it out for a month and you will find the things you stopped doing didn’t make you miss out on that much at all.
7) Save on necessities
Keeping an airtight basic budget is huge. There are leaks all around us. I mentioned cell phone nonsense but also look at your cable bill as well. Hydro is wasted very nonchalantly in our society so cutting back on that is huge. Taking in a roommate might be another way to save a bit of money, or even using a room sharing service like Air B and B. Cutting back on gas consumption or negotiating a lower car insurance rate works too. Brown bagging your lunch and coupon hunting is a great way to save on food. There are dozens of ways to save every month on the things we need. Look at it this way, saving $10 on each necessity could save you an extra $100 a month. That makes the savings goal a little bit easier to come by.
8) Use your Tax-Free Savings Account (TFSA)
A great place to put those savings as they accumulate is in your TFSA, or in America, the Roth IRA. This savings vehicle is completely tax-free when you withdraw your money, which is great for saving for a large purchase. Even better, any growth within this account is also tax-free, which means you can earn money off your money, which is great! You can invest your money in your TFSA into anything you want including stocks, bonds, exchange-traded funds, index funds, mutual funds and much more. This will help you hit your savings goals sooner. One warning I will give is that you should probably keep your risk tolerance a little more on the conservative side if you are planning on withdrawing these funds in a short period of time. Quite simply, you do not want to be ready for a purchase and your money is lessened by a market collapse.
9) Utilize your Registered Retirement Savings Plan (RRSP)
If you already have money in an RRSP, you can withdraw it to use for the purchase of your first home. This is called the Home Buyer’s Plan and it is a great way to fund your down payment. Traditionally you could use up to $25,000 for this purchase, but it was recently raised to $35,000. There are some rules along with it, so make sure you brush up on them. You must repay this money within 16 years of withdrawing it, but it can be done in a weekly, monthly or annual basis. You still get the tax deduction that your original deposits received, and it does not affect your overall contribution room. This program is simply amazing and everyone who can do it should utilize it.
10) Pay yourself first
As with any money goal in life including retirement, education, paying down debt, or funding a down payment, you must pay yourself first. This means that you take the money you need to accomplish the goal and put it away as soon as you get paid. It is this habit that will allow you to do any goal you put your mind to. It is far too easy to spend all our money before we get a chance to save it. Putting it away first will allow you to learn how to live on what’s left. In all reality, you will probably always have little disposable income. At least if you pay yourself first, you will be broke but with a fat savings account. That is how the rich get and stay rich.
Accomplishing the goal of saving for your first home is a remarkable feat. When we go back a generation, our parents struggled, scrimped and work hard to get that first home. We need to realize that we must do that too. Remember that this first home will be the savings piece that transitions your housing for the rest of your life. Done correctly it will add a valuable piece to your overall financial picture.
“You hear a lot of rap songs about spending money. I thought, wouldn’t it be funny to make a song about saving money because it’s ironic, but beyond irony, I genuinely have pride in saving money.” – Lil’ Dicky
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