4 Smart Ways to Save for a HomeMay 2, 2018
Home ownership is the ultimate American dream. Currently, 64% of Americans own a home, with many more working hard to save for this goal. For many people, the biggest thing holding them back is the down payment. It may seem insurmountable to come up with such a large chunk of cash, especially if you’re on a tight budget. However, there are lots of little things you can do that will make a huge difference over time. Start now, and those dream home inspiration boards you’ve been curating won’t be so out of reach!
Determine your budget
The first thing to do is figure out how much house you can afford. This will allow you to set a goal for savings. There are two percentages that mortgage lenders use to determine affordability: the front-end ratio and the back-end ratio. The front-end ratio states that your mortgage payment, including taxes and insurance, should not exceed 28% of your pre-tax income. The back-end ratio accounts for all of your debt, and states that your entre debt load should not exceed 36%. Once you come up with a number, you can calculate what percentage you need to put down—this usually ranges from 5-20%—and you will have your savings goal.
Automate your savings
The easiest, most painless way to save is to have someone else do it for you. These days, many banks offer programs that will transfer small amounts of money to your savings account on your behalf. Over time, those tiny transfers can really add up. If your bank doesn’t offer this service, there are plenty of apps that will help you save. Each has its own method for how it helps you save—Dobot lets you set specific goals; Digit learns from your spending habits—but in the end, they all result in you being a smarter saver.
Save your raise and overtime
This seems deceptively simple, but the truth is that most people re-adjust their lifestyle to fit their new income when they get a raise. Instead, when you get a bump in pay, try to maintain the same lifestyle and put that extra money away. Better yet, cut any unnecessary expenses from your budget to save even more. The same is true for overtime—though it is unexpected money, many of us still find a way to spend it. Resist that urge and set it aside instead.
Get a side hustle
You work really hard already, it’s true. But a side job will accelerate your savings plan and could put you months or even years ahead of schedule. Over 44 million Americans currently work more than one job. Not all side jobs are created equal, however. You need to make sure that the extra time and energy is worth it in the long run. Learn more about some of the most common side hustles and how much you can typically make.
Re-Evaluate Your Taxes
If you usually get a decent tax return, sock it away instead of spending it on a fancy new item or a vacation. You want to wait until you know the layout of your living room before you splurge on your dream big-screen TV, right? Even better than saving tax return money is not getting it in the first place. Instead, adjust your tax withholding for your paycheck to ensure you keep more of your money. This way, you’re the one who can earn interest on your money and watch your down payment grow even faster.
Saving for a home can be intimidating, but it is much more manageable when you have a clear goal in mind and take it step by step. Combine several methods of saving money and you will be well on your way to closing on the purchase of your first home!