If you’ve ever run a marathon, then you know just how much training and preparation goes into the final event. You lay out a proper training program, track each milestone and make significant lifestyle changes to ensure you cross the finish line on race day.
The same principle applies to saving for a home. First, you must figure out your ultimate goal, make a plan and then “financially train” yourself to develop the necessary habits to attain your dream of homeownership.
If your current finances could use some work, don’t get discouraged. Any short-term sacrifices will be well worth it once you’ve settled in your new home and begin building equity. To help get you started, we’ll discuss five simple steps to get your finances on track and save for a house:
Get a clear financial picture
One of the best ways to tackle a long-term savings goal is to get a very clear picture of your current income and expenses. If you find yourself spending a disproportionate amount of money on non-essentials like eating out or monthly subscription services, take a minute to identify excesses and make cuts where necessary. These questions may help you root out frivolous spending:
- Do you know your top three spending categories?
- How much money do you need each month to cover your non-cancelable debts?
- Do you pay monthly subscription fees for services you don’t utilize?
Once you identify specific areas to cut back, take it a step further with a money diary. Keep a weekly log of your day-to-day spending and you’ll surely have a better idea of your habits so you can make adjustments.
Set up a tracking mechanism
With any dramatic lifestyle change, it’s essential to set up some type of tracking infrastructure to show progress and avoid any setbacks. Your finances shouldn’t be any different. There are a variety of apps you can download to manage your finances. You can start with the Mint app which helps you get an overall picture.
Another effective way to track expenses is to set up automatic payments on all your accounts. Automation adds built-in discipline to your budget while allowing you to predict monthly expenses with greater accuracy. Making sure that your bills are paid before anything else will make it harder to lose sight of your objective, incur unnecessary late fees, or spend money on things you don't need.
Determine financial needs
Once you have a better grasp on your finances with a tracking mechanism in place, decide exactly how much money you will need for your down payment. It’s best to strive towards a solid 20 percent down payment since that will allow you to get the best rate and avoid mortgage insurance. Saving this much takes time, but an alternative solution could be exploring mortgage options that require as little as 3.5 percent down. Although a smaller down payment will affect the rate and terms of your mortgage, the possibility of one day owning your home free and clear outweighs paying rent to a landlord.
If your goal is to purchase a home for $300,000, then you will need roughly $60,000, or 20 percent. Once you know this number, break it down into a more manageable amount. If you’d like to reach your goal within 5 years, then plan on allocating $1,000 towards savings each month. By establishing what it takes to make your dreams a reality, it’s a lot easier to navigate towards it.
Open a Saving Account
What’s better than watching your money grow without lifting a finger? Opening a designated savings account is one of the best ways to ensure you’re not tempted to spend the funds you need for a down payment. If your employer uses direct deposit, you can easily set up auto-deposits each pay period from your checking account. Just like stashing money away in your 401k, you won’t even have an opportunity to spend it. Keeping a separate home fund savings account can help you stay on track, especially on those crummy days when you feel like treating yourself to a shopping spree.
The main reason to consolidate debt is to eliminate excessive interest that will hinder you from contributing to a house saving fund. For high-interest debts like credit cards or student loans, consolidation might be one of the best approaches to streamline payments at a more affordable interest rate. For credit cards, search for deals that offer 0% APR on balances and new purchases. The key is to make sure you can pay down the debt in its entirety during the introductory period and before interest kicks in. For your student loans, several institutions can help you refinance your loans. Start with Student Loan Hero for personalized advice on your best options.
As you break the debt cycle and reduce interest each month, don’t forget to get a head start on building a decent credit score. Your financial behaviors today will allow you to get the most competitive interest rate once you are ready to shop for a home.
Keep your goal alive
As you continue towards your homeownership goal, it’s natural to get discouraged, especially if you feel deprived by all those sacrifices you’re making. That’s why it’s important to celebrate even the small milestones and reward yourself along the way. Simple rewards like a nice dinner with a close friend or a new article of clothing once you hit another savings goal can give you the encouragement you need to keep going. Also, try to keep your goal top-of-mind by putting reminders in your home, workplace, car and other strategic places you can’t avoid. For example, print a photo of your dream home or better yet, make it a screen saver on your computer or phone to reinforce your commitments. If you can remember (and see) your end goal, you will be less likely to compromise it by impulsively spending.
Now that you have a plan in place on how to get a handle of your finances, you’ll be well on your way to making your dreams a reality. If you have any questions about down payments or any other lending-related questions, a loanDepot licensed loan consultant can help you.
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