How to Save a Down Payment for a House
How to Save for a Down Payment in 5 Steps
Saving up that much on a house can feel overwhelming, but fear not. It’s simpler than you think when you have a plan! Here are five steps to help you reach your goal:
Step 1: Start With a Clear Down Payment Savings Goal
Before you start saving, it’s important to know exactly how much you need. So what’s a good down payment? Dave’s a fan of putting 100% down on a home, but that’s not feasible for everyone.
Ask yourself these three questions as you determine your down payment savings goal:
1. How much should I save for a down payment?
If you can’t pay cash for your home, plan to put at least 10% down. If you can, go for 20%. Why? Because putting down 20% means no private mortgage insurance (PMI)—an extra cost your lender tacks on to your monthly payment just in case you don’t make payments on your loan.
Here’s how to buy a house you can afford: Think 15 and 25. You want a 15-year, fixed-rate mortgage that’s no more than 25% of your monthly take-home pay.
And here’s how you can find a home you love that fits your budget: Get a trusted real estate Endorsed Local Provider (ELP) to help you shop for a home based on your price range.
2. How long will it take me to save for that down payment?
This is up to you, but patience and hard work really do pay off! Because the more time you spend saving up, the more money you can save up. And the more money you save, the less your mortgage loan will cost in the long run.
Stay focused and you should be able to save a nice down payment in two to three years. Try not to drag it out much longer than that, though. You’ve got plenty of other money goals to take on next—like your retirement and the kids’ college funds.
3. Where is the best place to put the money I’m saving for a down payment?
In most cases, a down payment is not an investment. So stashing that cash in a money market savings account will get the job done. You’re not going to make tons on interest, but you won’t lose money either.
So, let’s say you have 24 months before you want to buy a home, and you decide to save $40,000 to cover your down payment (plus closing costs and other moving expenses). Now you’ve got your goal set up. Here’s how to fast-track your savings!
Step 2: Cut Some Expenses in Your Budget
Let’s start with the money you’re already bringing in every month. That’s right—let’s flex your budgeting muscles!
You’ll be amazed at how much money you find when you pay attention to your spending. Here are some ideas to help you tighten your spending temporarily while you work on making that home dream a reality:
- Take a break from the gym: $60 per month
- Save eating out for special occasions: $250 per month
- Trim your clothing budget: $100 per month
- Buy generic brands at the grocery store: $160 per month
- Cut the cable: $60 per month
These tips could save you $630 every month! That adds up to more than $15,000 over the course of 24 months. Now get creative and think up even more ways you save!
Step 3: Press Pause on Retirement Savings
If you’re already saving for retirement, this might feel really weird. After all, Dave normally recommends you start investing 15% of your household income for retirement right after getting your emergency fund in place.
But if you’re planning on buying a house in the near future, hold off on your retirement savings and redirect those funds toward your down payment. It’s temporary, so don’t worry. Once you’re sipping coffee in your new breakfast nook, you can get right back to that 15% toward your retirement goal.
Think of it like this: If you’re currently investing $500 a month into 401(k)s and IRAs, and instead, you put that toward your down payment savings, you could save around $12,000 in two years. That’s a big boost to your savings timeline!
A word of warning: Don’t borrow from or cash out your retirement accounts in order to save up for a down payment. You will not only get hit with taxes and early withdrawal penalties, but also damage the long-term growth of your retirement savings. It’s a mistake that could cost you hundreds of thousands of dollars at retirement. That’s not worth it. Not at all.
Step 4: Boost Your Income With a Side Hustle
If you’re looking for another way to turbocharge your income, there’s nothing like picking up a side gig or a second job.
Your side hustle doesn’t have to be torture either. When you’re thinking up ideas, start with the stuff you love doing already. Check out these examples:
- Exercise regularly? Walk neighborhood dogs after work or referee sports leagues on the weekend. Get healthy and bring in some dough? That’s a win!
- Have a heart for teaching? You can expect to make $30–40 an hour tutoring—even more if you live in a big city or have advanced degrees.3
- Love pets? Let your friends and coworkers know you’re available to watch Rover the next time they’re out of town. Get some fur therapy and make money at the same time.
So, is it worth it? Say you add in 16 hours a week making $10 an hour. That’s an extra $120 per week after taxes! Keep that up and you’ll have more than $12,400 for your down payment savings in 24 months.
Step 5: Find More Savings and Income in The Margins
It’s time to get tough and cut out some extras. Ouch! It might hurt some, but keep your mind on your why: home sweet home. Here are a few ideas to get you started:
- Drop the nice summer vacay. You could pocket $2,000 from that alone.4
- Do you have a lot of extra stuff collecting dust around your house? Sell. It. All. Take advantage of online sites or even an old-fashioned garage sale to bring in some extra dough. Scoring $500 from a Saturday morning garage sale? That’s a win in our book.
- Got an annual bonus or raise? The average pay raise in 2018 is expected to be around 3%.5 Tell that big screen TV it can wait. Stash that money in savings instead. That could be an easy $1,500 bump!
If you do all three of those, you’ll save an extra $4,000! Worth it.
DOWN PAYMENT SAVINGS GOAL: $40,000 in 24 Months
|CUT YOUR EXPENSES||$15,000.00|
|REDIRECTED RETIREMENT SAVINGS||$12,000.00|
|EXTRA INCOME FROM SIDE HUSTLE||$12,400.00|
|SELL STUFF / SKIP SPLURGES||$4,000.00|
For more tips, check out our Saving for a Down Payment Guide. It will give you even more practical tips to help you save a down payment fast. That white picket fence doesn’t seem like such a faraway dream after all.
Make the Most of Your Down Payment
When you’ve worked so hard to save up a big down payment, the last thing you want to do is make a bad financial investment. That’s why picking an experienced real estate pro—who has your best interest at heart—is key. – Dave Ramsey, financial Peace University
If you’re still wondering if now is a good time to sell or buy in your specific situation, we can provide you with accurate information and assistance during your home buying or selling venture. We offer free virtual consultations to review your specific circumstances. Simply email us at liz@DawesTeam.com or call 954-240.9680 We look forward to figuring a best plan for you.