Buying a home is an important milestone in one’s life, representing a significant investment that is both emotional and practical. The journey to homeownership requires careful planning, especially when it comes to accumulating the necessary funds for a down payment and various expenses in the home-buying process. To begin this journey with confidence, it’s important to understand how much you need to save to make your homeownership dream come true.
In this guide, we’ll reveal the steps for setting your savings goals and how to save money to buy a house.
How Much Money Should Save to Buy a House
Before starting your journey to homeownership, it’s important to determine exactly how much you need to save. Conventional loans typically require a down payment of 3% to 20% of the house value. However, the average down payment for first-time home buyers in the US is around 6%. In addition, real estate experts at Zillow report that closing costs and related fees can add up to 2% to 5% of the total purchase price of your prospective house.
Also, financial experts strongly advise building a cash balance that can cover at least three months of living expenses. All of these considerations are made before calculating costs such as homeowner’s insurance, setting up your new home, and other costs associated with moving.
9 Tips On How To Save Money For a House
1. Setup Saving Goal
If buying a home is on your mind, it’s important to start by determining your financial capacity. One way to measure this is to calculate the amount of money required to close the deal based on the purchase price of the property; Consider this your basic savings goal.
Apart from this base amount, you should also take into account the costs associated with moving, installing and purchasing the necessary items.
Once you’ve added up these expenses and calculated your final savings goal, it’s time to set a clear savings goal that fits your timeline. In addition to reaching the end goal, your savings goal should also outline a strategy for achieving it.
2. Determine Your Budget
Before embarking on the home-buying journey, it is important to determine your budget range. It involves a thorough assessment of several key factors. First, consider the price range of the house within your financial range, taking into account your ability to make a sufficient down payment.
Additionally, estimate the potential cost of a mortgage loan to cover the balance. To get this important information, research online, use home mortgage calculators and get information from friends and family who are experienced homeowners.
3. Open an Online Savings Account
Gone are the days of going to a traditional bank to open a savings account. Today, countless financial institutions offer the option to set up savings accounts online, allowing you to start the process anytime, anywhere. Beyond the convenience factor, choosing an online savings account can be a strategic move to maximize your savings.
Unlike their brick-and-mortar counterparts, online banks often offer higher interest rates, with some offering significantly more competitive annual percentage yields (APY). This means your hard-earned money can benefit from higher compound interest, leading to even stronger growth in your savings.
4. Automate Your Savings
When it comes to saving for your future home, one invaluable strategy is to automate your savings. With this method, you ensure that a portion of each salary is consistently sent to your savings account.
For example, if you get your paycheck every other Friday, you can take a proactive step by scheduling an automatic transfer of $100 to your dedicated house down payment account for the following Monday.
By setting up this recurring transfer to occur every two weeks, you can begin accumulating your down payment with remarkable efficiency.
5. Start Side Hustle To Earn Extra Source of Income
Although not everyone enjoys a high-paying full-time job, the extra income can make the dream of buying a home a reality. Fortunately, there are many additional projects you can work on without requiring extensive qualifications or special skills. Of course, if you have personal skills, you can use them to increase your income but don’t despair if you don’t.
Additional businesses such as food and grocery delivery, babysitting or pet sitting, car rentals, and resale businesses can all be started with minimal expertise.
If you have enough income and specific skills, consider tutoring, offering skill-sharing sessions, teaching English, providing support services, beginning a blog-based business, becoming a YouTuber, or becoming a personal trainer. These are just a glimpse of the many additional opportunities in today’s dynamic marketplace.
6. Pay off Your Debt
While saving your money to buy a house is undeniable, an equally essential aspect of this journey also includes settling your existing debt. The reason behind this is quite simple: If you want to use credit to buy a house, a strong credit score is essential. Without a favorable credit score, obtaining financing from banks can be a difficult task. Even if you are able to secure a mortgage, interest rates are high.
One of the best ways to improve your credit score is to diligently pay off your debts, primarily high-interest credit card debts. Also, it is wise to continue making minimum payments on your balance to maintain your progress toward your homeownership goal.
7. Consider Downsizing
A great way to accelerate your savings toward a down payment is through the downsizing process. Downsizing involves making deliberate efforts to reduce your expenses and live within your means while working toward your savings goal. Embracing downsizing is consistent with minimalism, where you prioritize only the essentials and allocate surplus funds to your savings account.
There are many ways to consider when downsizing your lifestyle. You could settle into a smaller apartment, sell an extra-family vehicle, or move to a more budget-friendly area. Many individuals embrace minimalism as a lifestyle while saving for significant investments such as buying a home, and find the satisfaction of living a simpler and more financially conscious life.
8. Save Less for Retirement
Ideally, avoid tapping your retirement account or borrowing against it. Such actions may result in repayment of the borrowed amount with additional interest or tax deductions and possible early withdrawal penalties. Instead, consider the prudent approach of reducing your retirement contributions little by little as you work towards your homeownership goal.
For example, if you currently contribute more than the company contribution to a 401(k) plan (reflecting your prudent financial planning), you may want to consider withdrawing these contributions and allocating the excess funds to your housing fund.
9. Start Investing Early
It takes patience and strategic steps to begin the journey of realizing your homeownership dream. If you’re wondering how to save money for a house, it’s important to take the time and be proactive about it.
Starting your investment journey early is an important strategy. Consider allocating your funds to various investment options like fixed deposits (FD), mutual funds, and bonds. By doing so, the financial aspect won’t be as big when it comes time to buy your own house.
Starting your investments early ensures that the process of accumulating substantial sums becomes gradual and manageable. Plus, the longer you invest, the more you benefit from compounding power.
Determining your timeframe for buying a home is an important first step in establishing your savings strategy for a down payment. If your goal is to buy a house in the short term (within the next four years), it’s a good idea to park your funds in an FDIC-insured savings account that not only provides security but also offers an above-average interest rate. This ensures access during unexpected needs.
However, if your homeownership plans extend into the future, you may consider embracing a slightly higher level of risk by investing your savings in the market. This approach has the potential to yield a high return on your investment. Individuals with long-term homeownership are advised to consult a trusted financial planner early. Alternatively, you can opt for the simplicity of a savings account to streamline your financial products.
Read More: How to Save Money