If you’ve been looking for ideas on how to save for a house in today’s economic landscape, you’re not alone. Many Americans want to purchase a home but are concerned about affordability and increasing home prices in their respective areas.
However, saving up for a down payment is not an impossible feat. With the right amount of diligence and creativity, you can start a successful savings plan today.
[ Thinking about investing in real estate? Learn how to get started by registering to attend a FREE online real estate class from expert real estate investors. ]
5 Steps to Saving for a House
You might feel intimidated by the prospect of saving for a house: you’ll spend more money on the down payment than what you’d spend to buy a brand new car, and you’ll be saddled with a loan that could take 30 years to pay off.
And it doesn’t help that home prices are generally increasing across the United States. By the time you reach your savings goal, the home prices in your desired neighborhood could be higher than what they are now.
But you can reach your savings goal very quickly (and without breaking the bank) if you just follow these five steps:
Set a Down Payment Savings Goal
Cut Down Your Expenses
Set Up Automatic Savings
Pause Your Retirement Savings
Creatively Earn Extra Money
1. Set a Down Payment Savings Goal
If you plan to purchase a home in the next few years, you’ll want to start saving for a down payment right away. Offering a sizeable down payment can lower your monthly mortgage payments and eliminate private mortgage insurance (PMI) fees, thus saving you a lot of money in the long run. The sooner you get started, the larger of a down payment you’ll be able to save up for by the time you’re ready to buy.
Sitting down with a mortgage lender can be a great way to get started. Make an appointment for a pre-qualification, during which the lender will go over your finances and outline how large of a mortgage you currently qualify for. This is also a great time to determine what areas need improvements, such as your credit score or income. This process should not be confused with pre-approval, which helps you become a qualified buyer once you’re ready to shop for homes. Read our guide on pre-qualification to learn more about the process.
After sitting down with your lender, you should have a much better idea of how much house you can currently afford and what goals you need to meet to increase that budget. For example, let’s say that you currently qualify for a property worth $200,000, but you want to increase that budget to $350,000. Establishing this goal allows you to calculate exactly how much more you need to save up for a down payment.
Down Payment Calculator
Smartasset.com offers an easy-to-use calculator that provides down payment options based on your estimated purchase price. Continuing with the example from earlier, if you input a home value of $350,000, you will find that you’d need to save a minimum of $12,250 for a 3.5 percent down payment, or up to $70,000 for a 20 percent down payment.
The different down payment percentages shown in the results section are determined by the loan type. Although opting for a mortgage with a low down payment requirement might help you qualify for a house faster, anything lower than 20 percent typically results in higher mortgage payments and mortgage insurance fees. Be sure to keep these implications in mind when determining how much to save.
Determining a Monthly Savings Goal
Once you’ve determined your home buying timeline and down payment goal, you can calculate exactly how much money you need to save per month. Try not to think of a down payment as a lump sum—that might make you feel discouraged! Better to break down that big number into smaller monthly savings targets. You’ll be able to save mindfully without getting overwhelmed.
2. Cut Down Your Expenses
If you want to maximize your monthly savings goal, you should focus on cutting down your monthly expenses.
Here are a few ways you can cut down on your expenses:
Track your spending
Tighten up your budget
Save any windfalls
Tackle your debt
Find a cheaper place to live
Track Your Spending
There’s a good chance that, if you look at your bank statements for the past 12 months, you’ll be amazed by how much money you spent on “nonessential” goods and services (no judgment here). You probably didn’t realize that you spent so much money on coffee, or fast food, or a Target shopping spree.
You can rein in those unnecessary expenses by tracking your spending. Expense tracking is all about mindfulness—when you understand what you’re prone to waste money on, you’re more likely to stop yourself from making those purchases when you feel tempted.
Budgeting apps such as NerdWallet or Mint make it easy for users to link their bank accounts and organize their spending into categories.
You can also experiment with using your credit or debit card for every purchase for at least one month so that you can take a microscope to your spending habits.
Tighten Up Your Budget
After analyzing your spending, find ways to cut back on any extras or luxuries. You may find yourself making some sacrifices, but try to keep your eyes on the prize. (Canceling that premium music subscription will feel well worth it when you’re signing the documents for your new home.)
Here are a few ways you can tighten your budget:
Find Cheaper Alternatives: Purchase generic brands at the grocery store rather than premium brands.
Cut the Gym: There’s nothing wrong with living a healthy lifestyle, but gym memberships typically cost between $30 and $60 per month—at the minimum. Consider working out at home instead, opting for calisthenics or jogging.
Stick to the Basics: You have three basic survival needs—food, shelter, and utilities (what good is an apartment without running water?). Try creating a budget that prioritizes food, rent, and utility bills. Not only is this the most efficient type of budget, but it’ll also help you develop a healthier mindset that’s not so dependent on consumerism.
Save Any Windfalls
Instead of spending any windfalls you receive during the year, such as that annual bonus or tax return, put it in your savings account. Saving any large inflows of cash can help you accrue a down payment much faster. If you receive a raise and can cover your basic needs, take the extra amount in each payment, and have it automatically transfer into your savings account. Just because you received a raise doesn’t mean you need to increase your spending.
Tackle Your Debt
Student or credit card debt payments can eat up your budget, and accruing interest can sometimes make them feel impossible to pay off. Try implementing debt payoff strategies that will help you free up your budget to save up more toward your down payment. For example, learn how to implement the debt snowball method, one of the most popular strategies for paying off debt.
Find a Cheaper Place to Live
Since you plan to buy a house, it doesn’t make any sense to pay rent above the market. If you’re living in a luxury apartment or living in an expensive neighborhood where the location is not vital to your commute, you should consider finding a place with cheaper rent.
Rent is probably the highest monthly payment you have. Reduce it by a few hundred dollars, and you’ll have that much more money to contribute to your down payment.
3. Set Up Automatic Savings
One of the best ways to save money without really missing it is setting up an automatic savings account. You can work with your bank to set up a recurring transfer from your checking account to a separate savings account.
4. Pause Your Retirement Savings
If you’re already contributing money to an IRA or 401(k), you might consider pausing those contributions until you’ve purchased your new home. Use those contributions for your down payment, instead. Remember, the higher your down payment, the better your rates and terms on the mortgage. You’ll save more money in the long-term, and you can contribute that extra money to your retirement fund.
5. Creatively Earn Extra Money
You can only cut your expenses by so much. If you still don’t feel like you’re contributing enough money to your savings plan, even after you’ve cut your expenses and tightened your budget, then you might consider finding ways to earn more money.
First, ask yourself if it’s time to ask for that raise or promotion, or consider applying for a new job that offers a higher salary.
If those aren’t options for you, then consider taking on a part-time job or freelance work on the side. There are plenty of creative ways to earn extra money for your down payment, especially in today’s gig economy.
9 Creative Ways to Save for a House
Creating room in your budget so that you can start saving for a down payment can be challenging. Even after tightening up on spending and increasing savings, some will find that they still cannot save up enough each month. If you find yourself in this predicament, try some of these creative hacks to increase your cash flow opportunities.
1. Get Paid to Advertise
Are you savvy on social media? Consider going the “influencer” route and getting paid to promote products on your profile. You can advertise products on your blog, YouTube channel, or Instagram feed. You can even sell ad space on your website.
Of course, you’ll first need to develop a large following on your social media before attracting any companies that want to advertise. But if you’re already skilled at social media and influencing, then that shouldn’t be too much of a problem for you.
2. Sell Your Creations
Consider yourself the artistic type? If creativity is a hobby for you, you could make some extra money by selling your art. Some of the most creative side hustles include:
Fine Art: Good at making pottery, jewelry, or resin tables? Sell your art on Etsy or eBay. Handcrafted items are growing in popularity.
Music: If you’re a talented musician, you could make some extra money by booking a gig or two on the weekends. Coffee shops and bars are often looking for musicians to play for an hour or two. It’s easier to find these gigs if you’re living in a larger metropolitan area.
Writing: If you’re a writer, consider writing blogs for a website. Freelance websites like UpWork and ClearVoice can connect you with businesses that need writing work done. It’s helpful to know a thing or two about marketing, but sometimes these companies are only looking for a writer who’s knowledgeable about a specific subject or industry.
Who knows? Maybe you could turn this into your new career.
3. Sell Your Belongings
Even if you’re not a creator, you can still earn some extra cash by selling things. Just sell your belongings that you don’t need anymore. You can use so many different websites to sell your old stuff, like eBay, Craigslist, and OfferUp. You’ll make more money selling larger items—like that couch that you just can’t imagine being in your new home—but smaller sales can add up over a long period.
4. Become a Driver
Rideshare apps, like Uber and Lyft, are incredibly popular because you can make a significant amount of money by just giving people rides. The big perk is that you get to do it on your own schedule, making it a great side hustle.
5. Provide Care
If you have any experience in caregiving, you might be able to make some extra money by providing care to the elderly or people with disabilities. Even if you’re not a trained nurse, there are plenty of people who need assistance doing simple tasks, like shopping for groceries or cleaning their home. You might enjoy this type of side gig if you’re a people person, and it’ll feel good to help somebody in need.
6. Go on a Spending Diet
Earlier, we talked about the importance of only spending on the essentials: food, rent, and utilities. If you find that difficult to do, try out a short-term “spending diet.” For a pre-determined amount of time—let’s say a month or two—you’ll buy nothing outside the essentials, or you’ll stick to a minimal budget that you’ve prepared for yourself. The end date makes it a little easier to hit your goals, and you won’t be overwhelmed by the demands of it all. However, once you realize how much money you’re saving, you might find that you want to continue the frugal lifestyle indefinitely.
7. Seek Free Entertainment
Entertainment is expensive. Whether you enjoy watching movies, going to concerts, or reading books, our weekly entertainment tends to zap a large amount of money out of our wallets.
Try seeking free entertainment rather than paid entertainment. Go to community concerts. Read books from the local lending library. Cancel your Spotify subscription and listen to music on YouTube. You might find that you can still enjoy your favorite types of entertainment without spending so much money on them.
8. Switch Up Your Commute
Most Americans drive to work. Driving is expensive: car insurance, gasoline, and maintenance cost a ton of money.
Consider using public transit to commute to and from work, whether it’s the bus, subway, or light rail. If public transit isn’t an option for you, try and set up a carpool with one of your co-workers so you can cut down on gasoline costs and mileage. Or, ask your boss to give you one or two days of remote work from home (if you’re not already doing that, due to COVID).
You can save a significant amount of money by doing less driving, and you’ll also prolong the life of your car, which is probably your second largest investment after your house.
9. Change Up Your Housing
Earlier, we mentioned that you should consider finding a cheaper place to live if you’re saddled by high rent. You could always move to a cheaper apartment, but if you want to get really creative, you could always retrofit that old van into a home-on-wheels. Van life is a thing in 2021.
If you’re a remote worker, you might consider moving to a cheaper city, state, or even country to save money. Of course, moving incurs its own costs, so you’ll want to make sure that your move won’t cost you an arm and a leg and derail your savings plan.
Of course, you might consider getting a roommate or moving in with your parents (or your SO’s parents, for that matter). The latter option might sound like a dreadful idea to some people, but remember that the more money you save, the sooner you’ll buy that new home. Think long-term, not short-term. Giving up a little privacy for a couple of years can help you get more privacy than ever before when you move into a property that you own.
Other Expenses to Consider
In addition to the listing price of a house, you’ll also have to pay interest, property taxes, homeowner’s insurance, or even homeowner’s association fees. These extra expenses will significantly increase the final cost of your house. Calculate these costs and include them in your budgeting, so you’re not financially overwhelmed when it’s time to close.
These additional expenses give you good reason to pay down your debt before you purchase a house.
Paying Off Debt vs. Saving for a New House
It’s best to pay off most, if not all, of your debt before you save for a down payment. There are a few reasons for this:
Speed: After you’ve paid down your debt, you’ll have far more money to contribute to your savings plan every month.
Credit: Your credit may improve as you pay off debt, which can help you obtain a better mortgage rate.
Additional Costs: When you’re debt-free (except for your mortgage), you’ll be able to handle a larger monthly mortgage payment, which in turn gives you more options on which house you can buy.
How Long Does it Take to Save for a Down Payment?
According to this report, it can take roughly 6.5 years to build a 20 percent down payment for a median-value home. These calculations are based on an individual who makes the national median income and saves 20 percent of their income each month. But depending on your own financial situation, it could take you longer or shorter to reach your down payment goal.
You can beat the statistic by following the strategies listed here—they’ll help you reduce the amount of time it takes to reach your savings goal.
Once you break the entire process down into five simple steps, learning how to save for a house isn’t so daunting. Here they are: 1) Set up a down payment savings goal 2) Cut down your expenses 3) Set up automatic savings 4) Pause your retirement savings 5) Creatively earn extra money. Be sure to pay down your debt before you begin saving for a down payment. Paying off your debt will improve your credit and give you more money to contribute to your savings plan and your mortgage payments.
Want to learn how to take advantage of the current opportunities in the real estate market?
Whether you’re brand new to real estate or have closed a few deals, our new online real estate class covers everything you need to know to help you get started. Expert investor Than Merrill explains the best real estate strategies for today's real estate market to help get you on the path towards a better financial future.
Register for our FREE 1-Day Real Estate Webinar and get started educating yourself on how to invest in today’s real estate market!