Buying a home is the American Dream and the dream of many people around the world. But, housing is costly and a bank won't give you a loan to make the purchase if you don't have some money to put in, a down payment.
Saving for a substantial down payment isn't easy - it takes persistence and focus, but the payoff is a home to call your own or an investment property that may generate income for you and your family for years to come.
1. Figure out how much of a down payment you'll need
The first step is always getting to our down payment goal - if you don't know how much you're going to need to save, you'll have a tough time getting there.
A lot of people start right away before doing a minimal amount of planning/prep work that's needed to articulate a goal properly. This occurs both in finance and in other aspects of life. It's not good to start things without goals - make sure to take the time to set an appropriate goal before you begin on any complex or challenging journey.
So, how do you figure out how much of a down payment you'll need? It's pretty easy with some basic math:
2. Figure out how much you'll need to save every month from reaching your down payment goal
Once you have the estimated/projected down payment number from Step 1, simply determine when you'd like to buy your house and calculate how much money you'll need to save each month from reaching that goal.
For example, let's us the $10,000 down payment from Step 1. If you want to buy your house in 2 years, you'd simply divide $10,000 by 24 months to get $416.67 per month. This is obviously a relatively small down payment goal - yours will probably be bigger, but simple round numbers are good for examples.
3. Decide where you'll park the savings until it is time to make your house purchase and put the actual down payment
The final planning step following Steps 1 and 2 is to determine where you'll keep your money. For the vast majority of cases, your money should be kept safe and sound in a savings account or some sort of liquid money market account. This is because most people will be looking to buy a house within a few years - at this time horizon, investing in stocks, bonds, commodities, crypto, or almost any other alternative asset is too risky.
If your home purchase goal is farther out, more options might be on the table. Say you want to buy a home in 5 years. In this case, you could expose your savings to some risk - you might be able to put it into a very safe and low-risk ETF or mutual fund that holds a large portion of the fund in low-risk securities or cash.
Another critical consideration is to store the money separately from other accounts. You'll want your down payment account to be separate and only for the down payment, nothing else. Don't mix it with your emergency fund, your kids' college funds, or your general wealth-building portfolio. By keeping it separate, you'll help to mitigate the risk of pulling that money out for other things (but not entirely).
4. Start saving!
To save more money, you'll need to do two key things:
Saving money is hard - most people are terrible at it, and it doesn't seem to be something most human minds are good at. However, it's possible to save a lot and enjoy doing so. The key is to find areas in your budget that can be cut out (e.g., restaurants and expensive memberships) while maintaining the discipline to actually put the saved money into saving (instead of spending it elsewhere).
To earn more money, there are many options in modern economics. Today the world has many side hustle opportunities available, most right from your smartphone. It'll take some energy and force you to spend some time away from friends and family, but if you do it for a short period of time, it can be well worth it. Six months to a year of intense side work can change your financial picture - it's not well paid, and it's not easy, but if you can muster the energy and the time, there's room to make some decent extra cash.
Extra cash is very beneficial to your down payment goals. Relying only on your current income might be enough, but getting some extra money every month can skyrocket your savings goals. For example, if you're able to save $1000 a month but also are able to side hustle and make another $1000 per month, you'll have cut your time to house purchase in half!
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