Having big goals when it comes to your money can help you stay focused and make small sacrifices now for a bigger reward in the future. Few financial goals are bigger and more sought after than purchasing a home. It can feel overwhelming at the beginning of such a lofty goal. However, there are a number of strategies out there that can help you organize your savings plan and start piling up cash for a house.
Automatically fund a ‘Dream Account’ to save for a house
Author and financial expert David Bach recommends setting up a ‘Dream Account’ to help you save toward goals such as buying a house. He recommends giving the account a name to help you pause and think before you take money out of it for other things. If you have an account set aside specifically for saving it can help you ask yourself, ‘Is this purchase worth slowing down my house saving progress?’ Making purchasing decisions in light of your bigger goals can help you get spending under control and have more space in your budget to save.
The foundation of Bach’s teachings revolve around setting up your financial life to be automatic. This means getting your paycheck deposited automatically, paying bills automatically, and saving automatically. The idea behind it – especially when it comes to savings – is that it takes away the need to decide to save each month. For example, if you set up an account dedicated to saving for your home and have 3 percent of your paycheck automatically put into that account, there will come a time when you don’t really notice that 3 percent leaving. You do not have to decide each month if you can ‘afford’ to save that money. It can be extremely tempting to skip a month (or several) of saving if you are faced with the decision each time. When the saving is automatic and consistent you adjust your lifestyle instead.
You can also set up your savings amount to increase automatically and incrementally. For example, some investment accounts allow you to automatically increase your savings rate by a predetermined amount and time. You can set up your account to increase the savings rate by 1 percent each year until it reaches 10 percent of your income. The increase is small enough that it will not feel like a major change. This allows you to adjust your lifestyle incrementally while increasing your savings rate. When you make saving for a house automatic it helps you stay consistent which, over time, is one of the most important factors for building wealth.
Free up your income so you have more money to save
Financial expert Dave Ramsey takes a different approach to saving for a house than many others in the financial world. His stance is that you will have the ability to save aggressively toward your goal of buying a house once you pay off all consumer debt. He is known for saying, ‘Your greatest wealth-building tool is your income.’ In other words, the more of your income you get to keep, the more money you will have to put toward other goals. Dave Ramsey breaks his plan down to seven steps. If you do not currently have a house, Ramsey suggests waiting until you are finished with the first three steps before you consider making a purchase.
The first step is to save $1,000 as a starter emergency fund, step two is to pay off all of your debt including credit cards, car loans, student loans, and personal loans, step three is to save a fully funded emergency fund which Ramsey considers three to six months of your expenses. If you want to purchase a house after completing those three steps, he recommends saving for a downpayment after step three but before starting step four which is saving for retirement. Ideally you would save up enough to pay cash for a house but the minimum recommendation for this plan is to save a downpayment of 20 percent of the purchase price.
If you are in a place where you have a lot of debt, the Dave Ramsey plan may seem like it will take a long time. The process he outlines for paying off your debt is called the ‘debt snowball’. Basically, you put every extra dollar you can find toward your lowest debt, once that debt is paid off, you take the amount of that payment and apply it to your next lowest debt. Over time, the amount you are paying toward debt will snowball and help you make major strides. Taking this approach will help you get into a position where you can confidently make a home purchase because you are no longer drowning in debt payments.
Save your money in an account that will provide a good return
For many people, the obvious place to keep money is a standard savings account. When it comes to saving for a home, however, you are leaving money on the table if you keep your savings in a low interest account. Interest rates are really low right now for mortgages which is great for people who are ready to make a purchase. However, if your goal is to save for a house, those low interest rates mean that you will not earn much on your savings. Options to potentially earn more money than you will find in a standard savings account include putting your money in a money market account or CD, investing it in a non-retirement investment account, or taking advantage of offers that provide cash bonuses.
Money market accounts and CDs (certificate of deposit) are savings vehicles that can offer higher interest rates than traditional savings accounts. The terms for these accounts are more restrictive – money market accounts only allow a small number of transactions each month and CDs require you to leave your money alone for an allotted amount of time – but if you can handle the restrictions you may be able to earn more on the money you save for your house. Investing in a non-retirement investment account can help you earn much more on your money than you would in a savings account. The catch is that the stock market can be volatile. If you do not have an extended period of time to allow your money to grow and overcome any dips in the market then you should go with a more conservative savings plan. Another option for maximizing your savings is to choose an account that offers cash bonuses. Some accounts give you a bonus after you make a certain number of deposits while others reward you for referring friends.
Give up space now for more space in the future
A long-term goal like buying a house usually requires some short-term sacrifices. If you are in a place where you want to save money quickly toward your goal of buying a house, take a look at your current living situation and consider finding a roommate. Do you live alone in an apartment or rental house? How much is your monthly rent? If you currently pay $1,000 per month in rent, you can cut that in half and save $500 per month toward purchasing a house if you are willing to get a roommate. If you also split utilities your savings rate can increase even more. It may not be ideal to get a roommate but it can significantly speed up your savings rate and help you get into a house more quickly.
Find a job that includes housing costs to save more quickly
Some jobs cover housing costs as an incentive to employees. Housing is, for the majority of people, the most expensive line item in the budget. If you can eliminate those costs for a time it will free up money to save for your future house. Options include being a live-in nanny/housekeeper, being a resident advisor for a program at a university, living abroad for a time to teach English, joining the armed forces, managing an apartment complex and living in one of the units rent-free, or taking a position that includes a housing stipend. There are more options out there if you are willing to explore and be flexible.
There are multiple ways to start saving money for your goal of buying a house. Choose the one or combination of methods that work best for you. You can set-it-and-forget-it or keep a close eye on every dollar you spend. The method you choose does not matter nearly as much as your dedication to being consistent with your money saving efforts over time.
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