Buying a home is one of the biggest investments you’ll ever make. And while a mortgage is obviously a large financial commitment, before you even get to your mortgage, you’ll be required to come up with a down payment.
Typically, lenders want buyers to contribute a down payment of 20% of the purchase price of the home. So, if a home is on the market for $500,000, most lenders want a down payment of at least $100,000. Being able to contribute the down payment shows lenders you’re financially secure and can take on the cost and commitment of a 15 or 30 year mortgage.
But if you’re like most people, you probably don’t have $100,000 at your disposal and will need to save for your down payment. Coming up with that large of a sum can be a challenge, but with the right strategy, you’ll be able to save your down payment much more quickly and easily than you might think.
Here are four tips to grow your savings account, get your down payment and get into a new home.
1. Write everything down
Before you can start padding your savings account and adding to your down payment fund, you need to get a clear idea of exactly where your money is going. For one month, write down everything you spend: everything from your monthly bills, like electricity and internet, to your variable expenses, like entertainment or eating out at restaurants. You can keep track of this manually (like in a notebook), in a spreadsheet, or through a budgeting app.
Writing down all of your expenses can be an eye-opening experience; most people underestimate the amount of money they’re spending in certain areas and having everything on paper will allow you to look at your spending habits objectively and identify areas where you can cut back and save.
2. Create a budget
Once you have all of your expenses written down, it’s time to create a budget. While some bills are unavoidable, like living expenses, you’ll definitely notice areas that will allow you to cut back. Spending $50 a month on lattes at the coffee shop? Make a commitment to brew your coffee at home and put that money in your savings. Have an expensive gym membership? Consider downgrading to a more affordable option or take advantage of free exercise options, like running in a local park. Spending a lot money on gas? Look into public transportation options.
Once you’ve identified areas to cut back, create a final budget and then stick to it. Use a budget monitoring app like Mint to help you keep track of how close you are to hitting your budget limits; the app will send you notifications when you approach your limits in each of your predetermined budgetary categories.
3. Save it before you’ll miss it
If you rely on your will to save money, you’ll likely find it challenging; it can be hard to motivate yourself to transfer money to your savings account when there are things you want to spend money on. To avoid spending more money than you mean to due to lack of willpower, save your money before you have the opportunity to miss it by setting up automatic transfers into your savings accounts.
Determine how much you want to save each month and then set up automatic transfers to ensure that amount makes it into your account. You can set up one transfer or multiple transfers, but set each to occur immediately following a payday; if you transfer the money from your checking to your savings immediately, you won’t have the opportunity to change your mind or accidentally spend more than you planned.
4. Celebrate milestones
Saving enough money to make a down payment on a home is a huge undertaking, and it’s likely to take quite a bit of time. And when it takes months or years to save, it’s easy to lose sight of your end goal and get discouraged. That’s why it’s important to celebrate savings milestones along the way to keep yourself motivated and committed to reach your goals.
Take your larger savings goal and break it down into smaller milestones, like first $1000 saved or 3 months without breaking your budget. Then, make sure to acknowledge and celebrate each milestone along the way.
Just don’t celebrate by spending more money; if you celebrate hitting your savings goals by breaking your savings commitment, you’ll do more harm than good. Instead, look for free or inexpensive ways to celebrate, like having a picnic with your family in the park.
With these four tips, you’ll be well on your way to getting the 20% you need to buy your next home. All you need to do is commit to your goal, stick to your budget and keep building your savings.