Five Realistic Strategies to Help You Save for a Down Payment
Written by Matt Crisafulli, EA, CFP®
This is part 1 of a 3-part series on readying yourself to purchase real estate.
Despite what you may have heard about the desire for home ownership being on the decline, saving for a down-payment on a home is consistently one of the top short-term goals for our clients. However, without a doubt, the most common barrier to entry into the real estate market is the inability to save for that initial down-payment; rents are becoming increasingly more expensive, which makes it harder and harder to save for that first home purchase. But what can you do? Instead of giving up on that dream of buying a home, use these five strategies to get closer to that dream property, and start building equity in your own home, instead of building equity for someone else.
1. Automate Your Savings.
The saying “out of sight, out of mind” is your best friend when saving for a big purchase. The less you have to think about saving to make it happen, the better off you will be.
Open a separate savings account (not at your primary bank) and set up automatic transfers between your primary checking account and the new savings account. The automation of this process will stop you from coming up with excuses to spend the down payment money month over month. Making sure you choose a bank other than your primary bank, will make it that much harder to transfer the funds back into your primary checking account.
I recommend a high-yield, online savings account for the best interest rate. In the current environment, it won’t be a lot of interest, but your money will be safe, and you won’t be tempted to spend it. Google “high yield online savings” for a list of banks with the best rates.
TIP: If buying a home is a short-term goal for you, we usually do not recommend clients invest that savings in the stock market in hopes of having it grow to increase their total down payment. Markets are volatile, and the benefits of investing do not outweigh the risks and costs of it for such a short period of time.
2. Defer Excess Income.
To help you reach that savings goal a little faster, defer your raises and bonuses to your new savings account. Receive a $500 bonus? Straight to the down payment fund. Get a 3% raise? Increase your monthly savings by 3% too. If you were comfortable living on your old salary, take your annual raise and/or bonuses and use those to super charge your savings. The sacrifice is only temporary, and the payoff will be well worth it.
3. Reallocate Debt Payments to Savings.
Most people have some type of debt they are paying back – an auto loan, a credit card, a personal loan, etc. – that is inhibiting their ability to save. Once one/some of those debts are paid back, reallocate those monthly payments into the down payment fund. For example, once the credit card balances are paid off, take the money that you were using for that monthly payment, and add that to the monthly savings. The extra savings will really add up over time!
4. Review Expenses to See Where You Can Cut Back.
We don’t like to admit it, but most of us overspend in at least a few areas of our lives, such as dining out, shopping, or entertainment. Review your current spending to see if there are any areas you can cut back to help you achieve your goal of homeownership a little sooner. I guarantee the pain of cutting back for a short period of time will pale in comparison to the joy of buying that first property.
5. Get a “side hustle.”
When all else fails, increasing your monthly income will help you reach your savings goals. Pick up extra shifts. Volunteer for overtime. Do work for your friends. Sell your old things on eBay. The possibilities are endless! The important thing is that the excess income gets saved month over month. The side hustle doesn’t have to be a different, unrelated job, but rather just a way to increase your income beyond your regular 9 to 5 job.
Not every strategy will be right for everyone. The important thing to consider is to be patient with your savings timeline and realistic with your savings goals. With diligence and a concrete strategy to reach your financial goals, you will have the ability to make the dream of homeownership a reality.
Matt Crisafulli, EA, CFP® is a Partner at ACap Asset Management as well as a UCLA Alumnus. He is a Fee-Only CERTIFIED FINANCIAL PLANNER ™ and an Enrolled Agent licensed by the IRS.
ACap Asset Management, Inc. is a “Fee-Only” investment management firm headquartered in Los Angeles, CA specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.