A home is a long-term investment that can appreciate and grow your equity. Saving for homeownership can be one of the best financial decisions you can make. The freedom, privacy, and the joy of owning a home make it worth saving.
But if you’re saving for a home, you need a sound financial plan and immense discipline. You need to prepare well for the high upfront costs and the potential maintenance costs.
The honest truth is you can do it, and it’s much easier than you may think. Just follow these seven steps to finance your next home!
1. Determine How Much You Need to Save
How much you must save for a home depends on your income. You must save enough to meet your goal while paying recurring expenses. As a general rule, your housing expense should not exceed 30% of your earnings which helps to ensure that other costs don’t overburden you.
You can save a higher percentage of your gross income, especially if you’re not into much debt. According to the Federal Housing Association, you can spend as much as 41% of your income on housing.
A mortgage lender has more experience to tell on the right saving amounts for a home. They may also be more realistic on the mortgage you can afford and the saving timeliness.
Make sure you’re targeting a down payment of 20% or more. While this isn’t a market rule, it will enable you to get a better housing deal. You may pay less private mortgage insurance and lesser rates for the entire mortgage.
2. Set a Budget
The next important step is to figure out where more house-buying finances will come from. Fixed savings may take you long to reach your dream. You need to know where your money goes to and if some expenditures are necessary.
Analyze your earnings and expenses to establish the exact use of your money. Identify the mandatory expenses like utilities and how much you spend on each.
Be sure to check if you’ve been overspending on non-necessities. Getting rid of certain expenses like entertainment or subscriptions can free up some cash.
After that, set a budget with savings at the top as one of your expenses. You should pump the expenditure on non-necessities into the savings for a home. Remember, this group of savings adds to the 30% set aside earlier for savings for a home.
3. Allow Flexibility into Your Savings Plan
No matter the importance of a saving goal, it would help to allow some flexibility. Emergencies may pop up and cause unexpected pressure on your finances. You may need to repair your broken car, cover an urgent medical issue, or even lose your job.
Set an emergency fund to avoid spending on your targeted home finances. This ensures preparation for some unpredictable expenses.
How do you avoid the uncertainties that come with pooled family savings for a home? Contact this family law lawyer to learn about your rights before saving for a family home.
4. Downsize and Spend Less When Saving for a Home
Saving for a home can be a painful process before the reward comes. You may need to overhaul your lifestyle to grow the savings. This involves reducing spending on necessities or downsizing.
You already know what expenses to avoid since you have a budget in place. The next step is to figure out if there are utilities you can cut back on. Reduce expenditures by adopting efficient measures in your rental home.
Make small changes that yield big results such as using less water or energy-saving bulbs. Switch off power-intensive electronics to reduce your power bills.
Some people may move into a cheaper house to save on rent. You may also sell some of your property to boost your home buying finances.
5. Figure Out How You’ll Increase Your Income
Sometimes your income may not be enough for expenses, let alone home financing. Meaning, apart from downsizing, you need to make more money to save more for house buying. Think about how you use your free time and weekends.
Can you freelance part-time? You may join the freelancing industry to explore one of your skills. You can become a part-time writer, web designer, or customer care representative.
Even the gig economy is growing fast and has several non-skilled jobs on offer. You can babysit, pet walk, or drive for ridesharing companies such as Uber. Get creative with ways to make extra income on the side.
6. Automate Your Savings
Studies show 40% of Americans haven’t saved enough to cover an emergency of $400. The temptation to spend makes saving for a home too challenging. You may face thousands of targeted ads that can easily distract you from your savings goal.
But there’s hope even for the most undisciplined saver. With automated savings, you can save consistently and avoid misusing the growing savings. Here are some tips to help you automate your savings:
- Apply for automated savings to have your savings deducted from your paycheck
- Save your tax refund
- Automate the payment of bills to avoid late payment penalties
- Let your employer deposit your savings for a home to a different deposit account or request a recurrent deduction on your payday
Adding automation to your savings process takes the extra pressure and work out of getting to your financial goals.
7. Improve Your Skills to Earn Higher Pay
If your income is low, a tighter budget may strain you or leave you with too little savings for a home. In that case, your best bet to house-buying may be through a better job.
Unfortunately, sometimes you may lack the skills to land a better job. And this is where career advancement or growing skills can be handy.
Target to improve your finances by becoming more valuable in your industry. Let customers and your boss see your value and indispensability.
You can also enhance your skills through reading or online courses. Make sure you’re focusing on the most demanded skills in your industry. One year of serious learning can land you a better paying job or pack you with rare side-business skills.
Start Saving for Your Home Today!
The hefty sums of savings required to finance a home shouldn’t put you off your goal. Saving for a home is more about sacrifice. Commit yourself to a saving plan and let no temptation distract you.
Use the tips in this article to reach your goal faster and more comfortable. We discuss other financial topics to help you with making big life moves. For more of this type of content, check out articles on our blog.