When you buy a home, it’s much more than simply a financial transaction. Your home is where you live and raise your family. As a result, once you decide you want to buy a home, you might feel some urgency about it. That can even be truer if you have the income to pay the mortgage but not the down payment to get the loan.
If this describes you and you are really willing to go outside your comfort zone, I’m going to tell you exactly how to raise this money. We’re going to use $50,000 in our example but it could be half or twice that amount. Just scale this to your own unique situation. Let’s get crack-a-lackin’. But a side note before we get started, saving money starts with having the right bank account! I can’t tell you how many times, and how many people, I have advised to ditch their stodgy brick-and-mortar bank account and open an online account! Higher interest and lower fees is vital to reaching your goal sooner than later! Check out Discover Bank High Yield Savings Accounts if you want to jump start those goals.
- Total Commitment From Your Spouse
You might have a burning financial desire to raise this money. But if your spouse couldn’t care less, you’re going to get frustrated and angry. Oh yes….and you’ll find it almost impossible to achieve your goal.
Commitment is super important. Chances are good you will have to undertake significant changes in your spending, saving and other financial habits to reach your goal. If you are the only one willing to sign on, you may find yourself bailing out water from the ship while your partner drills holes in the boat. No Bueno.
Don’t do a thing until you and your honey bunny are 100% on the same page and both willing to roll up your sleeves in order to complete this mission.
- Determine Monthly Goals
If we assume that you need to save $50,000 in two years, you will need to save $2,084 a month. Yes….we need to be that exact. And it’s critical to break this down to a monthly amount. Most people don’t have a way of tracking their progress and effort so they have no way of navigating their success. Using a FREE service like Personal Capital allows you to hook up all of your current bank and investment accounts (including 401k and IRA’s) and then creates a combined picture of your savings and net worth which then allows you to see how close you are to reaching your desired goal each and every day.
$50,000 may sound like an impossibly difficult achievement. But $2084 is an easier pill to swallow. Remember, every great journey begins with one step. In our endeavor, you just need to make 2084 steps each month in order to hit your target. That lower monthly number probably feels a lot more doable. If not, don’t worry. You have many more options than you might otherwise think.
- Identify Resources
Now is the time you need to brainstorm together with your spouse or partner and really use your imagination. Think of all the ways you can accumulate $2084 each month. Here are some ideas to help you kick start your process:
Cut spending (duh)
Side job (double duh)
Suspend retirement plan contributions (more on that in a second)
Refinance and reduce the cost of debt (interesting)
These are just some of the ideas to help you put aside $2084 each month but let’s take a closer look. The low hanging fruit is spending but you already know that. Go through every expense you incurred over the last 3 months – and I mean everything- and highlight those items you could have cut without putting yourself in mortal danger or become homeless. If you get aggressive with your highlighter, you’ll see that there is usually much more that you can cut than you might otherwise think at first.
By the way, the reason I suggest you looking over the last 3 months is because many bills come in quarterly or even semi-annually. Make sure you understand how you spend money. The only way to do that is to look at your spending routines over time. For argument’s sake, let’s say you find $500 a month you can cut. Super. Let’s go on to side work.
I love the idea of creating multiple streams of income. And if you start working on this now, it can yield benefits long after you buy your home. If you start a little side gig on the weekends for example, that job could grow over time to be a huge contributor to your net worth down the line. It may take time to get something going that provides a little cash flow but it is a worthwhile pursuit. Let’s say for our example, your side business can generate $500 a month to start and build from there.
What should you do if your business won’t create any extra cash right now? If that’s the situation you are in, you have two options. First, you can delay launching the business and get a second job or you can start building your business and encourage your spouse to get a side job. It shouldn’t be all that tough to do a little work and find an extra $500 in monthly income. Either way, if we take the savings and the extra income, we’ve reached $1000 without much trouble. So far, so good – and we haven’t even scratched the surface of our resources.
Let’s talk about debt. If you carry expensive credit card debt or student loans you might be able to refinance that burden and free up some much needed cash to dump into the down payment fund. Let’s say you owe $15,000 in credit card debt and you are paying 12% on this money. Well…..if you refinance this debt you might be able to lower your cost to 6% or lower. If you do, you’ll save $900 a year or $75 a month. It’s not going to make or break you, but it is a helpful push in the right direction.
Last, consider your retirement plan contributions. Normally, pundits suggest that you make retirement contributions no matter what. I normally agree with this advice but there are situations where convention wisdom falls on its face. This could be one of those instances.
Remember, your goal is to save $50,000 in two years to buy your house. That $2084 savings is your greatest immediate financial goal. If you can achieve it by cutting your spending and/or working a side job, great. But if you also need to stop making contributions to your retirement plan for a short period of time, that isn’t the end of the world.
As long as we’re talking about resources, keep in mind that your credit score is a very important one. That’s because the higher your score the lower your mortgage rate will be. Check your score and your report. If everything is clean, no problem. If you have a rough spots, fix them yourself or outsource the project. But whatever you do, don’t neglect this.
The cool thing is, since you have a 2 year plan to raise the cash for the down payment, you have that same period of time to work on your credit history. If you do a good job of improving your score and keeping it as high as possible, you may get a lower rate and better terms. That might even translate into needing less money for your down payment and buying your property much faster.
- Automate Everything
Now that you are clear on your monthly savings goals and have identified the resources available, it’s time to automate as much of this as possible. Go down to the bank and tell them to draft $2084 out of your bank account each month and deposit that money in a special savings account that you’ll use to accumulate your $50,000 over the next 24 months.
When you do this, the savings will happen without you doing a darn thing. That means you won’t have to worry about procrastination anymore.
And while you’re at it, I suggest that you put all your bills on auto pay as well. This is important because it forces you to think about spending rather than how to come up with money to pay your bills. It’s a subtle shift – but critical.
Often people who don’t take this extra step just invade their down payment account when it’s time to pay bills. That defeats the purpose. The idea is to spend less so you can save more. If you know that your bills are going to be paid automatically, you have no choice but to stay alert and keep those expenses in check.
- Evaluate and Adjust
If you implement each of these ideas you should have no trouble saving $50,000 in two years. Of course, you’re only human and life happens. Sometimes, unexpected events unfold that drive even the best laid plans off track. Don’t worry about it. You are doing your best and that’s all anyone can expect of you.
If for some reason you are unable to keep up on all these tasks, just take a deep breath and re-adjust. Are you going to have to work a little longer before you get to $50,000? So what? Are you going to have to buy a smaller place because you’ve “only” saved $40,000? Who cares? That’s fantastic progress and it’s a heck of a lot better than doing nothing.
Two years may seem like a long time but believe me it comes and goes quickly. You can use that time by shifting the way you live, save and spend and have a meaningful result; you’ll have the money you need to buy that house you’ve been dreaming of.
Are you in? What other tactics can people take in order to achieve this goal?