By Ashley Steel
For many people, buying a home is a someday dream. Many first-time homebuyers aren’t ready yet; often, the funds aren’t there. But if buying a home is your someday dream, it’s time you start saving for a first home now.
Where Do I Start?
The first step is to outline your dream in concrete terms. When will you buy a home and how much will you need to save? Since the average price of a starter home varies, a general suggestion provided by lending giant Freddie Mac is that a person can afford roughly 2.5 times their annual income.
For the sake of this article, let’s pretend that you’re buying a home in five years at a salary of $50,000. This would make your target home price $125,000 (salary X 2.5), requiring roughly a 10-percent down payment of $12,500. From there, you work backward, says John Bustrum, CEO and founder of My 403b Coach, a financial coaching institution. If you need $12,500 over the course of 60 months, that brings your monthly savings goal to $209. “Stay the course,” says Bustrum, “and the goals will be yours.”
Tip: Keep in mind that a starter home is not the time to play guessing games with your salary. Do not assume a raise in five years and plan for a modest total budget so that you’re not living on the edge every month, says Bustrum.
How to Save
There are a variety of ways to save money for a home purchase. Not all options will be compatible with your lifestyle needs, but it’s important to start considering those that do. Here are some ways to save for your first home:
Tax refunds can be an exciting source of extra funds. In years past, perhaps you put this money toward a shopping spree or an expensive dinner, but when saving for a new home, Bustrum recommends applying a refund toward your house fund. “Every dollar counts toward your goal,” he says.
While a savings account is a great and safe place to store money, they yield very little in the way of interest. Putting your money in a high-yield savings account like a CD or money market can produce greater funds in the short term. But Bustrum warns avoiding higher-yield market exposure, where you risk losing a substantial amount of your savings right before you need them.
“The good news,” says Bustrum “is when you have a steady income, most likely your income will rise with inflation every year, enabling you to save more.” Should you get a raise, Bustrum recommends putting away the extra into your home savings account where you won’t miss it and you have the chance to shorten the savings term.
Maxing out your 401K contributions is another great way to save for a home, says Hillary Legrain, vice president of First Savings Mortgage Corporation. “You can withdraw from your retirement account with no penalty for a home purchase and, if your company provides matching contributions, then that will give you even more funds to work with.” This strategy can also reduce your gross taxable income.
An easy, time-tested method, you can also seek financial aid via a roommate, says Kyle Gonnell, marketing manager of iGrad, a financial literacy program for students. Relatives and friends can bring down the cost of rent, groceries and even gas. Other basic options include downgrading to a smaller apartment, moving closer to work or taking advantage of public transportation.
The task of saving for a new home may be daunting, but developing a strategy to span the years until your someday can make saving for a down payment manageable. The dream of homeownership can be yours, so start saving today!
For more helpful info on saving for your first home, check out our New Home Guide article: How to Start Saving For Your First Home.