Home Buying Series: How to Save Quickly for Down Payment
Home-ownership is a goal that many millennials aspire to reach. In this series, I want to go through a step by step process for saving up for a down payment, the costs involved in purchasing a home, the new mortgage rules and what I think that means for millennials and budgeting once a homeowner.
For those that have followed my blog in the past you know that my husband and I are renters and enjoy renting. It fits with our current lifestyle and future goals. Having said that, I do believe that having a goal to own a home is good if that is one of your goals and if done correctly can be a great experience. As a millennial, I struggled with a lot of the same concerns 70% or more millennials do today. Some of the issues I faced included:
- Significant student loan debt. Having two degrees (undergrad and graduate) my husband and I amassed $120,000 of student loan debt over the course of our post-secondary studies.
- Obtaining gainful employment after graduation. Living in the most populated province in all of Canada, competition was high, the economy was hurting (we completed our undergrad in 2009) and I was unsure about my future career and job prospects.
- Rising house prices. The crash of 2008-2009 did not affect the housing market as it did in other parts of the world. Price of homes continued to rise.
If you are like me, you can probably relate to one, if not all of the points above. However, from my experience, once you graduate, get a decent paying job and a handle on your finances, the idea of home ownership becomes more attainable. Here are a few tips on how to save a substantial amount of money over a short period of time:
Don’t live like a student, live well below your means
A small percentage of students are financially responsible when they are in school. They lived on a budget, watched there spending and maybe even saved while in school. However, for the rest of us that used student loans for the ‘college experience’ know what I am talking about. We didn’t have a budget while in school, never watched our spending and focused more on the college experience than on the bottom line. Even though we received a good education and learned a lot from our degrees, we were not mindful or aware of the consequences our actions would have on our finances. This could be due to lack of financial education in school or from our parents, but there is no point in blaming anyone now. Don’t live like a student, live well below your means.
Your objective is to save, save, save. The best way to do that is to live well below your means. The only way you can do that is to develop a budget and know where your money is going. Once you know where your money is going, you can redirect it to where you really want it to go, like a savings account for a down payment.
Two areas where you should still consider living like a student include:
- As we get older the idea of renting a room becomes less appealing and we eventually want our own space. However, if your objective is to buy a home, then cutting down on housing costs is critical.
- For example, if you can afford a $1,000/month one-bedroom apartment with your new job, rent a $500/month room instead and pay yourself the other $500 towards your down payment.
- If you are in a relationship, opt to rent a small one bedroom instead of a large two bed room. Less space means less need to decorate around the home. The savings you get from renting a smaller unit, put towards a down payment.
- The recommended percentage financial experts suggest when spending money on housing is 35%-45% of take home pay depending on who you ask. If you are still a renter try to reduce this amount to 20% or less, put the difference towards your down payment.
- Take the public transit if you live close to work. If you don’t and need and a vehicle to get too and from work, buy a used car. You can get a used car in good condition for around $5,000. Financing a vehicle will draw from your income to cover interest expenses, plus you run the added risk of figuring out what to do if you lose your job before the car is paid off. The objective is to limit the number of lenders you need to pay back each month. You probably already have student loans to deal with, why add on another debtor. My husband and I bought our vehicle for $3,000 at a public car auction. We’ve had our Mazda for 3 years now and it works great!
Use your tax refunds wisely
As a full time post-secondary student, you would have amassed a sizable amount of tuition credits while in school. Whether you took out a loan, received financial assistance from your parents, worked, obtained scholarships or a combination of these, you would still have tuition credits at your disposal.
Once you start making an income, these credits translate into a sizable tax refund for the next few years, be sure to use this money wisely. Avoid using these monies for vacations, entertainment or other discretionary spending. Here are a few ideas for using your tax refund effectively:
- Use it to pay down student loan debt. If you hate debt like me, this is a great way to get some traction on eliminating your student loan debt. The added time and money you would save can be redirected to other financial goals like a down payment. For example: I used my three $7,000 tax refunds to pay off my student loan debt quicker. Being debt free, I am now able to put 30%-40% of our household income towards investing and retirement.
- Use it to save money for a down payment. If you prefer to save money then pay off debt, or you graduated without debt, saving your refunds for a down payment is a great way to get into your dream home that much quicker.
- Start your emergency fund. If you are living on your own, then an emergency fund is a must. If your car breaks down, if you lose your job or some other unexpected expense, you will be glad to have one. We have a $15,000 emergency fund that we will only use in the event of a job loss.
Move for gainful employment
This is probably one of the harder things to do. To relocate after graduation and leave your parents and friends in search of better opportunities. I am not discounting the importance of family and friend support. However, if where you currently live is limiting your job prospects either due to a weak economy, high competition or maybe they don’t have the jobs you seek for your industry, then it is time to move. My husband and I moved to Alberta 5 years for better employment and even though the economy is not doing so well right now, in the long term, the prospects are still more promising to us then living in a highly dense and competitive market like Ontario. The price we pay for this decision is that we have to spend more money on air fare to see my sister and his family in Toronto which we gladly do with the peace of mind of knowing that we are debt free and are saving for the future. Here are other benefits to leaving the nest, whether you live in the same city or relocate to a place outside the city:
- Forced adulting. When you are responsible for 100% of the expenses, it forces you to grow up and be more mindful of the decisions you make around money and your future career.
- Mindful budgeting. You gain an appreciation of how much things really cost when you are burdened with 100% of the cost. This may make you more mindful when deciding how much to spend on your needs and wants.
- Changing perspective. Living on your own may allow you to gain perspective on why people choose certain lifestyles than what you might have been accustomed to when living with your parents.
Pay Yourself First
Paying yourself first should be a life long objective when financial planning. By having the mentality of paying yourself first and taking care of you, you actually become better prepared to take care of other obligations and also help other people. Start with a savings rate of 15%, then strive to go as high as 30% or more. Here are other benefits to paying yourself first:
- You know your accounting for your financial future. So many people live paycheque to paycheque only meeting their immediate needs and wants. Pay yourself first ensures that future needs and wants are taken care of as well.
- You may be more likely to spend within your means. When you save first, you have less to spend for the immediate future, that is not a bad thing. This may lead to spending within your means and ensuring that you are not taking on more financial obligations than you can handle.
- You can spend the guilt free. Once you save for your future self, you can spend the remainder of your money guilt free. As long as you spend within your income and avoid unnecessary debt, you spend without worrying about the future.
Cut back on expenses by paying yourself weekly
Regardless of your pay cycle, strive to pay yourself weekly putting the difference into a basic savings account and transferring it back to chequing when the new week begins. This is what I currently do and it has significantly helped me reduce my grocery bill by 25% to 30% on any given week.
By living on a budget and paying ourselves weekly we tend to modify our spending habits knowing this we have less money to work with. We also get the added benefit of getting paid each week. Additional benefits we get from paying ourselves weekly include:
- Becoming more mindful shoppers as we have half of what we are use to spending
- We reduce the likelihood of running out of money before the end of our pay period
- Our discretionary spending is inline with our income. For example, we reduce the likelihood of blowing our entire eating out money on one weekend.
- The added savings we get we can put towards other expenses or savings goals
If you want to save for a down payment or amass a lot of money in a short period of time these 5 tips can give you the traction you need to make a substantial dent towards your financial goal. It won’t be easy and from my own experience it takes dedication and discipline but it can be done.