So you’ve decided to start and save for a home down payment. That’s a great first step in jumping into financial adulthood! Especially since millennials are expected to form 20 million new households by 2025.
In this article, we are not going to talk about the home buying process.
We will instead focus on steps you need to take to save for a home down payment, provided you already are certain that home buying is the right thing to do for you. Once you have made your mind up to buy a house, you need to make sure you are on the right track to reach your goal.
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Saving to buy a house can start years earlier than you actually end up buying that house. Here are some steps to take before planning out your home-buying strategy.
Steps to Save for Home Down Payment
Step #1: Budgeting
Step number 1 is to budget for the big plan. Keep in mind that you will need a minimum of 20% down payment when buying a house, but there are also other costs, including inspection, attorney, and closing costs. Once you have an idea of where you want to buy your new home, you can use apps like Zillow to get an estimate on houses that are currently on the market, which fit your life style and home buying expectations. Zillow also gives you a price estimate for your desired neighborhood, mortgages and school ranking.
Here are a few factors which determine your price range and the home you can afford to buy:
- Annual income
- Monthly debt
- Credit score
- The neighborhood you choose
- Down Payment size
Budgeting Process – Save for Home Down Payment
Let’s translate this to budgeting to save for home down payment.
1- Calculate how much you will need at the time of home buying. For this, you can use a method called Time Value of Money (TVM). This will help you understand how many months or years it is going to take you to save for a home down payment.
2- Determine your income for the period of time you have until you close on the house. If you are anticipating a raise, it’s best NOT to include it in the process. That way you won’t get your hopes up, but if you DO get a raise, it will be a positive surprise.
3- Create a spread sheet to keep track of your expenses. There are countless apps out there such as Mint that can help you with this.
4- Make sure your cash flow will remain positive once you purchase the house and start paying off the mortgage. There are apps such as CashPath that can help you stay positive.
5- Compare your expenses as a percentage of your income. Invest Diva’s Make Your Money Work for You PowerCouse helps you develop and monitor these steps on your own, without ever having to meet with a financial planner.
Step #2: Track Your Financial Ratios
Second step is to make sure you are on track with your financial ratios. That includes liquidity ratios, financial security and payment ratios. You need to calculate this for the 2 phases: before you buy the house, and after closing.
Here is the list of liquidity ratios you need to keep track of. To learn how to conduct these calculations, attend this free MasterClass.
Financial Ratios – Save for Home Down Payment
For example, you need to maintain a minimum of 6 months of your necessary expenses in your emergency fund, before and after you buy a house.
You also need to make sure that you have a positive cash flow after you are pre-approved to buy a house. That means, your income must out-weigh your expenses.
Step #3: Create an Online Investment Portfolio
Steps 3 is to consider investing in other investment securities in order to grow your savings. Depending on your risk tolerance, you can consider investing in a portfolio of stocks, ETFs or even forex. A well-diversified portfolio can give a return of somewhere between 5% to a whopping 200% within 3 to 8 years of investment.
If you start to save for home down payment years before you intent to buy, you get literally get your money to work for you and grow on top of your monthly savings. This could increase your buying power. It is crucial to keep in mind that any type of investment comes with a risk of loss. However, as history keeps on proving, ANY investment is better than keeping all your money in a checking account.
After calculating your financial ratios and determining you are on the right track, you can dedicate a part of your savings to online investments.
Your risk tolerance score will determine which markets you should be allocating your investments.
Not sure if investing is right for you? Find out.
Don’t miss out on growth opportunity, IF you have sufficient risk tolerance.
Step #4: Consider Your First Home as an Investment
The final step in saving for your (next) home down payment is to considering this very activity as an investment.
Once you are approaching the time to start looking for houses, search for a property that can be modified to have even higher value once you decide to sell it.
Of course, most brokers and housing experts will tell you the three main keys to home value are location, location, and location.
But there is this underlying factor that can eventually help you make money on the place you live, when it comes to selling.
For example, will this house be more valuable if you could modify the kitchen? Extend the bathrooms? Creating a knock-out walking closet? Adding a pool?
You must of course make sure that the house has the capacity to be modified, extended, or upgraded.
In this webinar, I lay out the exact steps I took when buying my first home, through investing in the stock market.
Reserve Your Seat to learn 3 Secrets to Making Your Money Work for YOU (without having to stick to your screen all the time.)
