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The American Dream is all about working hard to achieve success and happiness. An important part of this dream is to become a homeowner and secure your future. Well, if I am being honest, the American Dream is starting to feel more like a concept than a goal.
The rising costs and financial uncertainty have made it even tougher to buy a house today. No matter how you budget to buy a house or try to save money, something falls short. This might hit a nerve, but look at the bright side – you’re not alone!
Despite these expected or unexpected challenges, many before you have figured out how to save for a house on a low income, and you will too. All you need is smart work, a go-getter attitude, and this guide. With these practical steps, you can become a proud homeowner, no matter your income!
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1. Set a Realistic Savings Goal
The best way to save for a house is to set a realistic savings goal based on your budget, one-time expenses, and ongoing monthly costs.
One-time expenses are your initial costs, like a down payment (3% to 20%) for the home loan, closing costs (2% to 5%), inspections, moving expenses, and so on. On the other hand, ongoing costs include monthly mortgage payments, interest rates, property taxes, homeowner’s insurance, PMI (Private Mortgage Insurance), escrow payments, and Homeowners’ Association (HOA) fees. Understanding these costs will make it easier to set a savings timeline and your future expenses.
Let’s consider you are taking a $300,000 home loan with a 15-year term length. In an area like Philadelphia, if you pay a 20% down payment of $60,000, your monthly ongoing payment will be around $2300. This amount will increase by approximately $450 per month if you cut down the down payment to 5% ($15,000).
So, bigger down payments (one-time expense) equal lower monthly bills (ongoing costs) and more savings! This can be better understood using mortgage calculators like the American Bank Mortgage Calculator.
2. Follow the 50/30/20 Budgeting Rule
Our monthly expenses can start piling up quickly, making it difficult to make ends meet, let alone save. In such cases, one of the best house savings tips is to follow the 50/30/20 budgeting rule. It’s simple – use 50% of your income for your monthly and daily expenses like groceries, gas, electricity, etc., and 30% for your wants, like a vacation or a new MacBook. The remaining 20% is where things start to get interesting.
Initially, use this 20% to save for the bigger expenses like the down payment of your mortgage. Later, the same can be used to pay off the monthly loan payments, simplifying the entire process.
However, there are always ways to make your life easier, like tweaking the ratio from 50/30/20 to 50/20/30. By cutting down your non-essential expenses by 10%, you can save more for the down payment. This will also let you choose a mortgage plan with a shorter tenure, so you don’t have to wait until you are in your 50s to be debt-free.
3. Open a Dedicated High-Yield Savings Account (HYSA)
If you’re serious about saving money to buy a home, you can’t afford to leave your money in a regular savings account. They’re better than checking accounts, but you’re only earning an APY of 0.61%. That’s peanuts compared to a high-yield savings account (HYSA).
HYSA accounts are designed to make your money grow faster with higher APYs of over 4%, depending on the financial institution. Opening a HYSA account is one of the best down payment savings tips and can be your cheat code for early retirement.
Check out options like SoFi High-Yield Savings (3.80%), Ally Bank (3.60%), and Capital One 360 Performance Savings (3.60%). The trick here is to set up recurring monthly or weekly payments from your checking account, even if they are as low as $25. It’s better than impulsive Amazon shopping, and you can save $100 more every month, on top of the 20% monthly savings.
4. Cut Unnecessary Spending Without Feeling Deprived
I know cutting down on our spending isn’t always easy or fun. But I am not asking you to make any major changes in your life. From meal prepping to using public libraries, there are several ways to reduce unnecessary spending without sacrificing comfort.
One of these ways is to follow a “30-Day Rule” before buying something non-essential. Thirty days are more than enough to “get over your dirt bike phase,” so to speak. Or, if you want some options for things to stop buying altogether, consider switching from branded pantry staples to generic or store-brand ones – Tastes the same, costs much less!
Besides that, you can potentially cut down on your guilt-free spending. Instead of eating out twice a week, do it only once. However, no one will judge you if you indulge yourself once in a while. After all, everyone deserves an extra slice of cheesecake!
5. Increase Your Income With Side Hustles
Do you know what works better than cutting down your expenses? Earning more! If this isn’t your first time on Finsavvy Panda, you already know I am all about creative side hustles to supplement your income. On the other hand, if you are new to side hustles, get ready to have your mind blown.
Side hustles are about putting your hobbies, interests, and talents to work. If you love dogs, you can walk your neighbor’s husky or use Rover to find pet-sitting gigs. Or, sell the resume template you used to bag your job on Etsy. No? Then maybe you would like to become a freelance writer, graphic designer, video editor, or photographer on Upwork.
There are plenty of side hustles to choose from, but it’s better to choose something that fits your lifestyle. If you have a car or a bike, for example, you could deliver food via DoorDash.
6. Use First-Time Homebuyer Programs and Tax-Advantaged Accounts
I know I have hammered on and on about saving money and budgeting, but you don’t necessarily have to do everything by yourself. Luckily, there are first-time homebuyer savings plans that are specifically designed for first-time homebuyers like you.
If you qualify, you can apply for an FHA loan to buy a home with as little as a 3.5% down payment. You might even be eligible for Conventional 97 loans, where you only need a 3% down payment if your credit score is at least 620. Not only that, but USDA loans and VA loans offer zero down payment loans for people living in rural areas and veterans.
Last, but not least, you could also tap into your Roth IRA and withdraw up to $10,000 of contributions penalty-free for a first home purchase. To check your eligibility and for more information on first-time homebuyer programs and tax-advantaged accounts, visit HUD.gov or your state’s housing agencies’ portals.
7. Pay Off High-Interest Debt First
Any financial expert will agree that paying off high-interest debt before buying a house is the most logical option. As a general rule of thumb, pay off any debt with an interest rate over 7% before investing. Even the best HYSA can’t beat a return of 7%.
When you’re dealing with multiple debts, the Debt Avalanche method is a better approach than the Debt Snowball Method. With the avalanche strategy, you focus all your efforts to pay off the highest-interest debt first and make minimum payments on the rest. Once the most expensive debt is paid off, roll the payment into the next highest interest payments, so on and so forth. Mathematically, you end up paying less interest, even if it feels like it’s taking forever at first.
8. Track Your Progress Regularly
While “out of sight, out of mind” may work for some, it might not be everyone’s cup of tea. Tracking your progress regularly will keep you motivated and focused on your goal. Also, watching your money grow is more satisfying than hitting “Add to Cart” late at night. Trust me, this simple step is the secret weapon you need to stay focused and fired up!
Use apps like YNAB (You Need a Budget) or Minto to connect your HYSA account and see your numbers in real-time. If you don’t really want anything fancy, a simple Google Sheet will do the trick. Plus, calculating your savings manually and seeing it grow every month is all the motivation you will need.
Why not take it a step further and get off the screen while at it? Track your progress with these printable savings trackers, which have progress bars for you to fill in a little every week or month.
9. Save Any Extra or Unexpected Money
Think of your house savings fund as a piggy bank. Like we did in childhood, put in as much money as you can, even from unexpected sources like bonuses, birthday cash, tax refunds, or those rebate checks you forgot to cash.
Why? Let’s say you get a $3,000 tax refund. Now, if you are saving $1,000 a month, you could easily shave off three months from your timeline. If all goes well, who knows, you might be doing your next Thanksgiving in your new home!
Look at it as the money you didn’t plan for, going towards the life you are planning for! That’s the kind of mindset that separates dreamers from doers. Besides, if you weren’t expecting this inflow anyway, saving it won’t halt your daily expenses, but could slice months off your savings timeline in a single go!
10. Rent Like a Minimalist
We are all hustling through life to live comfortably. But sometimes, we need to sacrifice short-term comfort for long-term gains.
Renting like a minimalist is just that, where you make tough choices, like subletting the extra space or room in your rented house. If this helps lower your rent by even $500 a month, you could save $6,000 more a year.
I am not asking you to live uncomfortably – just slightly below your means. Think of it as a short-term investment for your long-term comfort. The sooner you save money, the sooner you can have the keys to your house and buy furniture that you actually love!
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