When should you start saving for a house? As soon as the desire to buy one crosses your mind. Most people know that a home is probably the largest single purchase they'll ever make. But many first-time buyers underestimate the amount of money they will need up front to purchase their dream home.
A $200,000 home will require a cash outlay of around $16,000 at a bare minimum, according to realtor.com. First of all, there's the down payment: At the very least, it'll be 3.5% of the purchase price – the going rate for an FHA loan for lower-income earners. However, those loans are hard to get; it's more likely that you'll qualify for a mortgage that requires 5%, 10% or even 20% down. Then there are the various closing costs required to complete the sale; these typically will run between 2% to 5% of the home’s value. Oh, and don't forget moving expenses, which can easily run into the four figures, especially if you have heavy equipment or appliances to bring with you.
Next question: If you don’t have it, how will you save for it? We got a sextet of suggestions, ranging from making more to spending less.
Did you get a bonus at work, a tax refund or some other unexpected sum of money? Set up a house-buying account, and put all of that cash towards it.
Assuming you’re living in an apartment now, consider moving to a smaller, less-expensive one—or get a roommate to share the costs for your current place. A $300 drop in the monthly rent saves you $3,600 annually. If you're single, perhaps it would be possible to live with your parents for a year. It's an emotionally tricky move, admittedly, but getting rid of a $1,040 housing expense (the 2017 national median monthly rent for a one-bedroom) would save you $12,480 a year—enough for the down payment on that hypothetical $200,000 home.
Saving for your later years is more important than saving for a home, so don’t take or borrow money from a retirement account. But maybe scale back the contributions a bit. Perhaps you don't need to put money into both an IRA and your 401(k) this year. If you’re already funding your up to the company match, for example, put any extra funds you were thinking of contributing into your house fund.
You've probably already figured that big purchases — expensive clothes, jewelry and furnishings —are out. But even little things can count as luxuries, and those little things add up. Two fewer cups of fancy barista coffee or fancy cocktails a week, and less dining out can save you a lot of money over the course of a year.
Nobody wants to say it out loud, but most people have plenty of places to skimp on or eliminate expenses. Can you cut the cord on cable TV, get a cheaper cell phone plan, use the roads and public parks for running rather than the treadmill at the high-priced gym? You may miss not having these things, but it’s necessary if you're serious about saving.
Don’t just look for ways to save, also look for ways to earn. Can you get a part-time job? Have you skills you can use in freelance work? If so, put all of this extra pay into your house fund.
Plan to implement these ideas over the course of a year, at least. It’s true that interest rates may rise while you’re waiting, but probably not enough to outweigh the benefits of saving, especially when you consider your total cost over the life of a mortgage.
Whenever you have to save a sizable chunk of money, it’s going to be inconvenient. Ask yourself this question: Is my short-term comfort more important than buying a home? If your answer is no, live well below your means now, so you can live better once you acquire your home.
For related reading, see our tutorial How to Buy Your First Home.