Saving Money to Buy Your First Home
The larger the down payment, the bigger the house you can afford-or better yet, the smaller your monthly mortgage payments will be. With that said, it’s time to set up a budget and save as much money as you possibly can to put down on your first home and cover closing costs.
If you’re like me, you thought you’ve been frugal all along-until you decide you’re ready to buy a home and start looking more closely at your personal finances. Where should you start?
Set Up a Budget
First, create a budget spreadsheet that details your monthly expenses, such as rent, electricity, gasoline, car payments, groceries, you get the idea. This can be done the old-fashioned way with paper and pen, or on the computer using a spreadsheet program such as Microsoft Excel. I recommend the latter because it can be set up to perform calculations automatically. Create a tab (or worksheet) in your spreadsheet for each month left in the calendar year.
Now you can diligently record your expenses as you incur them. For example, when you pay the electric bill, boot up the computer and fill in the appropriate cell in your spreadsheet. Recording your expenses like this allows you to see exactly where your money goes each month. And by the end of the month you’ll know how much money you have left over to deposit into a savings account for your down payment.
Next, plan out what you expect your bills to be like for the rest of the year, using the tabs you created for each month. Be sure to account for seasonal changes (such as higher electric bills in the summer if you have air conditioning), times when big payments are due (like car insurance premiums if you don’t pay monthly), and paycheck deductions for health benefits or retirement account contributions.
Total up these numbers on each tab to determine your monthly living expenses. Then add 10 percent. (Let’s be realistic here-did you budget for the occasional stop at McDonald’s, Dunkin Donuts coffee on weekends and a magazine or two at the convenience store? That’s why we’ve budgeted an extra 10 percent. It’s easier to under-budget than it is to over-budget, and for saving purposes it’s better to be on the conservative side.)
Now enter your monthly net salary (after taxes) into each tab on your spreadsheet and create a cell that automatically subtracts your monthly expenses from your income. This calculates the amount of money left over by the end of the month-the money you’re saving for your down payment. This is the number to watch closely.
Using a spreadsheet like this one will help you to clearly see how much money you spend each month and, most importantly, how much you’re able to save for your first home. This information will help you determine when you’ll be ready to make the purchase, and will give you an idea of how much home you will be able to afford.
Stick to It: Advice you won’t get anywhere else
Saving money should come more easily now that you have a monthly budget spreadsheet to track your expenses. Now that you see the whole picture, you can start weeding out the things you really don’t need. (After all, saving up for a home is more important than buying new clothes each season, taking an expensive vacation or eating dinner out on the weekendsâÂ?¦ right?) Here’s a piece of advice you won’t get anywhere else:
Every time you make a purchase, no matter how small, write it down in a 3 x 5-inch memo notebook. Write down the date, the purchase and dollar amount.
Writing down even the most inane purchases will help you discover where your pocket money is going. Whether your weakness is a gossip magazine at the check out line, an afternoon pick-me-up from the vending machine, or the ease of buying lunch at the company cafeteria, this notebook method will help you mentally separate necessary purchases from the unnecessary.
Plus, when you get home, you can enter these numbers into your budget spreadsheet in the appropriate cells. This is your real budget.
Now on to the stuff you probably already know but need a small push to get started:
– Stop eating out. Instead, buy groceries and cook your own dinners. It was nice to eat out with friends while it lasted, but it’s not conducive to saving money for your first home. You can still enjoy your friends’ company over a great meal-just invite them to your place.
– Brown-bag-it at work. Company cafeterias aren’t just expensive, but the meals usually aren’t of the quality you’d expect for the price. It’s much less expensive to make your own sandwiches and pack your own lunch. The upside is that you’ll always know what’s available for lunch and if you’ll like it. Plus, you know the ingredients are fresh because you bought them yourself. And you’re saving money each day to put towards your first home! (Has the inconvenience got you down? Grab a can of soup and a bowl and heat it up in the office microwave. Hey, you’re on a budget!)
– Avoid individually wrapped goods at the supermarket. They cost much more per unit than foods and drinks that come in larger sizes. I’m not recommending that you buy your groceries in bulk, but stay away from juice boxes, single-serving sized bottles of iced tea and individually-wrapped bagels that come with a tablespoon of cream cheese. You’re paying for packaging and convenience, two things that aren’t really worth the money when you’re saving for a home.
– Cut coupons. They usually come in the Sunday newspaper. There’s just one catch: don’t think that because you have a coupon for something you should rush out and buy it. That’s why coupons were invented-to make you feel “ok” about buying something you normally wouldn’t buy and really don’t need. Just save the coupons for items you’d normally buy. Oh, and don’t forget to turn them in at the register.
– Scout the area for cheaper gas stations. Chances are, you go to the gas station that’s closest to home or work. Have you scouted the area for a cheaper one? It might be a little less convenient, but if it’s not too far out of the way, using a cheaper gas station can be a way to save money. (Tip: Try not to let your gas tank get too close to empty, or you’ll be forced to use a more convenient (expensive) gas station.)
– Don’t pay full price for clothing. Really, this should read: Don’t buy new clothes, you’re on a budget! It’s probably ok for you to spend small amounts of money a few times a year to freshen up your wardrobe, but wait until a good sale comes along.
– Leave extravagance behind. Do your own manicures and pedicures, wash and iron your own clothes and clean your own apartment. If it’s something you can do yourself to save money, you should.
– Get used to feeling deprived. If you’re the type who buys what you want because it makes you happy, this is going to be a tough transition. You’re going to feel deprived at first, especially when you begin weeding out the things you don’t really need. But keep your eyes on the prize-it’s worth all this deprivation!
Although it takes effort to save money and cut back on the little extras that make life easier and more enjoyable, it’ll pay off in the end when you save enough money for your first home. Creating a budget and sticking to it will help you save up for a larger down payment or any other large purchase, provided that you’re diligent and honest with yourself. Reaching this goal on your own will be satisfying and rewarding-you’ll see. (Plus, it’s better than borrowing the money from Mom and Dad.) Good luck!
