Buying a house is a major financial goal for many people, but it also requires a lot of planning and preparation. Saving for a house can seem daunting, especially if you don’t know how much you need, where to save, or how to save. However, with some simple steps and strategies, you can build a savings fund that can help you achieve your dream of homeownership. Here are some tips on how to save for a house.
1. Determine How Much You Need
The first step to saving for a house is to determine how much money you will need to buy the house you want. There are several factors to consider, such as the price of the house, the size of the down payment, the closing costs, and the moving and other expenses.
The price of the house is the amount of money you will pay to the seller to purchase the property. The price of the house depends on various factors, such as the location, size, condition, and features of the house, as well as the supply and demand of the housing market. You can use online tools, such as Zillow or Realtor.com, to search for houses in your desired area and get an idea of the price range.
The down payment is the amount of money you will pay upfront to the lender when you get a mortgage to finance the house. The down payment is usually expressed as a percentage of the price of the house, and it can vary depending on the type of mortgage and the lender’s requirements. Generally, the higher the down payment, the lower the interest rate and the monthly payment of the mortgage. A common rule of thumb is to save at least 20% of the price of the house as a down payment, but some mortgages may allow you to put down as little as 3%¹.
The closing costs are the fees and charges that you will pay to finalize the purchase of the house. The closing costs include items such as appraisal fees, title fees, origination fees, escrow fees, and taxes. The closing costs are typically about 2% to 5% of the price of the house², and they are usually paid at the time of closing, which is when the title of the property is transferred from the seller to the buyer.
The moving and other expenses are the costs that you will incur after you buy the house, such as hiring movers, buying furniture, making repairs, or decorating. The moving and other expenses can vary depending on the condition and size of the house, as well as your personal preferences and needs. A good way to estimate these expenses is to make a list of the items and services you will need and research their prices online or in stores.
To sum up, the total amount of money you will need to save for a house is the sum of the price of the house, the down payment, the closing costs, and the moving and other expenses. You can use a calculator, such as the one offered by NerdWallet⁴, to estimate how much you need to save based on your inputs and assumptions.
2. Set a Savings Goal and Timeline
The next step to saving for a house is to set a savings goal and timeline, which are the specific amount of money you want to save and the deadline by which you want to save it. Your savings goal and timeline will depend on your current savings, your income, your expenses, and your desired house.
Your current savings are the amount of money you already have saved for a house, or for any other purpose. Your current savings can include your savings account, your checking account, your investment account, or any other liquid assets that you can easily access and use. You can use your bank statements, your brokerage statements, or your online platforms to check your current savings balance.
Your income is the amount of money you earn from your work, your business, or any other sources, such as interest, dividends, or rental income. Your income can be either regular or irregular, depending on the frequency and stability of your earnings. You can use your pay stubs, your tax returns, or your online platforms to check your income amount.
Your expenses are the amount of money you spend on your living and lifestyle costs, such as rent, utilities, food, transportation, entertainment, or debt payments. Your expenses can be either fixed or variable, depending on the predictability and flexibility of your spending. You can use your bank statements, your credit card statements, or your online platforms to track your expenses amount.
Your desired house is the type of house you want to buy, based on your preferences and needs, such as the location, size, condition, and features of the house. Your desired house will determine the price of the house, which is one of the main factors of how much you need to save. You can use online tools, such as Zillow or Realtor.com, to search for houses in your desired area and get an idea of the price range.
To set a savings goal and timeline, you need to subtract your current savings from the total amount of money you need to save for a house, and divide the result by the amount of money you can save each month. The amount of money you can save each month is the difference between your income and your expenses, and it can vary depending on your financial situation and behavior. You can use a calculator, such as the one offered by Credit Karma³, to estimate how much you can save each month based on your inputs and assumptions.
For example, suppose you need to save $100,000 for a house, and you have $20,000 in your current savings. You earn $5,000 per month, and you spend $3,000 per month. Your savings goal is $80,000 ($100,000 – $20,000), and your monthly savings is $2,000 ($5,000 – $3,000). To reach your savings goal, you will need 40 months ($80,000 / $2,000), or about 3.3 years.
3. Choose a Savings Account and a Brokerage Platform
Once you have set a savings goal and timeline, you need to choose a savings account and a brokerage platform to save and invest your money for a house. There are different types of savings accounts and brokerage platforms that you can use, depending on your preferences and needs.
Savings Accounts
The type of savings account that you use to save for a house will affect your interest rate, your access to your money, and your fees and charges. There are different types of savings accounts that you can use, such as:
- High-yield savings accounts: High-yield savings accounts are savings accounts that offer higher interest rates than traditional savings accounts, usually from online banks or credit unions. High-yield savings accounts are suitable for saving for a house because they can help you grow your money faster and keep up with inflation. However, high-yield savings accounts may have some limitations, such as minimum balance requirements, withdrawal limits, or transfer delays.
- Money market accounts: Money market accounts are savings accounts that offer higher interest rates than traditional savings accounts, usually from brick-and-mortar banks or credit unions. Money market accounts are suitable for saving for a house because they can help you grow your money faster and provide more flexibility. However, money market accounts may have some drawbacks, such as higher fees, lower liquidity, or variable interest rates.
- Certificates of deposit (CDs): CDs are savings accounts that offer fixed interest rates for a specific period of time, usually from a few months to a few years. CDs are suitable for saving for a house because they can help you lock in a guaranteed return and avoid market fluctuations. However, CDs may have some disadvantages, such as early withdrawal penalties, lower interest rates, or lack of access to your money.
Brokerage Platforms
The brokerage platform that you use to invest in stocks or other assets for a house will affect your fees, your access to information and tools, and your customer service. There are different types of brokerage platforms that you can use, such as:
- Full-service brokers: Full-service brokers are brokers that offer a wide range of services and products, such as financial planning, investment advice, research, trading, and account management. Full-service brokers are suitable for investing for a house if you want a high level of guidance and support, and you are willing to pay higher fees and commissions. Some examples of full-service brokers are Merrill Lynch, Morgan Stanley, and Edward Jones.
- Discount brokers: Discount brokers are brokers that offer fewer services and products, but charge lower fees and commissions. Discount brokers are suitable for investing for a house if you want a low-cost and convenient way to buy and sell stocks or other assets, and you are comfortable with making your own investment decisions. Some examples of discount brokers are Charles Schwab, Fidelity, and E*TRADE.
- Online brokers: Online brokers are brokers that operate primarily or exclusively through the internet, and offer online platforms and tools for investing in stocks or other assets. Online brokers are suitable for investing for a house if you want a fast and easy way to buy and sell stocks or other assets, and you are familiar with using technology and online resources. Some examples of online brokers are Robinhood, Webull, and TD Ameritrade.
- Robo-advisors: Robo-advisors are online platforms that use algorithms and artificial intelligence to create and manage your stock or other asset portfolio, based on your goals, risk tolerance, and preferences. Robo-advisors are suitable for investing for a house if you want a hassle-free and automated way to invest in stocks or other assets, and you are willing to pay a small fee for the service. Some examples of robo-advisors are Betterment, Wealthfront, and Acorns.
4. Automate and Maximize Your Savings
The next step to saving for a house is to automate and maximize your savings, which means setting up a system that will automatically transfer a certain amount of money from your income to your savings account or brokerage platform, and finding ways to increase your income or decrease your expenses. Automating and maximizing your savings can help you save more money faster and easier, and avoid the temptation to spend or skip your savings.
There are different ways to automate and maximize your savings, depending on your preferences and needs. Some of the most common ways are:
- Direct deposit: Direct deposit is a service that allows you to have your paycheck or other income electronically deposited into your bank account, instead of receiving a paper check. Direct deposit can help you automate your savings by allowing you to split your income into different accounts, such as your checking account, your savings account, or your brokerage account. You can set up direct deposit with your employer, your bank, or your brokerage platform, and specify the percentage or amount of your income that you want to allocate to each account.
- Automatic transfer: Automatic transfer is a service that allows you to have your money automatically moved from one account to another, at a regular interval, such as weekly, biweekly, or monthly. Automatic transfer can help you automate your savings by allowing you to transfer a fixed or variable amount of money from your checking account to your savings account or brokerage account, on a specific date or day of the month. You can set up automatic transfer with your bank or your brokerage platform, and specify the amount, frequency, and timing of your transfers.
- Round-up: Round-up is a service that allows you to have your purchases automatically rounded up to the nearest dollar, and have the difference transferred to your savings account or brokerage account. Round-up can help you automate your savings by allowing you to save small amounts of money every time you make a purchase, without affecting your budget. You can set up round-up with your bank, your credit card, or your brokerage platform, and specify the account where you want to deposit your round-ups.
- Increase your income: Increasing your income is a way to maximize your savings by earning more money from your work, your business, or any other sources, such as interest, dividends, or rental income. Increasing your income can help you save more money faster and easier, by giving you more money to save and invest. You can increase your income by doing some of the following things:
- Asking for a raise or a promotion: You can negotiate a higher salary or a better position with your current employer, based on your skills, performance, and value. You can also look for other job opportunities that offer higher pay or better benefits.
- Working more hours or taking on a side hustle: You can earn extra money by working overtime, taking on additional projects, or finding a part-time or freelance job that suits your schedule and interests. You can also use your skills, hobbies, or passions to create a product or service that you can sell online or offline.
- Investing in yourself: You can improve your skills, knowledge, and credentials by taking courses, attending workshops, reading books, or getting certifications. This can help you advance your career, increase your earning potential, and open up new opportunities.
- Creating passive income streams: You can earn money without active involvement by creating passive income streams, such as dividends, interest, royalties, rent, or online sales. You can also use your savings account or brokerage account to generate passive income by investing in income-producing assets, such as stocks, bonds, or real estate investment trusts (REITs).
- Decrease your expenses: Decreasing your expenses is a way to maximize your savings by spending less money on your living and lifestyle costs, such as rent, utilities, food, transportation, entertainment, or debt payments. Decreasing your expenses can help you save more money faster and easier, by giving you more money to save and invest. You can decrease your expenses by doing some of the following things:
- Creating and following a budget: A budget is a plan that helps you track your income and spending, identify areas where you can save money, and set realistic and achievable goals. You can use a spreadsheet, an app, or a website to create and manage your budget. Some examples of budgeting tools are Mint, YNAB, and EveryDollar.
- Adopting a frugal lifestyle: A frugal lifestyle means living below your means and avoiding unnecessary spending. You can save money by reducing or eliminating some of the following expenses:
- Eating out and ordering food: You can cook your own meals at home, plan your menus ahead, use coupons and discounts, and buy in bulk.
- Entertainment and hobbies: You can find free or low-cost activities, such as reading, hiking, playing games, or watching movies online. You can also borrow or swap books, music, and movies with your friends or family, or use your local library.
- Transportation: You can walk, bike, carpool, or use public transportation instead of driving your own car. You can also save money on gas, maintenance, and insurance by driving less, driving a fuel-efficient car, or selling your car altogether.
- Housing: You can save money on rent or mortgage by living in a smaller, cheaper, or shared space, or by moving to a lower-cost area. You can also save money on utilities by using less water, electricity, and heating, or by switching to renewable energy sources.
- Shopping: You can save money by buying only what you need, not what you want, and by comparing prices and quality before you buy. You can also save money by buying second-hand, repairing, or repurposing items, or by selling or donating what you don’t need.
5. Stay Motivated and Focused
The final step to saving for a house is to stay motivated and focused, which means keeping your eye on the prize and sticking to your plan. Saving for a house can be a long and challenging process, and you may face some obstacles or temptations along the way. Therefore, it is important to stay motivated and focused, and avoid any distractions or deviations from your goal.
There are different ways to stay motivated and focused, depending on your preferences and needs. Some of the most common ways are:
- Visualize your goal: Visualizing your goal is a technique that involves creating a mental image of your desired outcome, such as the house you want to buy, and imagining yourself living in it. Visualizing your goal can help you stay motivated and focused, by reminding you of why you are saving and what you are working towards. You can also use physical reminders, such as pictures, posters, or models, to help you visualize your goal.
- Track your progress: Tracking your progress is a technique that involves measuring and recording your achievements and milestones, such as the amount of money you have saved, the percentage of your goal you have reached, or the time left until your deadline. Tracking your progress can help you stay motivated and focused, by showing you how far you have come and how close you are to your goal. You can also use tools, such as charts, graphs, or apps, to help you track your progress.
- Celebrate and reward yourself: Celebrating and rewarding yourself is a technique that involves acknowledging and appreciating your efforts and accomplishments, and giving yourself a treat or a break, such as a gift, a trip, or a day off. Celebrating and rewarding yourself can help you stay motivated and focused, by boosting your morale and confidence, and making your journey more enjoyable and fun. However, you should be careful not to overspend or overindulge, and keep your rewards in line with your budget and your goal.
Conclusion
Saving for a house is a smart and important goal, but it also requires a lot of planning and preparation. By following these five steps, you can create and execute a savings plan that works for you and your goal. Remember, saving for a house is not a sprint, but a marathon. Happy saving!
