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June 30, 2015

Saving for Your Downpayment - Make Changes that Matter!

If you’re saving toward a downpayment on a new home, it will take you a long time to get from Point A (your rental property, or living with your Mom) to Point B (your own front door) if you don’t put some significant effort into the task. Don’t get me wrong…every little bit helps! However, this isn’t the time to talk about cutting back on Starbucks runs or buying generic spaghetti sauce instead of the brand name version. Let’s say you want to collect a $20,000 downpayment. How long do you think it will take? Ten years? Five? How about two? Ridiculous, you say. How can I possibly save that much in such a short amount of time?!?! If you’re serious about putting the cash together and are willing to make some changes that matter, you can definitely write a check for that amount when the time comes. Let’s look at some of the best ways to gather funds quickly.
  1. Reassess your current living arrangements.
Many people tend to take up more space than they actually need. If possible, move to a smaller house or apartment while you’re saving. If you’re single or part of a couple and have two or more bedrooms, consider a more modest space. By dropping from a two bedroom apartment to a one bedroom apartment, you can often save up to 25 to 30% on rent each month, depending on where you live. If you love your place, consider rearranging your stuff (or selling some…see #2) and renting out the extra bedroom to a boarder. His or her rent can go into your downpayment fund. You can also consider moving from a more expensive neighborhood to one that’s more economical, but make sure not to compromise your safety. And don’t forget…if you’ve been with your current landlord for a long time, and have been an excellent tenant, you can try to negotiate your rent. Lastly, if your landlord knows you’re saving for a downpayment and he or she might be willing to sell your current house, a rent-to-own arrangement might be made.
  1. If you don’t need it or use it, sell it.
Just like most people have too much space, a lot of people have too much stuff. But if you’re serious about growing your downpayment, look critically at what you currently own. Do you really need two cars? Can you make it work with public transit and one automobile? Do you ever play that guitar you have in the closet? Is that mountain bike you “had to” have gathering dust in the garage? Do you store high-end clothing you’ve outgrown that could go to a consignment shop? How about having a gigantic yard sale or listing more expensive items on Ebay? You’d be surprised…it’s easier than you think to collect several hundred dollars or more at a time with a few passes through your house. And if you have an offsite storage unit, seriously consider clearing it out and banking the proceeds from the sale. It will not only add to your savings, it will help you with your next task…
  1. Find at least two or three major ways to save on regular expenses each month.
Many think their current budget is bare bones, but when they look a little harder, most people can find at least this many ways to save every month. Consider a small investment in a used treadmill, another exercise machine or some DVD programs and cut a gym membership out of your budget. Scrap your cable or satellite TV and use hulu, Netflix and library rentals, or stream shows directly from websites for entertainment. Carpool with co-workers to save on gas and/or parking. Review your insurance policies, cell phone plans and internet plans to see if you’re spending more than you should. Call your credit card companies, if you’re carrying a balance, and negotiate a lower interest rate. Limit your meals out to once a week if you haven’t already, and invite friends and family over for potlucks or movie nights instead of more expensive entertainment. If you have loans, look into refinancing them. Mortgages aren’t the only things that can be refinanced – consider lowering your payments on a car, furniture or any other installment plan you have…even student loans. Be ruthless with your monthly expenses…what can you do without? That storage unit, perhaps?
  1. Plan a “stay-cation” at home instead of a vacation away.
Most people haven’t been tourists in their hometowns. Check to see what’s in your own backyard that you’ve been missing! You can also plan short day trips or finish DIY projects you’ve been meaning to get to that will fill time off from work without killing your budget. It’s amazing how much money you can save by jettisoning that expensive cruise or overseas flight and sticking close to home for a just a couple of years. A decent hotel costs over $100 per night in many places – you’ll see the savings accumulate quickly!
  1. Pick up some extra work.
Whether it’s a part-time job, freelancing or selling crafts on sites like Etsy.com, there’s usually a way to turn your interests and hobbies into cash. If you love animals, a weekend or evening job at a pet supply store may be fun as well as good for your bottom line. (Just make sure that you won’t want to buy every new thing that comes in to your store…if you love fashion, don’t take a job in a clothing shop you love!) Turn your talent for graphic design, writing or balancing a budget sheet into cash through freelance sites such as Elance.com, Upwork.com, Freelancer.com or Fiverr.com. Even ten hours a week can contribute significant cash to your downpayment account!
  1. Just “say no” to shopping.
Whether it’s online or in-person, try to “make do rather than buy new”. Ask yourself if you truly need something (new running shoes, for example) or if you’re just bored with what you have (“Why did I think lime green and neon orange running shoes were cool?”). Don’t invest in something you don’t have already unless it’s absolutely necessary. If it is necessary, consider buying it second-hand first. Goodwill and Craigslist are your best friends!
  1. Match only to the max.
If you’re currently contributing more to your 401(k) than your company will match, scale back to that amount. Put the additional money into your savings for your downpayment instead. Or, if you are a first time home buyer, you might want to do exactly the opposite, and put an even bigger chunk into your 401(k). This is an almost bulletproof way to save if you haven’t bought a house before. This rule permits people to withdraw up to $10,000 in IRA dollars toward the purchase of a first home without paying the 10% penalty that applies to a withdrawal from a traditional IRA before age 59½. If you're married, each spouse can pull from a retirement account, which would give you $20,000. You will have to pay income taxes on the withdrawal, but for people who have a hard time saving once the paycheck is in their hand, this is a great option. If you have had a Roth IRA for more than five years, however, there is no interest penalty, so save, save, save!
  1. Don’t mix your money.
Keep your downpayment account separate from all other money for your household. Do not withdraw funds under any circumstances – only add.
  1. Stick with safe savings.
While it may be tempting to invest in a higher-risk alternative to get a higher reward, use safer accounts such as high-yield savings accounts or CD’s rather than the stock market. Credit unions and online banks usually offer better return on savings accounts than traditional banks.
  1. Make it fun!
Friends of mine were saving toward their downpayment, and were having a hard time sticking to their resolve. Instead of giving up and giving in to their prior spending habits, they turned saving into a contest. Each kept track of how much money they put into the account, and how they “found” that money. Small rewards (a huge ice cream cone, a massage hour from their spouse or a pass from doing the family laundry for a month) went to the savings winner at regular intervals. Other rewards were given for the most creative ways someone found to put money into the account. They wanted to save $25,000 in two years – and they saved almost $29,000! Now that you know how to do it…it’s time to get started!
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