Thursday, July 19, 2007

Saving for a Down Payment on a Home

For me it's been up and down over the years trying to save for a home. I'm sure it is for many people. Most families get into a house by either inheriting the money or the house. For those that have to save for the down payment on a home it can be quite trying. I've used our home savings as an emergency stash plenty of times. How does a family save for home on a small income?

I've had money automatically taken out of our paychecks every month and put into an ING savings account. It usually generates about a 4.5% interest rate. My biggest weakness is that it can take years and years before we can see real results in savings. I'm going to take this process a step further in order to save up this big chunk of money.

# 1 is to figure out a time frame in which you would like to have the money accumulated. Since I get distracted easily I’m shooting for 5 years, tops.

# 2 Get the entire family involved, even the kids. Sit down and motivate everyone about the idea of having your own home. What does each one want? Their own bedroom, backyard, dishwasher, garage, etc. Write down all the features that each one dreams of having.

# 3 Think about and discuss what area you want to live and the price ranges you are looking to get into.

# 4 Once the entire family has agreed on what they want in a home, the area, price range, and time frame write out a specific goal of that. For example: "We are going to save for a down payment on a 3 bedroom, 2 bathroom single family home with a 2 car garage in the Los Angeles area by January 2012." Type it up nice and big and even draw a picture of the type of home. Post this goal on your fridge or any area that the family goes by everyday.

# 5 Think about how you are going to achieve this goal and start writing down ideas. Become frugal, always be thinking of ways to do things cheaper or even for free. Lower your living expenses as much as possible to save the maximum. When you get a raise or bonus put at least half if not all towards the house savings. Same goes with money gifts.

# 6 Set rewards for yourself along the way. When lowering your living expenses one of the first things to go can be expensive entertainment that kids where used to like amusement parks, Chuck E Cheese, and things like that. Each month when your savings goals are achieved award the whole family with cheaper entertainment. At the beginning of the month think about what your reward will be and shoot for it.

# 7 Families with children usually get a big tax return in January-March. Take half that money and put it into your house savings every year.

# 8 Every year you will be saving up your money by having it transferred into a savings account-try to find the highest interest paying account you can find, most of these will be online. Add this money up with your tax return and put it all into a one year CD earning more then 5% interest. Make sure the CD is started right when you receive your tax return so that it becomes mature at that time the next year. You will continue adding your savings from the year past and your tax return money and opening up a new CD.

# 9 Essentially you are creating your down payment with compound interest. The interest you earn will be doubling each year because you are adding such a big chunk of money to your CD each time. You will see the savings add up fast, which will in return motivate your family even more!

# 10 Share in the progress with the entire family along the way. Let everyone know you are 15% towards your goal and so on.


tehnyit said...

What a great article! Getting the family motivated and focus getting a deposit down on a house is very challenging, especially if the kids are young.

I like the way you emphasis communications as the key point.

j2r said...

I love the idea of getting the kids involved. I'm not sure about #7. I think you should treat any tax return as a bonus and try to save as much of it as possible.
Another suggestion is to create another ING Savings account for emergency funds. Some emergencies are not really emergencies and if the money is saved up in one single spot, you might be tempted to tap that fund for that "emergency". Eg: Your car breaks down and you need a new one. If you have $10k in your emergency fund, you might be tempted to tap more than you actually need. However, if you had the money in 2 separate accounts, it's easier to control yourself and only tap the emergency fund. Eg: $4k in your emergency fund and $6k in your house funds.
By the way, I'm still working on the 8 random things about myself. It's not as simple as it looks like.

j2r said...

I'm also contributing to your house fund by clicking on ads to help a bit. I like to help other small PF bloggers like myself. And I know you could use this ad revenue ;)
For me, it's more of a hobby.

Misti said...

@j2r The other half of out tax return I put into an emergency and fun account.

I decided to take off all the ads because mine's really a hobby too :)

RY said...

Looks like you did a great job of breaking down your goal into smaller achievable steps. That's how the best problem solvers accomplish things in their lives. I hope your plans work out for you and your family!


Moneymonk said...

These are good steps in obtaining any goal.

Once you are organized now you can attack !!

j2r said...

take a look at this article

Anonymous said...

You may not need as much as you think. Once you know where you want to live make appointments with local banks. We found a bank on the main street of our town that offered a 5% downpayment, no closing costs (saved us $8,000) and no PMI. We live in an area where everyone wanted to buy in a wooded area outside of town and the bank was giving these special loans to anyone who bought within a 5 block radious of the bank in town. So call around and speak directly with the bankers. We made sure to buy a house that we could afford the monthly payment easily on one income. That's the most important part. The bank wanted to lend us more money - that would have made our monthly payment higher (and their profits) but we said no. The house is not our "dream" house, but we're building equity and we are no longer paying very high rent.

Good luck to you and your family - I love your post about involving everyone.

mrspiggy said...

Definetly not alone on this .
My blog dedicateed to the same.