How to save for a house is probably the first question any aspiring home buyer should ask. After all, a down payment on a home is a sizable sum, averaging around $48,180 if you put down the recommended 20%. So how do you scratch this mountain of money together without making yourself miserable in the process?
It turns out there are actually ways to save for a house without feeling the pinch. As proof, check out these three strategies that real people have tried with great success, plus some take-home lessons for putting these ideas into action yourself.
Build a ladder
“My parents, who have saved a lot on teachers’ salaries, taught me about CD laddering. I have a savings account with a set minimum in case of emergencies, but every time I get $1,000 above that amount, I buy an 18-month CD with that money, which gives me a bit more interest than my savings account. My goal was to buy enough to eventually have a CD maturing every month. Once they matured, I’d reinvest the money in another CD. If I hadn’t started early and locked away money consistently over a decade, I never would have been able to put down 20%—close to $100,000—on my two-bedroom apartment.” – Kathryn Lowery, 34, Brooklyn, NY
Lesson learned: If you plan to buy a home in the next few years, putting that money in the stock market can seem risky because it might disappear right when you’re ready to buy. As an alternative, consider purchasing certificates of deposits, which will give you a higher return in exchange for locking it up tight for a set amount of time. The best part? It’s a guaranteed investment, so you can’t lose a dime when it’s time to take it out. And when you do, you can either use it as a down payment or—if you’re still not ready—put that money right back into a new CD to keep your savings growing.
Shop around for the best savings account
“When we started saving for a house, investment accounts seemed too risky, and we didn’t want our money locked away in a CD, just in case we found a house we loved and had to move fast. So, we surfed around online to find a savings account with the best interest rate so our money could grow a bit. We stashed as much of our salaries in there as we could while still making our bills. Our strategy worked, because four months later we found—and bought—the perfect home.” – Eddy Weiss, 41, Baltimore, MD
Lesson learned: Even experts agree that sometimes a traditional savings account is the right option.
“When someone tells me ‘I want to buy a house in the next year or two,’ they’re often surprised by how boring my advice is: Cash is king,” says Tey Kim, founder of Millennial Capital Partners. “It’s true that keeping money in a savings account doesn’t make much money, but it also means you won’t lose money, which is a risk with an investment account. You’ll also have the ability to cash out whenever you want if you need to move fast.”
Just make sure to shop around for a high-interest or “high yield” savings account, where you’ll earn 1% or more in interest. Sure, it might not seem like much, but if that interest is compounded monthly, it can add up pretty fast. You can shop for different accounts at Bankrate.com, which also has a calculator where you can crunch your own numbers to see how much you’ll save.
Get an app for that
“Until I actually started using the app Acorns, I could not believe that the ‘spare change’ method of saving could be that significant. It rounds up all of my daily purchases to the nearest dollar, then invests the spare change. I feel proud of myself for doing it, because I saved $2,300 over 18 months! I don’t have a timeline for buying outside of ‘one day,’ but seeing how my spare change adds up fast, that day could come sooner rather than later.” – Kate LaResance, 32, Boulder, CO
Lesson learned: No doubt, saving is hard to do—so why not lean on apps that make it easier? Acorns, Digit, and Simple can all help you put more money aside through automatic savings transfers. Tip Yourself helps you train your brain to see your savings as a reward for good behavior (e.g., go to the gym, give yourself $3; fold your laundry, throw in another buck), and in no time you’ll see positive actions lead to growing balances. And we’d be remiss if we did not mention Mint, where a simple press of an icon will let you see simultaneously what’s happening in your savings, checking, CD, and any other accounts to give you a full picture of your financial status.
Want more guidance on how to save for and prepare to buy a home? Check out our First-Time Home Buyer’s Guide.
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