A couple of years ago, I bought my first house for a whooping £375k and put down 20% of the purchasing price as a down payment. Since then, I have worked with many people in their 20s and 30s who are working hard to save enough to buy a home.
In fact, this weekend, I am going to visit one of those people who picked up the keys to their new property 2 days ago.
There are several things I did that made being able to save enough for a down payment possible. Today I want to share them with you so you too can save for your new home.
Firstly, consider how much you need for a down payment to buy a house
The amount you need to buy a new home depends on many factors including how much you earn, the interest rate for the different down payment brackets, your credit score, how long you have to save and so many other things.
The key thing to know here is that you don’t have to save 20% like I did, you can aim for more or less depending on your individual situation.
However, once you know how much you need to put down you can now begin to save rigorously for your new home by applying these strategies which have worked really well for me and various individuals, I have coached to purchase a home.
Save for a purpose.
1. Build A Budget
For you to be able to set money aside for your down payment you need to be on top of your monthly income and expenses. The best way to do so is by having a budget.
Here, I mean not just creating a budget but sticking to it. When I first decided to start saving down for my house, I created this really complex budget that was hard to keep up with. I used it confusingly for about 3 months then stopped completely for another year. In that year I saved $5,200 mostly by luck, in the next year where I tracked judiciously, I saved £ 14,890.
Get started with a simple budget that is easy to use and maintain. With a little knowledge of Microsoft Excel you can create one. You can even buy an actual budgeting book if you are the type that likes to put pen on paper.
Your budget should track all your income and all your monthly expenses. Don’t just track the fixed income (e.g., salary from fixed term job) and expense (rent), also track the variable income (e.g., from freelancing) and expense (e.g., grocery).
Track your expenses as soon as they occur. The urge to do it later is often the reason why your income and expenses don’t reconcile with what is in your bank statement.
This brings me to the next point, no matter how good you are at tracking consider reconciling your income and expenses with your bank statement. That way you make sure nothing is missed or forgotten.
The best thing about budgeting is that once you start doing it right you start to physically see how important and useful it is and you never stop. You use it to save for the next house, the next car, that big wedding and so on.
Budgeting is so powerful that I still do it to date. I use 1Money to track my income and expenses on a daily basis. I connect my cards and let some magic happen automatically, the rest I input myself and compare to my target and previous months.
Based on the monthly summary, I make the necessary changes then track again the next month. By consistently budgeting, even in years where my income has reduced, I have been able to reduce my expenses accordingly and increase the amount I have left to save and invest.
Even better when my income has increased, I have been able to keep my expenses low through my budget and have even more to save and invest.
Create your budget today.
2. Eliminate Wasteful Expenses – Cut Out The Bad Habit
This is the strategy that helps you get to your goal quicker. It is possible to set a budget that includes a monthly expense of £500 when actually if you cut out those bad habits and spend a little less your budget will be £250.
When I got serious about buying a home, I became frugal.
- I reduced the number of reoccurring monthly subscriptions that took money from my account. I canceled my Netflix subscription and found a friend’s own to use. I still use friend’s Netflix -such good friends I have! I switched to the lowest data bundle for my mobile phone subscription and took advantage of free Wi-Fi everywhere I went. I bought a cheap functional phone so that way I didn’t have to pay monthly for the newest iPhone.
- I reduced the number of things I bought. I used to see items I like and force myself to wait a week to analyse and determine how I have survived without it and if I really need it. Often times I don’t.
- I changed my route to work. Fortunately, or unfortunately, my route to work used to go through one of the biggest shopping centres in the UK, and every day, I at least bought an item on my way in or out. It didn’t necessarily have to be a dress or a shoe, sometimes it was pretzels which at £4.99 really does add up very quickly.
- I stopped impulse buying. This is one of my most powerful habits to date. If I see an item, I didn’t think I needed until I saw it, I just don’t buy it. The stores are clever but so am I.
- I set a takeout and fast-food budget. I restricted myself to a certain amount of money to spend on fast food every week and if I had finished that budget by Tuesday then I just had to wait for the following week. This made my restaurant trips even more precious and dear. I enjoyed it better as the brain makes scarce commodities pleasurable.
By cutting out the bad habits, you will be able to save more without even increasing your income. This way you reach your goal faster.
3. Pay Yourself First – Automate Savings in Several Bank Accounts
The next step is to automate your savings. As soon as money comes into your account make sure a sizable proportion of it goes to your housing budget first by standing order.
Create multiple savings accounts, rename them to what you want to use them for and make sure your automatic payment goes into the respective account as you have set out in your budget immediately the money comes in.
If your income comes in on the 15th of the month like mine did, don’t set your automatic payment into your home savings account for the end of the month, set it for the 15th. Let it go out first, so you are not tempted to spend it and postpone that saving target for another month.
Deliver yourself from the temptation that you have so much money.
Since buying my first house, I have not closed my home savings account and have continued to use it.
I have also found that the temptation to resist was even more effective when I set up this multiple savings account with different banks.
Till today I have;
- Main account – where my income comes to
- Home account – which I am using to save for my next investment property
- Mortgage account – where my mortgage payments go to before the bank takes it
- Index Fund account – where I put money, I use to invest in index funds a few days before it gets taken by Vanguard or Invest Engine for investment
- Sinking fund account – which I am using to save for my friend’s 30th birthday to the Caribbean
- Emergency fund account – where I have saved 6 months of my expenses
- HMRC Account – where I keep the corporate tax, I owe the UK government and the VAT I collated from services offered to be paid to the government
- Giving Account – where I set money aside to pay my tithe, give to charities and take care of my parents. Family is everything to me!
- Living Life Account – where I put money aside to indulge in the good things of life
4. Set Clear Startegies to Pay Off Debts
In addition to shying away from unnecessary expenses, if you have indulged a little bit too much in the past or had emergency expenses creep up on you, then you need to set clear strategies to pay them off, so you are not discouraged from owning when you owe.
Your credit card balance is taken into consideration by the Banks when calculating how much they can borrow you.
For me, I had a huge medical expense to pay off over £10,000 in the second year of saving for my home and I had to decide if to totally pay it off before buying or not.
You can either choose to reduce your debt or pay it off completely before applying for your mortgage. I chose to reduce mine to less than £2,000 before applying rather than paying it off because I intended to rent out a room in my house and knew that will generate an average of £1,000 per month. That way I get to use someone else money to pay off my remaining debt in a few months.
That was my strategy. What’s your strategy for paying off your debt? Are you paying off the most expensive debt first? Are you deleting your credit card details from those online stores? Take action to reduce your debt today.
5. Ask For A Raise
Yes, ask for a raise.
I’ll be first to admit that once I knew I needed a raise to buy my house I actively sought more ways to be relevant at work and add additional value. Once I was certain I was adding so much value then I discussed with my manager the need for the value I created to be rewarded.
It is worth noting that this doesn’t happen in a day, it takes a series of conversations, so you need to time it right. Consider the promotion cycle of your organisation, when your manager is in the best mood, when Executives will be in the office and for what meetings so you can contribute.
You must be prepared to ask for a raise as it won’t just happen without you working towards it. Most employers don’t want to pay you more even when you have earned it so until you ask for it you will continue to get rewarded with the occasional chocolate and below inflation bonuses.
I read books to help me prepare for my raise conversation.
If you add value at work, then that value you create should be rewarded
If you don’t get a raise, then consider the next point below.
6. Get A New Job
If you asked for a raise and didn’t get it then consider what employment options are out there.
If you asked for a raise and got it congratulations your effort got rewarded but it’s still worth exploring the market and seeing what else is out there
Switching to a higher paying job can help you save towards your down payment quicker than you expected.
However, when moving jobs make sure to consider various factors beyond money including;
- The company’s culture – what do they stand for and how does that compare to what matters most to you?
- The benefits on offer – health insurance, dental package, stock options, pension contributions
- Flexibility – can you work from home if you need to look after your kids?
- Paid holidays – how many vacation days? Sick leave? Parental leave?
- Room for advancement – is the company a good brand for your CV? What can you learn? How can you progress within the organisation?
- Company stability – you don’t want to start today and be laid off in 3 months. You probably won’t be entitled to severance until you have been at the company for a while. Don’t lose out. Check how well the organisation is performing in comparison to its competitors. Read what the market analyst are saying about the company? Are they in crisis or a lot of online controversies?
7. Take Advantage of Free Money
There are various schemes out there that could help in your home purchasing journey.
In the UK there are the;
- Help to buy scheme – an incentive for first time buyer’s which allows you to purchase your property by only putting down 5% deposit and borrow 20% of the purchase price (40%) in London) interest free for five years. You can apply for this scheme until 31st March 2023
- Help to buy ISA – With the help to buy ISA you pay in up to £200 each month and the government tops up your savings by 25% (up to £3,000) when you buy your first home. While you can no longer open a Help to Buy Isa you can still pay into an opened one until November 2029 and claim the 25% bonus until November 2030. You can read more about how it works and the requirement for accessing these benefits here
- Help to Buy: Equity Loan: With this scheme, you can borrow an equity loan from 5% to 20% of the property purchase price for a newly built home. The catch is that the property must not have been lived in by anyone before you buy it. You can read more about the Help to Buy Equity Loan on the UK government website here
- Lifetime ISA – You can out up to £4,000 per year into your Lifetime ISA until your 50th birthday, and the government will top it up with a bonus of 25% to a maximum of £1,000 per year. Imagine accumulating a bonus of £3,000 in 3 years!. You can read more about the Lifetime Isa here
Before you take advantage of any of these schemes make sure to read the fine line – do your research as they have specific requirements.
I took advantage of the help to buy Isa and received a free contribution of £ 3000 toward my purchase.
8. Grow Your Passive Income Streams
Another way to buy that first property quicker is to increase your income while limiting your expenses.
There is so much wealth of knowledge out there on possibly hundreds and thousands of things you can get involved in with a varying level of difficulty to increase your income.
In my case, I generated passive income by;
- Freelancing – I started getting paid for reviewing new books before they got published. This was a win-win for me as I love to read
- Selling online – I love photography so I started selling pictures from my google photos online. It’s incredible how much you can earn by selling those pictures you admire
- Renting out my parking space – I didn’t own a car and imagine my surprise when I found out I could earn from my driveway which was just sitting there.
- Building simple websites – I taught myself how to build beautiful websites and get paid for it. I got started using simple WordPress templates and hosting on Hostinger.
9. Focus on Building Your Credit Score
Your credit score is a key consideration in determining if you are worth borrowing money and how much you could borrow.
I started out by checking my credit score and trying out various ways to improve them as the months went by.
I improved my credit score by;
- Registering on the electoral register to prove where I live
- Making regular payments on time
- Keeping my credit utilisation low
- Reporting mistakes and making sure they got corrected as soon as possible.
10. Sacrifice.. A Little Bit More
This is a very important last steps worth mentioning. By budgeting and cutting down your expenses it is fair to feel you have sacrificed enough. I had to take a final step by sacrificing on big vacations with the girls. I love theatre and had to start sacrificing front-roll seats. I bought my own candles and had at-home spa treatments.
I found ways to create new experiences at a cheaper cost. I loved historic sites, so I visited historic sites in the UK rather than travel abroad to see some.
This sacrifice will be worth it in the end when you have your home, travel for that beautiful vacation, and come back to your warm and cozy home.
Set Milestones and reward Yourself
The journey is as important as the destination so on the journey to saving for your new home it is important to set some milestones and celebrate those milestones with someone precious or something special.
I look forward to celebrating your new purchase and wish you comfy sofas, bright lights, green plants, and warm rugs in your new home.
I wish you all the best on the journey to purchasing your first home.
*This is not financial advice. Do not consider this blog to be a substitute for obtaining advice from a qualified investment advisor. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional *