How to Save for Down Payment on a House

**shultice24** · 12-16-2009, 08:36 AM

Given that you are a single dude with no family to support, I think a $3k emergency fund is pretty darned good for the time being. If it were me, I might divert quite a bit of that $300 allocation into an account specifically for the future down-payment. That alone won't get you close to $30/40k, but it's a start.

If a genuine emergency were to come up that's bigger than $3,000 worth, you'd still have a cash cushion to take care of it, just under a different name.

**disneysteve** · 12-16-2009, 08:42 AM

You need to break down that $829 and know exactly where it is going. Clothing should be zero or close to it. Food should be maybe $200. Gas depends on your commute. There should be a few hundred of that $829 that is available for a house fund. I'd also say you could slow down a bit on the EF savings though I wouldn't stop it since $3,000 isn't nearly enough, especially if you will be a homeowner in a couple of years. Maybe do $200 to the EF and $100 to the house fund.

**creditcardfree** · 12-16-2009, 08:43 AM

It is quite possible your friends and coworkers did get down payment money or had a small downpayment. Unless they tell you specifically, you do not know.

I always think it is a good idea to get rid of other debt first before obtaining a home loan. Sending in extra to current debt, provides incentive to live on less than you make. You would have quite a bit extra each month to save towards a home, without debt payments.

Great job getting your retirement funded!! Maybe your friends aren't doing this but it is good that you are.

**jIM_Ohio** · 12-16-2009, 10:18 AM

Originally posted by LegHead1 View Post

Hello -

I am 26 years old, aiming to buy a house within the next 2-3 years. Most of my friends who are the same age as me have all somehow managed to save the 30-40k necessary for houses in our area (DC). I have no idea how they do this since they all work with me and live the same type of lifestyle (parents maybe?). Anyways, I'll lay out my expenses w/ income, and any advice how to save some money for the house would be much appreciated.

Current income: 40k/yr plus 5k bonus.

Assests:

401k - $11,000 apprx, with 285 plus full match going in every month, plus a pension, but I dont know that amount, it is also coupled with a $180k life insurance plan, but I am a single male with no fam, so not all that necessary.

Emergency Fund - $3,000

Debt:

Car Loan: $9000 left to pay at 4% interest, quaterly payments of $790.
Student Loan: $8000 at 6.5%, payments of $219/mo.

Income/Expenses:

Net: $2,221

Rent: $400
Utilities: $85
Car Loan: $240
Student Loan: $219
Gym: $64
Insur: $84
Emer Fund: $300

Total: $1, 392

Thats $829 left over.... I usually divide this by 4 and thats my money for food,, gas, clothes, whatever per week. (207)

Sooo.... how do I save for a down payment? Second job? Anything I get from my tax refund will be put in savings....when can I stop contributing to my emer fund? 3 or 6 months?

Thank you! Look forward to your responses!

Do not make money issues a race or live by other people's standards. There will always be someone richer than you, and no matter how much money any of us have, we always want more.

I have lived in DC area before (Potomac MD to be specific) and my brother lives in Alexandria right now. Most posters here would phrase your location as HCOL (High Cost of Living). There are some conventional wisdoms you might read on other threads or this one which might not be as applicable to your situation because of HCOL.

You need to deal with 3 specific issues, each "unrelated" now. You will thank me later when it comes time to buy the house.

Issue 1- find a house and location you desire. Price it out. The cost difference between Rockville, Potomac and Hagarstown is incredible. Get a ball park price on a house.
reason 1- you should "expect" to put down 20% of that price. So a 500k house is a 100k down payment.

Issue 2- you need to know your current budget better. I am impressed with where you are at age 26. We could do a whole thread here on just your budget. Let me run a better way to budget by you
you make 40k per year. You need to save 8k per year (20%). Put about 4k of this into 401k (long term goal is always prioritized over short term needs and wants) and put the other 4k per year into a savings account.

reason 2- #1 key to any financial goal is spending less than you earn. This will help make banks feel comfortable lending you money, it will improve your net worth, and if you can live on 80% of what you earn in a HCOL area, nothing financial will ever slow you down ever again.

Issue 3 with the 4k per year "savings" you need to make a timeline on the debt and house. Do not "force" the timeline, just see what it tells you. There are 4 issues on your timeline which will control when you have enough money for a house down payment.
Issue a) the student loan debt
Issue b) the car loan
Issue c) the rate of return on savings
Issue d) how much you need for house down payment

Reason 3- put all 4 of the numbers into same spreadsheet. You know you have 4k per year to play with (because you will solve Issue #2 by saving 8k or 20% per year with 4k to 401k and 4k to short term savings). What you want to do is work on paying down the debt (will take 4 years max to remove all debt from your name, possibly sooner), then probably another 10 years to save the cash needed for a 100k down payment.

For example if you save 4k per year straight up, it will take between 20-25 years to accumulate 100k for a down payment in a savings account.
If you apply the 4k to debt repayment, you will free up 500/mo in debt payments to add to savings, so after 4 years of debt payoff, you can apply 9k per year to savings. 9k per year gets you 100k in about 10 years in savings account.
The purpose of the timeline is to play with numbers so you can see "what it would take".
For example if you lived on 50% of what you earn, you would reach goals faster than if you saved 20% of what you earn. Learn what variables you have control over, and focus on what you can control.

Once you see it takes 14 years to get 100k, you will start to learn some things about yourself. You will start thinking "I do not need a 500k house", you might move further away from DC (like Frederick or Hagarstown) and only need to save 20k, or possibly start looking at job situation and suggesting you can make more money (and make sure to save 20% of all raises and bonuses too!).

You are 26
I see no problems with current situation
Your biggest issue to me is knowing how to set timelines to goals, and making sure timelines you set for yourself are realistic (I do not think owning a house in 2 years for you is a realistic goal based on the little info you provided- it was good info, but with what I see, 2 years is not a good target).

**creditcardfree** · 12-16-2009, 10:46 AM

Nicely said, Jim!!

**Fern** · 12-30-2009, 03:45 PM

I can tell you how I did it. I worked at low-paying (under $45K) jobs for years, lived in my sister's basement paying cheap rent for a few years and becus i was extremely risk-averse, I only bought a house when i had 45% of the down payment. What that also means is that I could have bought much more house, and was urged to do so by my realtor, but as a single person, i had no use for a big house and wanted to make sure my monthly mortgage payments would be reasonable, especially if i lost my job.

That would be my biggest piece of advice for you: don't cave into conventional wisdom of days gone by that says, "Buy as much house as you can afford." This gives you wiggle room should you face a layoff , have a medical crisis or face some other unforeseen emergency that keeps you from working sometime in the next 30 years.

I didn't buy my house until i was 36 years old.

Don't be in a rush to buy the American dream until you're sure you can afford it becus a foreclosure down the road is not worth the stress or anxiety.

**TheMoneyMan-Leo** · 01-03-2010, 04:36 PM

Yes Jim...very nicely said.

Wanting to live in the style of mom and dad too fast is something I see all the time.

I'd recommend looking at a multi-family home for your first real estate investment.

With a 3-4 unit place you'll have 2-8 people going to work every day to pay your mortgage. You could sock away the money you'd normally pay to live into an account for more investments.

Yeah you probably don't want to be a landlord but better to do it when you are young to get a good jumpstart on life so you aren't a Wal-Mart greeter in your 70s to pay the bills!

You can work there for fun! ;>)

You are in good shape.

How to Save for Down Payment on a House