Urban areas in some of Canada’s most popular cities have a serious rental shortage. Couple that with attractive lending rates for home owners to do renovations and builders and developers to build countless new homes, coming up with money for a down payment on a home of their own has become a top priority for many young adults.
Saving for a down-payment is as much psychological as it is financial. There are any number of ways that we CAN save money, but adjusting our mindset and lifestyle expectations is the difference between “trying to save” and “actually saving.”
With that in mind, if home ownership is your goal, here are steps to take to make it a reality as quickly as possible:
Start by Considering Your Spending Habits
Most people don’t truly know where they actually spend every cent they earn. When you want to save up a down payment fast, you need to know exactly where every cent you earn goes. If you only have a pretty good idea, that will make it harder to reach your goal.
Start by tracking your spending. Use a journal, app or spreadsheet, but jot down where you spend your money. You might be surprised by what you discover.
Create a Budget that Maximizes Saving
After tracking your expenses for a few weeks, build a budget that maximizes the amount of money you put into savings. Budgeting can be quite a simple process, however, when you want to reach a goal fast, every dollar your household earns needs to play a role in getting you there.
Use a comprehensive list of household and personal expense categories to really dig down and determine how you want to spend your money. For instance, keep your personal care expenses separate from your groceries. It’s tempting to combine them because many people buy them all together at the grocery store.
Resist Drastic Spending Cuts
As you allocate your money towards each category, resist the urge to slash your spending in certain areas entirely. Realistically, depending on how much you want to save up and how much you’ve already got saved, it could take another one to three years to save up enough money to buy the home you want.
Doing without in one area of your lifestyle, e.g. entertainment, recreation or vacations, is not realistic for the long term. Limiting yourselves too drastically could have the reverse effect of over-spending or splurging unintentionally. Rather than drastic cuts, start with a 50 percent reduction. Try that for a number of weeks then reduce spending in that category by another 50 percent. You’ll soon see if you can eliminate the expense entirely, or just spend less on it.
Pay Off Debt Fast
It is extremely hard to save when you’re in debt, so an essential part of your budget needs to be money allocated to pay off debt fast. High interest credit card debt is one of the worst savings stoppers because of how much extra income it takes to pay those cards off. If you’d like a nice list of extremely effective methods to pay off debt, have a look at this list.
Depending on how much you owe, how much money you currently have saved and what changes you’ve already made to your lifestyle, you might be able to make a lump sum payment to bring your debt down fast, then start saving more quickly by redirecting your former debt payments to your savings.
A strategy like this works most effectively once you’ve already made the lifestyle adjustments needed to live within a budget.
Break Your Savings Goal Down Into Realistic Steps
Looking at a large savings goal can be demotivating because it’s so big. To make it easier psychologically, set much smaller goals. You might not yet know when you need the money, so the traditional way of breaking a goal down by dividing how much you want to save, e.g. $50,000, by the number of months before you need it, might not work.
Instead, let your budget be your guide. Crunch your numbers very carefully to see how much less you’re able to spend each week. For example, if you and your girlfriend can each find a way to spend $50 less each week, that would come to over $400 every month. Then work your way up from there, e.g. a next goal might be to spend $100 less on entertainment each month.
Work together, make it fun and set a timeline once you have a better idea how much you can actually set aside in your down payment savings account. You’re not trying to spend less to limit yourselves; you’re spending more strategically to get more of what you want later.
How You Save Will Matter
The money you set aside for your down payment should be in a separate savings account. Use automatic or pre-authorized transfers to make deposits to this account whenever you get paid. Ensure that the account is not accessible by debit card to make it harder to spend the saved money impulsively. When the money is transferred into an account before you see it in your chequing account, you tend to forget that it’s there, out of sight and out of mind tends to keep it safe from yourself.
Once you have about $1,000 saved, visit your financial institution to see what kinds of higher interest accounts they offer. Earning even a little interest in a tax free saving account (TFSA) can help you reach your goal that much faster.
Consider Increasing Your Income
There are countless ways to earn a little extra, e.g. taking on a second job, picking up extra shifts at work, offering your services for baby-sitting, home repairs, music lessons, tutoring or something else you’re good at, or taking in a boarder or roommate. Reducing your expenses will get you so far, but if you’re serious about reaching your home buying goal as fast as possible, increasing your income might be the way to go.
First Time Home Buyer Programs and Assistance
There aren’t a lot of first time home buyer programs available in Canada, however if you have an RRSP, you are able to withdraw up to $25,000 in a calendar year tax free to help pay for a home. The catch, however, is that you must repay this money to your RRSP within 15 years.
You may also qualify for some tax credits, both at the time you buy, or federally, depending on your overall situation, e.g. GST/HST new housing rebate. Ask your realtor as well as your lender for help finding out what you qualify for and if there’s anything you need to do to apply.
The Bottom Line on Saving for a Down Payment Fast
Saving up for any large purchase is hard to do effectively in isolation from the rest of your money management strategy. A big enough down payment, however, is essential for not simply buying, but truly affording the home you eventually purchase. Furthermore, the savings discipline and money habits you learn while saving for the down payment are skills that will serve you well as homeowners.
As you save for a home, if you have a partner, you will be most successful if you work together with him or her to create a step by step plan. You can encourage each other to stick to it when the going gets tough. Together you should review your successes and ensure that you do more of what works best for you. Saving up for a down payment fast won’t happen overnight, however saving $100 this week will be more than what you had last week. When you do all of the little things right, the big dollars will take care of themselves.
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