How We Saved Our Down Payment
5 Tips to Own Your First Home
Tips from a Millennial Couple (Age 25 and 23) who bought their First Home in One of the Most Expensive Counties in Northern California.
Let’s face it — saving money is difficult. Not joining your friends for a night out on the weekend is boring, cooking dinner at home is time consuming, driving a new car around looks so much cooler. It is all too tempting to put off home purchase and pay rent for the convenience of now.
However, there is only one direction rent is going: up. Landlords require their rental income to keep pace with inflation. Whereas, mortgages are fixed, for 30 years; if you refinance it down the road, the monthly payment goes down. I am not telling you something you don’t already know. Your instinct tells you that, your parents (hopefully) tells you that too. For most people in most circumstances, renting is the financial equivalent of throwing money away. Do as you please, but I want you to be financially successful.
If you plan on staying in one area for more than 3 years, it almost always makes better financing sense to purchase your home than to rent. It can be a difficult process, especially if you have not been properly aligning your finance towards homeownership. However, as with most things, everything starts with the first step.
If you plan on staying in one area for more than 3 years, it almost always makes better financing sense to purchase your home than to rent.
No, our family did not help us with our purchase. Yes, we saved every penny to make it happen. Here are 5 tips on how we saved our down payment:
1) Cut all unnecessary expenses, ruthlessly.
It is all too tempting to sacrifice your ultimate objective for temporary pleasure. Resist it. Are you eating out every night of the week? You need to cook at home more often. Are you going to Starbucks before going to work every morning? You may want to start brewing your own coffee. Friends inviting you out to the bar? Why not invite them over for a drink instead? Need new clothes? Instead of splurging, you should consider going to a thrift store.
There is a tradeoff for every decision you make. The goal is not to make your life miserable. If you love trying the newest restaurants in town, instead of going out every night of the week, how about twice a week? Or once a week? You can argue: if you cut out coffee completely, you can save a lot more money than brewing at home. In that case, it depends on your utility function, what makes you happy matters. The key is it cannot be excessive.
As a side note, owning a brand-new car can be one of the biggest hurdles for young people to financial success. It is a negative asset that only devalues over time (classic cars can be an exception, but I am talking specifically brand-new vehicles). I drove a 7-year old orange Prius with over 220,000+ miles for years. I knew it was not glamorous.
This are ways to trick your own brain. Pay yourself first when your paycheck hits your bank account. Set a goal for how much you will need for the down payment, decide a realistic timeline for you to save that amount, and pay yourself that monthly portion at the beginning of every month (or whenever you get paid).
Human beings tend to give in to temptations. When you see money sitting in your account, it makes it easy for the average person to feel “no big deal” to spend a little. However, that habit can snowball, and soon you will find yourself putting off the task of saving money until next paycheck.
Pay yourself first. Bills, expenses, entertainments all come later.
3) Create a budget sheet (Avoid Debt)
How do you know if you are overspending if you do not track your spending? Measure what areas you tend to spend on, what are your weaknesses? Which area can you cut down? Create a budget sheet.
QuickBooks is a great tool for household expense tracking. I use a simply Excel spreadsheet. Anytime I spend a dollar, I add that to my budget sheet. No need to let budgeting overwhelm your life, once a week balancing should work wonders.
Lastly, debt should be avoided at all cost. No spending any money that you do not have. Exceptions exist, there are good debts out there, such as a mortgage. However, personal debt, credit card debt, auto loans should be avoided like a plague.
No spending any money that you do not have.
4) Set goals — and gamify your life.
The saving process does not have to be painful. It should be rewarding and enriching. Once you set a goal for yourself, create some check points to reward yourself for the good job you have done.
If your goal is to save $20,000, set a milestone for when your saving hits $10,000. Reward yourself with a nice dinner out with friends. Gamify your life. Make it a game where you “unlock” rewards at every achievement.
A great app that you may find useful in tracking your habits and goal progress is Habitica.
5) Don’t let money be a source of argument.
Lastly, if you are in a young house hold, besides managing finances, there can be many more stress and multifaceted challenges. Do not let a positive and rewarding experience turn into a source of stress between your spouse and you.
Have open conversations, decide together what your priorities are. Recognize the personality differences, if both of you are completely on the same page, wonderful. If one of you prioritize a home ownership, while the other prioritize driving a new car, recognize it. Decide together how you can both achieve those objectives with a realistic path, which objective comes first? The task of financial management can be a shared or a delegated task. You have your partner, let life settle around your situation.
Ultimately, money is important, but not more important than family, not more important than feelings, and definitely not worth arguing over with your loved one.
Money is important, but not more important than family, not more important than feelings.
There you have it! No magic bullets. There is only two ways to have more money: increase your income and decreasing your expense. It all comes down to how you can achieve that in the most effective, and painless manner. There are also alternative options for young families to home ownership such as: down payment assistance programs, low income charter for developments, etc. Ask your local real estate experts for more information.
No one will ever demand you to be successful in life. It is a decision and an action you must take in order to make it happen. Do not let the “someday” excuse fool yourself.
About the Author
Danny Lau has set up several successful small businesses, he is a top real estate sales professional, and he shares real estate investment advice through his YouTube Channel.
Disclaimer
This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
