There comes a turning point in a lot of people’s lives where they just need to buy a home. Whether it’s starting a family, or whether they’re getting married – there’s a pivotal moment where people just need to buy a place to “settle down.” In this post, I’ll show you how to save money to buy a house because without the necessary funds, you can’t buy a house.

First, Figure Out How Much Money You Need Save For The House’s Down Payment

There’s all types of different loans out there that’s available. They range from having to put a 20% down payment on your mortgage, all the way down to 3% for a conventional loan. For special loans, like a VA or USDA loan, you could even pay 0% down for the property.

Keep in mind though, the less money you put down, the higher your debt will be. As such, your monthly payments to your mortgage will be higher. Also, keep in mind that most of the time if you’re not putting 20% down, you’ll need to pay for mortgage insurance, which will cost you even more money each month.

I’ve written a post that details all the steps on how to buy a home, and a lot more gory details on different types of real estate loans if you’d like to check that out as well.

A 0-3% down loan might be something to consider if you’ve got enough money coming in each month to cover your mortgage payments, but don’t have that much money saved up.

Paying 20% down is consider “normal” for buying a home, and will result in a smaller amount of monthly mortgage payments due to 1) the loan being smaller and 2) the lack of mortgage insurance. This is a good option to consider if you’ve saved up enough for a 20% down payment and prefer to save more money each month after you’ve purchased your home.

Second, Figure Out Your Monthly Debt Service

There’s generally 4 parts to a mortgage, known as “PITI”:

• Principal
• Interest
• Taxes
• Insurance (homeowners, and mortgage insurance as well if your down payment is lower than 20%).

There’s a mortgage calculator you can use here, but it doesn’t cover mortgage insurance so you’ll need to add that manually.

Once you figure out how much money you’ll pay each month, you should make sure that it’s only 30-45% of your monthly pre-tax income. Or at least, that’s what’s conventionally recommended. I personally recommend your monthly payments be no more than 20-25% of your pre-tax monthly income.

If the payments are too high, you may need to consider buying a cheaper home. Alternatively, if the % is huge but the loan you’re considering is 0-3% down payment and you almost have 20% of down payment saved up anyway, I would run the calculation for 20% down payment to see if the monthly payments there make sense. If “yes,” I might just save for the 20% down payment and enjoy lower monthly payments after buying the house.

Write Down Your Savings Goal

Now that you’ve done all the calculations, you’ll know exactly how much you need:

• To save for the down payment.
• To be able to service the monthly debt payments for the house.

If you can pay the down payment and your income is 3-5X the debt service, you’re ready to buy a home.

If you’re good with the monthly payments, but enough to pay the down payment, write down how much you need to save. This is your goalpost on how much money you need to save before you can buy a house. More details on how to actually save money to buy a house below.

If you’re not making enough money to cover monthly payments, consider putting more money down or you’ll need to get a pay raise.

Tactics On How To Save Money To Buy A House

If you’re saving up for the down payment, outlined below are a few tactics to get there faster.

Pay Yourself First.

According to the Richest Man In Babylon (great book that teaches financial lessons anecdotally), you should be saving 10% of your paycheck. Since I’m more aggressive, I’d recommend you save at least 30-60% of your paycheck if you have the flexibility to do so.

The main trick here is to have a dedicated savings account for you to buy a house. You can do this within a few minutes by signing up for a savings account on Ally.

• It helps segregate your normal funds with the funds you’ll need for the down payment.
• It acts as a psychological barrier to accessing those funds. You can’t just easily extract the funds from a separate savings account. You’ll have to actively add a new account to pay off a credit card, and you’ll have to manually transfer money back to your checking account.
• But you won’t do that, because no matter what, you do not touch this savings account. This savings account will only be used at the closing table.
• Afraid you won’t have the discipline to add money to this account each month? No worries! Most banks allow you to automatically transfer money on a scheduled basis. You can schedule automatic transfers 10%-60% of your paycheck that’s ACH’d into your checking account to your dedicated savings account.
• Example: If your work pays you $1000/paycheck on the 15^th and the 30^th, you can just schedule $200 auto-transfers from your main checking account to your savings account every 18^th and 2^nd of the month (giving the bank a couple days to process the paycheck). Alternatively, just schedule $400 to be transferred the first of each month.

Different Tactics To Save Money

I’ve outlined in great detail a lot of different tactics to save money in these articles. For example:

• Don’t buy expensive coffee, since a daily habit of this can cost you thousands a year.
• Don’t buy luxury goods, since this habit can easily cost you 10s of thousands a year. And even the occasional purchases can cost you thousands of dollars here.
• Another huge expense is vacation. You might consider doing a staycation instead of international travel to save tons on hotels/flights. Doing a more ‘frugal’ vacation or omitting vacation together can save thousands per trip.
• All of this added up should let you net a few extra thousand a year to speed up your ability to save money to buy a house.
• Save even more by checking out the link above for other ways to save.

Don’t YOLO Your Money

You should have “backup” money to cover 6-12 months of mortgage expenses. This way, you won’t get foreclosed on if you’re laid off and will have 6-12 months to find a job instead.

If your down payment goalpost is $20K, don’t buy a house the minute you’ve saved up $20K.

Emergencies happen more than you think and it’s psychologically relieving to know that you’re not just barely making your house payments.

Wrapping It All Up

The most important first step is to figure out:

1. Your debt service should you purchase the house (PITI + mortgage insurance, if any).
2. How much down payment you need to save to buy a house.

Once you’ve figured out the basics, cut expenses. The only limitation in cutting expenses is you can only cut so much. You can’t realistically spend $0/mo for example. So if you’d like to earn more money on the side, I’ve got a bunch of articles for that too.

• Keep in mind that some side hustles are riskier than others and may actually lose you money. So be extra careful when choosing a side hustle as you don’t wanna backtrack and wait even longer to buy a house. If you’ve got questions on what side hustles to choose, just ping me at hello@goodmoneygoodlife.com with your ideas and I’ll give you my honest opinion.

Also, make sure you have emergency funds so a bad month or two won’t wipe you out.

Lastly: do you actually need to buy a house? Unless there’s a real good foundational reason why buying a house is justified, you might consider continuing to rent.

I personally prefer to rent instead of buying a house due to the massive financial opportunity costs that come with buying.

But buying a home is most definitely a personal decision and I hope this post helped you come up with ways to save money faster so you can buy your dream house without having to wait decades!

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