1. Make a list of your existing expenses.
This may include:
- Groceries
- Transportation
- Insurance (auto, health, life)
- Debt payments
- Cell phone
- Internet
- Gas and electricity
- Water and other utilities
- Emergency savings
- Retirement
2. Factor in the upfront costs of buying a home.
The most obvious cost you'll deal with is the price of the home itself. Few people can afford to buy real estate without taking out a mortgage.
Here are the upfront costs you'll need to cover.
- Down payment: Most people put at least 3% down, although it is possible to get a zero down payment mortgage.
- Closing costs: Depending on the lender and the home loan program, there's a number of fees you may need to pay. Some lenders allow you to roll closing costs into the loan balance. If you do, you'll pay less out of pocket. But you'll pay more in interest charges for the life of the loan.
Besides the mortgage, you'll also pay the usual expenses associated with any relocation.
- Moving costs: You might need to rent a moving truck and shell out cash to get your utilities turned on.
- Making it yours: You're unlikely to buy a home that exactly suits your tastes. You might want to paint, install new window coverings, clean up the house, buy furniture, or even take on a major remodel.
3. Add the expenses you will start paying once you have a home of your own.
Here are some of the most common expenses homeowners should prepare for:
- Mortgage Principal plus Interest payment: Your credit score and the amount you borrow both influence the interest rate you qualify for. If you are able to increase your credit score before you apply, you could lower your mortgage payment.
- Property Taxes: The national average is about 1%, of the appraised value, but yours could be higher or lower than that.
- Homeowners Insurance: Expect to pay at least $100 to 150 per month.
- Landscaping: Some people pay someone to mow the lawn and pull weeds for them.
- HOA fees: If you buy a home in a neighborhood with a homeowners association, you may have to pay HOA fees.
4. Include regular contributions to your emergency fund and your retirement savings.
Ideally, your emergency fund should be big enough to cover three to six months' worth of living expenses. This will ensure you can continue to pay the mortgage if you lose your job or face another financial issue.
5. Set aside money for maintenance.
This may be the biggest new (and ongoing) expense you'll face. There is no way to predict exactly how much money you'll spend or when, but a good rule of them is to set aside approximately 1% of the home's purchase price each year for maintenance.
Maintenance is not an "if," but a "when." You might have no expenses for a period of time, and then several large expenses all at once. You can be certain things will need to be replaced or repaired in your home sooner or later.
6. Set a new savings goal for future upgrades.
Depending on your total monthly spending, you may find you need to wait a while before you can update the kitchen or bathroom. But when you're ready, you'll want to have some money put aside for any future renovations.
7. Start saving.
Now you're ready to start saving! Remember the money you set aside to buy a home should be in a place you can access on demand without penalty.
Where to put your savings
Remember the money you set aside to buy a home should be in a place you can access on demand without penalty. Here are a few places to consider:
High-yield savings accounts
A high-yield savings account or a money market account (MMA) both give you full access to your funds, so long as you don't make more than six withdrawals per month. You can earn significantly more interest than you'd get from a typical checking or savings account.
Certificates of deposit (CDs)
A certificate of deposit (CD) is another option for your down payment savings. The interest rates are comparable to those of MMAs and high-yield savings accounts. But keep in mind that you'll pay a penalty if you withdraw the money before the CD matures.
Where not to put your savings
It can be tempting to invest your home-of-your-own savings in the stock market to try to earn more interest. However, the stock market is only a good option for money you don't need in the short term -- you don't want to have to sell when the market is down. Stocks can be volatile and there are no guarantees.
It takes many people a couple of years or more to save toward the down payment on a house and build up a sizable emergency fund. During that time, it's smart to maximize earnings and minimize risk.
