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It’s a difficult time to be a first-time home buyer. Post-recession buyers are wary--and for good reason--of how and when to save money for a down payment on a house. One thing to remember, however, is that it’s always a good time to start saving.
In this article, we’re going to cover the four most useful methods of saving for a down payment on your first home. That way you can feel confident in taking the first and most important step toward homeownership.
Choosing the right savings account
Unlike riskier investments, a savings account is a safe and proven way of building interest and saving for a home. However, not all savings accounts are created equal.
Typically, brick and mortar banks offer interest rates that are low--the current national average is only about 0.06% annually. While these banks offer conveniences such as in-network ATMs and check-cashing, their physical locations make them expensive to run.
Enter the online bank. Since online banks don’t have all of the costs associated with running branches, they can afford to offer better rewards--namely, high-interest returns on your savings accounts.
So, should you take all of your money out of your current savings account and transfer it to an online bank? Maybe. But let’s talk about the benefits of having multiple savings accounts.
Open a dedicated account with automatic deposits
Saving isn’t just difficult due to financial reasons. Managing money also takes time and effort. To simplify this process, it’s preferable to direct deposit or automatically transfer a percentage of your weekly income into your down payment savings account.
While it may seem like pinching pennies at first, even small weekly deposits add up, and within a few years the compounding interest can earn you enough for a higher down payment than you thought possible.
Prioritize high-interest debt now
Have student debt or a car loan that’s keeping you from focusing on saving for a down payment? Oftentimes the best coarse of action is to aggressively pay off high-interest loans. In the long term, this will save you money that can then be used toward a down payment.
For debt that will take several years to pay off, consider refinancing for a lower interest rate, or consolidating your student loans. Speaking with a student loan adviser or financial planner is a good first step to take toward managing your debt.
Make a real budget
Most of us think of a verb when we hear the word “budget.” However, it’s more useful as a noun.
Creating a real budget, whether it’s in Excel, Google Sheets, or with the help of an app, having a budget you can refer to once a week is vital to making good savings decisions. It will help you monitor your spending and stay on top of your savings goals.