Step 1: Figure out how much you’ll need to save
Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Pretty straightforward yeah? Plan a sit down with a real estate company that will let you know how much of a mortgage you can qualify for (and yeah you guessed right, you should have a sit down with us at Vines Realty).
Generally speaking, your housing expense should not exceed 28 percent of your stable monthly income. So if your income is #50,000, you can safely allocate #14,400 of that (#50,000 x .28) to your future house payment.
Step 2: Determine your timeframe
The next step is to determine your timeframe. If you plan on purchasing a home in five years, you’ll have to be prepared to save a certain amount per year.
Naturally, the shorter your timeframe is, the higher your annual savings goal will be.
Step 3: Find the best way to save for your down payment
As a rule, since the money that you are saving for the down payment on a house has a definite purpose, and needs to be reached within a specific timeframe, you should not save money in risk-type investments (stocks, real estate investments trusts, etc.) Instead, you would be better served to keep it in a savings account.
Sure, you may be able to earn more money by investing your down payment account in higher-risk vehicles, but there is also the very real risk that you will lose money in the process.
Remember, if you’re saving for a house, the worst-case scenario would not be missing out on returns, it would be losing some of the money you needed to buy your home.
Step 4: Make room in your budget
Since we’re talking about saving hundreds of thousands of naira per year, you have to clear some room in your budget to ensure your savings goal is doable. That means you may have to earn additional income, cut back on expenses, or both.
But, making room in your budget can help you save the kind of money you’ll need for your down payment, and it will also prepare you for managing the type of tighter budget that homeownership requires. Embrace it for all it’s worth!
Step 5: Set up an automated savings plan
Unless you’re a saver by nature, and most of us aren’t really, you’ll need to automate the savings process. That will mean some sort of payroll savings plan. PiggyVest is your plug here. You should allocate a certain percentage or amount of your regular pay to go directly into a savings account dedicated to accumulating the funds for your down payment.
Not only does this make the process automatic, but it also makes it invisible. Money moves from your paycheck to your dedicated savings account without you even seeing it happen. That will remove both the temptation and ability to spend the money on other purposes.
Step 6: Build flexibility into your savings plan
Whatever the size of your down payment, it is important to build flexibility into your savings plan.
While you’re saving up money, there’ll be other demands on your finances. These can include major car repairs, replacement of a car, uncovered medical expenses, or even the temporary loss of a job. None of these will magically stop just because you have a goal of saving money for a down payment on a house. You’ll have to be ready when they happen.
Make sure that you have an emergency fund—before you even start saving for your down payment—and keep it well-stocked. And if you have predictable expenses, such as replacing your car, you’ll need to simultaneously prepare for that expense as well.