Down payments are used when there will be an outstanding balance after a purchase. Buying a house or a car is greatly impacted by the down payment. The size of your down payment affects the size of the loan, the loan interest rate and other loan terms.
Unless you have scored a sizeable raise or a new job with a nice salary increase the reality is the down payment will have to come from your current income. You will have to take an honest look at your current lifestyle and how your money is being spent.
What is My Savings Reality?
Start with your monthly budget. If you do not have one, now is the time to start. Begin with your monthly income. Income is wages, salary, bonuses, interest and/or investment income, child support and/or alimony, etc. If you need help with a budget download our FREE Budget worksheet here.
Next, itemize all necessary expenses. Start with fixed expenses these include items like rent or mortgage, student loans, utilities, car payments, insurance, cell phone, credit card payments, etc. Other expenses that have more flexibility are called discretionary expenses and include groceries, entertainment (movies, concerts), clothing, eating out, transportation, etc.
Once you have done the above steps you will have an idea about what your cash flow looks like on a monthly basis. This will enable you to make informed decisions. Making decisions to reduce spending will help you achieve necessary savings for a down payment. Remember that is your ultimate goal.
Where to Start
Take a look at your credit cards. Which ones have the highest interest rates? Does one of the cards have a noticeably smaller balance? If so, what would it take to pay that off and then roll that payment towards the next card? Perhaps one balance can be rolled to another card. Ask or look for offers of no interest charges for a period of time.
Discretionary Expenses
Yes, we are coming after your latte and that’s not all. Lunch out, even if it is fast food adds up over the course of a month. A medium double shot latte is about $4.25. Three times a week this equals $51 at month’s end and if you are picking up coffee five days a week the expense is now a hefty $85 per month. You are looking at anywhere from $600- $1000 over the course of a year.
Is your stomach starting to growl because the lunch hour is near? A fast food burger meal for one day figures at $6.20, burrito and soda the next day for $8.30, and a restaurant sit down style lunch on Friday at $10 means that you are eating lunch out to the tune of $98 per month. And that's on the cheaper side of things!
Just combining coffee and lunch over the course of the year is an expense right around $2200 or it is a savings of about $2200. How to beat both of these expenses? Buy a good coffee maker or coffee press and a travel mug and start making a week’s worth of lunches on Sunday. We are just getting started on that savings plan!
The Bigger Ticket
What does your cell phone data plan look like? If you are not using all your data a lower plan could potentially save $30 per month. Reduce the cable television bill by going with the basic package and removing the premium channels. Instead add Netflix or Hulu so you don’t feel like you are missing anything. By removing two premium channels like HBO and Showtime, having one DVR instead of two, and having a cable box in two rooms instead of three, the saving potential is $50-70 per month. Potential data and cable savings over the year is $960-$1200.
For every degree lowered on the thermostat the savings is about 3%. This is according to the American Council for an Energy Efficient Economy. This nonprofit group estimates about a 10% savings by resetting the thermostat three to four degrees cooler for the winter months and warmer for the summer months. If heating and cooling averages about $200 per month that is a savings of $200 per year, allowing two months where neither system is running.
Does your definition of vacation include a flight, hotel, dining out, and other activities? If so, the average vacation cost per person is around $1000-$1200 per trip. Ways to reduce this include vacations closer to home, more day trips or even camping instead of a hotel. This approach could potentially save $2000 per year for a family of two.
Do You Have Something to Sell?
Maybe it is time to have a garage sale. Is there exercise equipment collecting dust when it could be sold for money? What services can you sell? Dog walking, house sitting, or other free- lancing can add up quickly.
Pulling it All Together
Just using the above methods you can realize an additional $5500 savings per year. And what hasn’t been analyzed yet are suggested saving methods for, groceries, toiletries, clothing, dinner out, transportation, and entertainment. Recommendations for saving in all of these categories are easily found via a quick Google search.
Determine the amount you need to save and what your time frame is for achieving the goal. Set up a second savings account (separate from your emergency account) and make sure all of your hard won gains are funneled to that account. Check the monthly statement and give yourself a pat on the back.
Maintain the Motivation
Saving for a house or a car? Put a picture of your goal on the refrigerator. Perhaps you do better with a daily motivational statement. Spend some time figuring out what will reinforce your discipline of saving.
A small reward every three months may do the trick. You will look forward to the reward and plan for it; a movie out, a new pair of shoes, something that is meaningful to you. If you are in a relationship you can be a cheering party of two. Make lunches for the week together, assembly line style.
There is a big reward at the end of your goal. You will finally be purchasing a car to meet your needs or a home for your future family. Plus you will have gained the lifelong skill of saving. It never goes out of style.
Get a budget make over and start saving for that big purchase. Download our FREE Budget Worksheet!
If you have questions about buying or selling your home, head over to our page called Everything You Need to Know About the Mortgage Process to answer all your mortgage questions, and then some.
