Saving for a down payment for a house, car, or other major purchase can feel overwhelming. How do you begin? Where do you stash the money? When will you reach your goal? The following tips will help you answer these questions so you can start saving now.
Whether you are ready to settle in a home, have your eye on a new ride, or are considering a renovation to your existing digs, the first step in saving a down payment is the same: you must figure out how much money you need. Go over your finances with a fine-tooth comb to find easy ways you can start saving. You might cut out some entertainment expenses, whittle down your eating-out expenditures, or even get a side gig to bring in extra income. Perhaps you have a healthy emergency fund or retirement account you can access to jumpstart your savings.
Buying a house
Although you don’t always need a down payment to purchase a home, it is in your best interest to have one. If not, you may have trouble finding a lender. Even if you do find a lender, you will be required to purchase additional insurance if your down payment is less than 20 percent of the full purchase price, according to Jeremy Vohwinkle, writer for TheBalance.com. Plus, not having a sizable down payment leaves you open to astronomical interest rates on your loan.
“If you are comfortable with a down payment lower than 20 percent, check with the Federal Housing Administration or Veteran’s Administration as well as state housing authorities for programs that can offer first-time and low- to moderate-income families a lower down payment requirement than conventional loans,” advises Vohwinkle.
Other sources to check include the U.S. Department of Housing and Urban Development and U.S. Department of Agriculture’s Rural Housing Service.
Searching for a car
When you’ve picked the car you want, you need to figure out your down payment. Shannon Bradley, writer for NerdWallet.com, recommends aiming to save at least 20% of the car’s purchase price to put down. If that amount is out of your reach, save as much as you reasonably can without draining your emergency savings. A larger down payment means a smaller loan, and therefore lower monthly payments.
For safe keeping
According to Eric Rosenberg, writer for Investopedia.com, the money you save for your down payment should be accessible, earn a return, have low risk, and retain its value. There are several options for keeping your down payment secure, starting with the simplest and easiest route — a traditional savings account at your current financial institution.
“If you want to earn more interest without sacrificing the safety of FDIC or NCUA protection, opt for a high-yield savings account,” suggests Rosenburg. To use this type of account you will likely need to be an existing customer. These accounts are also typically exclusive to online-only financial institutions.
Some states offer a first-time homebuyers savings account. The riskiest option for holding your down payment, according to Rosenberg, is through a brokerage account, which draws returns from your investment success in stocks and bonds.
With a clear plan, time, and sacrifice, you will have what you need for a down payment on a house, car, or other major purchase.