It is well known that investing or buying a home is a challenge that a lot of people can’t get through unless they are related to the rich and famous, and unless those prestigious people fell generous to give and assistance. The odds are that you will have to largely cobble together money on your own to save for a house. On one hand this is a difficult task, while on the other saving money can be a real accomplishment, one with goals and a real prize for success.
Here is some advice from Peter G. Miller, a nationally syndicated real estate columnist about how to save up a down payment in a year.
Open A Savings Account
Open a savings account online or at the same bank or credit union where you now do your checking. The reason to use one institution is convenience: Most banks and credit unions allow you to transfer funds back and forth from accounts electronically and instantaneously. That means you can move money into savings from your checking account without visiting a branch or taking much time from your day — and you want socking away savings to be as easy as possible.
Start a Budget
Every company has a budget, and so should you.
The easy way to establish a budget is to use a spreadsheet — show your monthly gross income and then subtract taxes and other costs from your pay stub. This will give you your net income after taxes. Next, show what you pay for other monthly costs such as rent, student loans, car payments, and credit card bills. Subtract these costs from your net income.
Now comes the fun part. How much money is left each month — and how do you spend it? Start keeping receipts for such things as gasoline, utilities, restaurants, entertainment, parking, and other things you spend money on.
In very short order you’ll be able to see how much you take in — and how much goes out. Now you can ask the magic question: Where can costs be cut?
Given that income and expenses are closely matched in many households, the only way to get ahead is to bring in more money or change your spending habits (meaning spend less) and avidly look for new savings sources.
This may seem difficult, but it’s a reality that every household can save more. We know this because no matter how much you earn there are people with smaller pay checks who live in your neighbourhood and yet live more or less like you do.
To create savings you have to be ruthless. Set a time to review your spending and budget, say the first and third Mondays of every month. Go through the numbers with zeal, asking if every nickel and dime was justified.
Check Interest Rates
Interest rates differ for such things as credit cards, savings accounts, car loans, and other accounts. Go through every bill and account and check the interest rate. Can you do better?
For instance, if you’ve been making full and prompt credit card payments, call up the credit card company and tell them you want a lower rate. You might get a lower rate simply by asking.
Auto loans are different. If you have a car loan with simple interest, then it can make sense to prepay the debt. However, many auto loans use a special “sum-of-the-digits” interest calculation, which makes prepayments less attractive as well as virtually impossible to understand.
How do auto lenders get away with such tactics? Easy. While mortgage lenders have lots of rules and standards under Wall Street Reform, auto lenders are specifically exempted from the rules with what in Washington is called a legislative “carve out” — a fancy term meaning auto lobbyists succeeded in getting auto loans excluded from the regulations. Auto borrowers, of course, have no lobbyists.
Should you sell your current vehicle and get a cheaper used one? That’s not always feasible given trade-in values and sum-of-the-digits financing, but run the numbers and always consider safety first. Meanwhile, when you next get a car, make sure it’s financed with simple interest and has a strong warranty that will cover repairs even if you move. Also, if you have savings, you can put more money down and qualify for a lower rate — still another reason to bulk up your savings accounts.
Check Your Credit
Your ability to borrow — and the rate you pay — are closely dependent on your credit score. Lenders might be very willing to originate a mortgage for you with little down and less savings if you have strong credit.
Your credit score is based on the credit reports, electronic files which show such things as where you have credit accounts, how much you have borrowed, your total debt, any missed or late payments, and how much more you can borrow with existing accounts.
“The key to the system is the assumption that credit reports are accurate, but that’s not always the case,” said Rick Sharga, executive vice president at Auction.com. “Sometimes credit reports are wrong, and when that happens your credit standing can be demolished. The result will be either higher borrowing costs or maybe no mortgage or auto loan at all.”
According to the Federal Trade Commission about 20% of all credit reports have errors. Five percent have mistakes that can drop scores by 25 points. That’s enough to move marginal borrowers into lower credit categories and higher rates.
Even worse, one report in every 250 has so many errors and blunders that the borrower’s score is actually off at least 100 points. That’s enough to sink a lot of mortgage applications and move your credit status from gold to tin.
Part of the problem comes from the vast number of reportable credit transactions which occur every year plus the potential for error: It can happen that the report for “Kenny Smith” may well include dings from “Ken E. Smith.”
The only solution is to check your report for factual errors and out-of-date items several months before you apply for a mortgage or car loan — enough time to clean up errors and disputes.
It’s great to save by spending less, but there’s also another source of savings — those occasional events that bring extra money into the household. Think of birthdays, bonuses, tax refunds, and — ding, ding, ding — the biggest winner of them all, weddings.
While it can be tempting to splurge a bit with these periodic windfalls, this is money that can be used to increase your savings account quickly without dipping into regular income.