Owning a home is a dream for many people, but there’s one thing that stands in the way of realizing this dream: a down payment.
A home is the biggest purchase you’ll make, and you can expect to put down a hefty down payment. Most people will have to save for several years before they can finally make an offer on their first home.
There are many ways to save for a down payment. The right strategy can help you reach your goals faster and more efficiently.
1. Transfer Money to a Special Savings Account Each Month
The most popular and convenient way to save for a home down payment is to transfer money into a savings account each month. Set up an automatic direct deposit so that you have no excuse not to save. Make a commitment to never use those funds for anything other than your down payment.
Opening a savings account is quick and easy, especially if you already have an account with a bank. It’s also a safe method, as your funds are guaranteed. The only drawback is that your return will be very low. Regular savings accounts have very low interest rates.
If you want to earn more interest, you can open a high-yield savings account. These sometimes pay 10-20 times the rate of a regular savings account. The highest rates are usually offered by online only banks.
2. Put Some Money into Investments
If you have a higher risk appetite, you might consider putting some money into investment accounts. The account will allow you to put your money into stocks and mutual funds that may provide higher returns than even a high-yield savings account.
If you prefer sticking to safe investments, you can put your money into GICs. With a guaranteed investment certificate, you’re guaranteed to receive your initial investment plus a little interest. You can choose to invest over the short-term or up to five years. You only need $500 to get started, but the return is much lower than what you’d get with an investment account.
3. Sell Some Investments
If you already have investments, you might consider selling them and moving them into another investment vehicle: your home.
4. Borrow from Your Retirement Accounts
If you want to speed things up, you might consider borrowing from your retirement accounts. You may be able to make a penalty-free withdrawals from your plan because you’re buying a home. Many profit-sharing and company-sponsored 401(k) plans will allow you to borrow against your savings to buy a home.
5. Save Bonuses, Tax Returns and Raises
It may be tempting to take a vacation or do some shopping after you receive a bonus or your tax return. It’s also tempting to upgrade your lifestyle when you get a raise. But instead of taking on a higher car payment or moving into a more expensive apartment, put this money away for a down payment.
Every time you have an increase in your income, increase the amount of money you’re saving each month. If you can maintain your same lifestyle, you can save more money and reach your goals faster.