Owning a home is a classic element of the American dream, but with an average median home price of $241,300 in 2019, such a purchase may feel out of reach. However, leveraging auto-saving methods can help you build up your savings before you know it, giving you the down payment you’ll need to buy that dream home.
How to use auto saving to your advantage
Automatic-savings methods allow you to direct money to your savings account before it ever hits your wallet. Without the spending temptations that may strike before you move the money, you could accumulate much-needed cash long before you expected.
Save for a down payment
Minimum down payment requirements vary based on the different loan options available, as well as the individual buyer’s financial standing. For example, a Federal Housing Administration mortgage requires a 3.5% minimum down payment, while conventional loans require a 3% minimum down payment, although many of these lenders prefer a down payment of 20%.
The bigger the down payment, the lower your monthly payment, so saving up before your big purchase is a smart move. Say you want to save a total of $10,000 in five years, an auto deposit of $38.50 per week or $167 per month will get you the lump sum you need.
If you’re taking out a conventional loan with a down payment of less than 20%, the lender will require you to carry private mortgage insurance, which can increase your overall mortgage payment. The more money you can save beforehand can help you lower, or even eliminate, that extra cost.
Get a jump start on closing costs
If you already have your down payment, you can start saving for fees and closing costs associated with your mortgage. Closing costs and fees usually cover such expenses as loan origination fees (the cost to approve your loan), home appraisal costs, title search fees and recording fees. Average closing costs range between 2% and 6% of the loan amount.
Fund your dream amenities
If you had to settle on an almost-dream home to accommodate for location or costs, set up an automatic “fixer-upper fund.” Regularly socking away a certain amount of every paycheck can help you build toward updating your kitchen, adding that swimming pool or turning the basement into the ultimate home theater. Just be careful not to go overboard on the amenities or you’ll risk pricing yourself out of the local market if you choose to sell.
Plan for the unexpected
Homeownership comes with a lot of unplanned expenses, so it’s good to be prepared. You never know when your refrigerator will break down or a pipe may burst — and these repairs are not cheap. At the very least, it’s a good idea to save the amount of your homeowners insurance.
How to auto save
There are numerous ways to set up automatic savings, so you can try them out to see what works best for you and your goals.
Make the most of direct deposit.
According to the American Payroll Association’s 2018 “Getting Paid in America” survey, 93% of respondents get paid via direct deposit. That’s great news, given direct deposit is a quick and easy way to automatically add to your savings. Using direct deposit, you can split your paycheck into various amounts, which are then deposited into specific accounts such as primary checking and different savings accounts based on your goals. Talk with your human resources or payroll administrator to set up your preferred direct deposit arrangements.
Set up automatic transfers.
Most banks and credit unions provide automatic transfer services that allow you to have a set amount of money moved from your checking account into a savings account on a recurring basis. Likewise, if you use a credit card with cashback rewards, you may be able to set up an automatic transfer from your cashback balance to your savings account once you receive a minimum amount.
Consider goal-oriented robo-advisors.
Automated online investment platforms, robo-advisors will invest money for you in an investment portfolio. You add money to your account, and your robo-advisor will invest it based on your investment habits and preferred risk level. This can be a great way to start investing with a small amount of money and low brokerage fees. If you set up a specific timeline to reach your savings goal, this will impact the asset allocation and risk tolerance, but you will still be putting funds in the market with the potential to lose value.
Use apps that round up your spending.
When cash was the preferred currency for transactions, it was common for many people to take their loose change and collect it in a jar. Once the jar was full, they would trade the coins in for bills or deposit the money into a savings account. Nowadays, you can apply this same approach with a smartphone app. Qapital, for instance, lets you round up your transactions and transfer the difference to your savings account. Some banks offer this same service — customers of Bank of America can sign up for its Keep the Change savings program, which rounds up debit card purchases and transfers the difference to your savings account.