How to Save for Your First Down Payment

saving for a down payment on a house

The days of the 20 percent down payment are long gone, and in some cities you can put down as little as 1 percent, thanks to local first-time home buyer grants, or as little as 3 to 5 percent, as long you pay private mortgage insurance (PMI), which in most cases is entirely worth it.

The key to saving money quickly is to focus first on reducing your three largest expenses.

You should never buy a home you can’t afford, but most banks these days won’t approve you for a mortgage if you don’t have some money in the bank and a steady job. That’s actually one of the benefits of the mortgage crisis: It’s more difficult to get approved, but if you do, it most likely means you can afford it.

How much you need to save depends entirely on the price of the home. Let’s look at some numbers:
$100,000 home x 1 to 5 percent = $1,000 to $5,000 down payment
$200,000 home x 1 to 5 percent = $2,000 to $10,000 down payment
$300,000 home x 1to 5 percent = $3,000 to $15,000 down payment

Not too bad, right? Now, on to saving strategies. And note that while making coffee at home will definitely help you save some money, avoiding Starbucks alone won’t push the needle with regard to a down payment.

The key to saving money quickly is to focus first on reducing your three largest expenses.

Most Americans spend between 60 to 70 percent of their take-home pay on housing, transportation and food. Here’s how to save money on all three. The monthly savings really adds up.

Housing /Rent

If you want to save money, move to a smaller apartment, get roommates or even sleep on a friend’s couch for awhile to save money for a down payment. When I was saving for my first place, I moved from a $1,500-a-month apartment to an $700-a-month one and saved the difference for a down payment.

Potential monthly savings: $500 +

Transportation

If you have a car, sell it and bike, carpool or use public transportation. Or move closer to your office and just walk (I actually did this). Moving close to work will help you save not only money, but also time. Also look into your company’s pre-tax transportation benefits and limit ridesharing: Taking Uber or Lyft every couple days can really add up. It always pays to walk or bike.

Potential monthly savings: $200 +

Food

It’s never been easier to order amazing meals online and have them delivered to your doorstep, and who can resist dinner out – no meal planning, prep or dirty dishes to clean. But all that comes at a cost. In downtown Chicago, for instance, the average lunch is about $10, which equates to $50 a week or $200 per month. And dinner out adds up quickly, often without you even feeling it. After looking through statements, I realized that I had spent over $3,000 a year on Mexican food alone. That’s almost a down payment! So cook at home and you will have your down payment in no time.

Potential monthly savings: $200 +