Saving for a new home doesn’t have to automatically mean giving up everything you love, rather it should begin with identifying intentional spending and reviewing what is actually adding value to your life. It can be hard, particularly for millennials to give up certain comforts like vacations, nights out with friends, that preferred brand of premium coffee or a weekly manicure, but rather than cutting them out entirely, sort your ‘must-haves’ from your ‘can-live-withouts’ and plan a reasonable budget around those expenses.
Unpack Your Spending Habits
Similar to the way you’d approach a lifestyle change to reach your health and fitness goals, saving for and buying a home requires a lifestyle shift that doesn’t leave room for frivolous spending. It’s best practice to start this lifestyle shift early on. Make a spreadsheet of your typical spending habits over the last 3 months to give yourself an accurate picture of where your money is going.
Many new homeowners think that as long as they can get approved for a mortgage and get their foot in the door, they’ll deal with finances later. This is a breeding ground for the house poor phenomenon and should be avoided. Shifting the way you approach spending and saving prior to buying your home means that you can continue to enjoy your favorite activities even after you sign on the dotted line. It also gives you a realistic picture of how large of a monthly mortgage payment you can take on.
Sort expenses into two categories, Necessary and Other. Necessary expenses are items such as transportation costs, shelter, living costs and any debt you’re paying off. The rest goes into Other. Before you begin sorting through your non-essential expenses, look through your Necessary costs and see if you can reduce. A few simple shifts can make a huge impact on your monthly Necessary costs.
Finally, begin shifting through those other expenses. A few common categories you’ll probably find you’re over spending in are eating out, shopping, entertainment, gym memberships, traveling and bank charges/ATM fees. If this is the first time you’re exploring your finances, we recommend doing a deep dive. Divide eating out expenses into buying lunch, dinner, alcohol and coffee/breakfast to see where you’re spending the most. These expenses might be ones that will make or break your home buying dreams.
Set Your Budget
Once your you can see what your biggest spending areas are, begin developing your ideal spending in each category and decided what you have to eliminate. When doing this, it’s important to avoid the mindset of sacrificing or depriving yourself. You may not be able to do or have everything you had before, but it’s because of a shift in values and a path toward a larger goal. That being said, there are many things you can continue to do with proper planning and saving. If your fitness class is non-negotiable, make cuts in other areas to cover that cost. Likewise, it’s important to note those areas where a change in your habits is needed. Perhaps you can bring a lunch from home or limit your dinners out to twice a month. Maybe you spend way too much on Uber or take too many small trips a year that you previously thought weren’t affecting your bottom line. This might also be the time you realize that you need to increase your income to be able to meet your homeownership goals and can now begin looking for ways to do so.
It may take a few weeks or even months to make all the changes necessary to be at your ideal monthly spending/saving plan, but this adjustment period is best spent when you don’t have a mortgage looming over your head. Once you achieve your ideal saving/spending balance, you’ll have a better understanding of what a realistic monthly mortgage looks like to you.
Nix Unplanned Spending
Unplanned or mindless spending is kryptonite to all but the best planned budgets. An impulse purchase at the drug store, a new outfit you found on sale and an impromptu dinner night can dismantle the plan you so carefully laid out for yourself. With your new budget in mind, learn to say no to things you can’t afford. Make plans with friends for the following month and work it into your budget, stop walking into retail stores when you’ve maxed out your shopping budget and calculate the totals in your head or on your phone before you get to the cash register to avoid unpleasant surprises.
Love Your Money
One of our favorite finance guru’s Brittney Castro, founder and CEO of Financially Wise Women and an embodiment of the mindful spending movement reminds us that “being financially wise doesn’t mean giving up your daily latte or the things you love. It means spending your money in alignment with what you value most.” Brittney’s number one tip for staying financially wise is to have a weekly date with your money. Sit down, put on some music, make a tea or pour a glass of wine and review your finances with gratitude and appreciation, not judgment and shame. Make note of where you went wrong this week, and set goals and reminders for the week ahead. Don’t skip your money date. Not only does it ensure you know what’s going on with your hard-earned cash but it also fosters a positive association with your finances, rather than the crippling fear you may have experienced before. Check out Brittney’s blog for more tips and tricks – don’t worry fellas, Financially Wise Women has tons of great content for you as well.
Additional Tips to Get You to Your Goal:
- Set up an automatic transfer of $5 every time you swipe your card to a savings account; not only will you be more mindful of your spending knowing it costs your $5 a pop, but at the end of the year you’ll have a nice chunk of change to add to your down payment.
- If you’re still paying off debt while saving for a home, that extra hurtle requires a bit more attention. Consolidate your debts to the lowest interest rate possible and work a debt payment schedule into your budget (pay higher interest debts first if you can’t consolidate everything). Don’t fall into a habit of dumping lump sums into your debt whenever you can and not monitoring your payments.
- Meet with a financial advisor at your bank to talk about any fees that you may be paying and how to reduce those costs and maximize your money. Switch accounts that don’t best suit your spending habits and take advantage of any perks they may offer, like rebate rewards or a cash back credit card, higher withdrawal limits without charges, or high interest savings accounts.
- Make use of online tracking software like Mint that will take the guesswork out of tracking your spending in individual categories. You can link your online banking accounts to your preferred app and set budgets for your month in different areas, which will then be tracked for you with each purchase you make, reminding you when you’re reaching your budget limit.