Updated on 10.24.13

New Year’s Resolution Workshop #3: Save for a Down Payment

Trent Hamm

new year's resolution workshopOver the next few days, we’re going to take a look at five common New Year’s resolutions that people often adopt for their finances, evaluate some of the traps that people fall into with regards to that resolution, and come up with some real actions that can turn a challenging New Year’s resolution into a success.

On New Year’s Eve 2005, my wife and I made a solemn commitment to start seriously saving for a down payment. We had a one month old child and were living in a tiny apartment that, even with just the three of us, was already getting tight for space. We knew that we would have to upgrade our living quarters soon and so together we resolved to make a change.

It didn’t go so well. Just four months later, we reached our financial low point – and we realized that just making such a resolution didn’t really help anything at all. We needed a plan in place if were were going to make things work, and so we got down to business with a real plan for saving for a down payment. Today, we’re happily entrenched in our own home.

What could we have done differently back then to make our resolution work? Here are some tactics that we used later on for our down payment plans that would fall right in line with such a hefty resolution.

Set a very clear goal right off the bat. So, you want to save up for a down payment. How much money is that?

Surprisingly, many people stumble even at that first question. The idea for a down payment is very vague in their head. I know that our original thoughts on the subject were incredibly vague – we just knew that we needed to save quite a bit of money.

Chasing after such an intangible goal is almost a guarantee that you will fail. Instead, do some basic house hunting in your area and get an idea of the prices on the type of house you would like to buy, then set a savings goal based on that price.

Let’s say, for example, that you decide that a $200,000 house is right for you. How much of a down payment on that house are you going to save for? A 10% down payment? 20%?

The larger the down payment, the better. You’ll need 20% down in order to get a typical fixed rate mortgage at a low interest rate. If you have less than that, you’ll usually have to get separate mortgages (an 80% mortgage along with an additional 10% mortgage) or, if they’re still being sold, an adjustable rate mortgage of some kind.

These two numbers will tell you what your dollar goal is, but what’s your timeline? Are you intending to save $40,000 in four years? That’s roughly $10,000 a year – $800 a month will get you there.

Your timeline, you see, will help you break down this big goal into smaller short-term goals. $800 each month – can you do that? Can you do it if you get creative with it? $800 is a tangible goal that you can shoot for each month – a vague notion of “saving for a down payment” will never push you towards your goal.

Make sure the goal is a realistic one. Once you’ve started breaking things down into real numbers, you’ll probably start gasping at the high amounts. Can I really afford that? Likely, you can make a pretty strong goal each month if you put your mind to it, adopt some frugal strategies, and settle in for the battle.

However, there is often a temptation to make the goals too high. If you’re attempting to save 50% or more of your monthly income for this goal, you’re probably not going to make it.

My suggestion is to try your savings plan for a month or two and see how it works for you. If it’s beyond your means, go back to the drawing board. Don’t be afraid to toss your plans aside and adjust things. Perhaps you can expand your timeline. Perhaps you can set your sights lower in terms of the house you intend to buy.

The key is to not decide that things are hopeless just because you’ve decided that your first attempt at a plan is just too much. Step back, look at the overall plan, and make some adjustments. Don’t just walk away because you find it too difficult.

Figure out where that money is going to come from. So, you’ve elected to save a certain amount of dollars each month. Where is that money going to come from?

In some situations, people are already natural savers and they already spend less than they earn, but this seems to often be the exception rather than the rule. Quite often, people who make a resolution about a down payment aren’t saving much at the moment to begin with, and coming up with a savings plan is going to be difficult.

First, look for ways to easily cut your spending. Look for big pieces and also ones that repeat monthly. Instead of leasing a car, perhaps you can buy a late model used one and drive it for many years, saving yourself a car payment that you can put away for your down payment. Perhaps you can eliminate that monthly Netflix bill, or maybe you can cut back on your cell phone usage – do you really need that many minutes or that big of a text message plan? Maybe you can adopt a “one meal out a week” plan instead of dining out every other evening – that will likely save you $10-20 a meal at least.

Second, adopt some simple long-term cost savers. Install CFLs throughout your apartment to cut down on electrical use. Install a programmable thermostat in your apartment (check with your landlord) and program it so that you’re not wasting money on your heating or cooling bills while you’re at work. Put your home electronics on a switch so you’re not paying for your cable box to sit there idle while you’re not at home. These solutions will save you significant money on your energy bill without thinking about it.

Finally, look for some extra income. Perhaps you could work a part-time job to earn some extra cash, or maybe you have some marketable skills that would work well in a freelance environment. If you can bring in extra cash, that cash could go straight to your savings without skipping a beat.

Automate the savings. As you begin to save, you’ll find that it’s often tricky to keep your savings in balance with your normal spending. You’ll try hard to keep money swept into a savings account, but it doesn’t always work smoothly.

Make it smooth. Institute an automatic savings plan with an online bank that has a good rate of return on their savings account (I use ING Direct). Then, each week, have the plan automatically withdraw a certain amount from your checking account. $190 a week, for example, equals out to roughly the same amount as $800 a month over the course of a year.

With an automatic savings plan, you know that the amount will be withdrawn each week, and you can plan ahead for it. It’ll force you to be much more careful with your spending, even if you seem to have the cash on hand to afford something frivolous. Even better, after a while, you can check that new account and see that the savings is really starting to add up.

Utilize windfalls effectively, even small ones. Another useful tactic is to immediately pass along any windfalls that come your way straight into your savings. Did you just get a small inheritance? Don’t spend it foolishly – instead, apply it directly to your savings without a thought.

This goes for little savings and windfalls, too. Let’s say you find a $20 bill on the street. You might be tempted to spend it on something fun, but why not just go ahead and put it towards your big dream? The same goes for any small savings you might make – let’s say you don’t eat out at all this week and save $25 in the process. Go ahead and sweep that straight into your savings.

What this will do is accelerate your dream just a little bit, and perhaps take some of the pressure off.

The real key to making a resolution to save for a down payment work is persistence. This isn’t a goal that will happen overnight. Instead, you need to provide a degree of constant focus in order to make it work. Good luck!

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  1. Attagirl says:

    I was so surprised to find that saving really *is* addicting. I have automatic deposits going to my ING fund every two weeks, but I find that I hate waiting two weeks to see an increase, so I’ll send found money, small amounts because that’s usually what I have, so I can see it increase faster. It’s fun.

  2. You don’t have to achieve every goal for it to be meaningful. I think my down payment goal is too aggressive, but that doesn’t mean I won’t try.

  3. mk says:

    Back in 1996, I started saving for the down payment, simply I found a State Tax Credit column for the first time homebuyer that tax season. *Read your tax booklet:)

    Next 5yrs I saved $5K every year, it became $25K. Not enough for down payment in Hawaii where median home price well above 400K, so I opted for a condo. Looked many, many properties that time.

    Saving is a part of the process, and I felt good about what I savied. But when housing boom further pushed up the price, it seems it never catch up.

    I finally dived and bought a oondo in 2005. By the time I found another financing incentive from both Federal & State, able to finance shorter term (15yr instead of 30yr) w/20% down. I could have bought earlier, should have saved sooner or I should have bought larger (NOT!).

    In order to save for down payment, I reduced the retirement plan contribution, my annual saving rate haven’t changed much, just changed the proportuion of the saving goals. I would recommend “play house” – assume your new home costs 20% more than your current rent, put aside that 20% into saving. You will see it grow.

  4. BankerBryan says:

    I love ING Direct! I use the Automatic Savings Plan for my savings goals too. It’s so easy to set up accounts, in just a few clicks – under 2 minutes I can open additional Savings accounts or CDs.

    So when I have a decent amount of money in a savings account – I move it over to a CD, making it even less likely that I will spend it because I won’t want to incur a penalty.

    I agree that ASPs make you much more careful of your spending – I prefer to set mine up to come out the same day I get paid, so I don’t even notice it. After a while you get used to being “paid” just the amount that ends up in your checking account.

  5. pat says:

    saving is easy…ONCE you do it…its getting started that’s so hard…

    now this is years ago, but it still applies to today, only thing is the amounts would be higher…

    for months we just spent every paycheck, no thought for tomorrow…we rented, we didn’t plan to buy a home or anything like that, we just party’d..after work…

    well one day the IRS showed up..seems myhusband owed them some money from before we were married..seems the amount was $800..and the deal made was we would pay them $100 every week to get tht taken care of….

    we stopped partying, stayed home..got it out of the way, and once done…we both realized..Now ifwe had saved $100 a week, we would have $800…

    and that’s what we did…we just kept saving that $100 a week..we had no plans for it,…the goal was tosee how much we could save…it wasn’t a hardship…it was what we wanted to do…pretty soon we had $2,000…and just about that time came across a place we wanted to buy…but they wanted 5K down…realator said…”don’t worry, when yu wave that $2,000 in their face, they’ll sell..and they did…

    same thing when I joined the credit union at work years later…oh I missed that money they took out of my paycheck every 2 weeks for about the first month, and after that…I never noticed it..soon I noticed I had $4-500 in there…what’s that?? nothing in my eyes…and then seems I just forgot about it…and pretty soon I had a couple grand…

    it was so simple…I didn’t have to do anything, all the paperwork was done for me…and the money just kept accumulating…True I coulda looked around for higher interest and all…but I just wanted something simple…

    but the first time they took out money of my check..oh, I missed that so badly…but once I got over that??? it was the cats meow…

    if you put money aside… whereever you put it….make sure you choose an amount that you can live with…cause ifyou put too much aside…you’ll find youself taking it out…and that’s very defeating to one mentally….

    as I say this was years ago…

  6. Frugal Dad says:

    This is a very timely post for us as we are beginning to look for another house. Oddly enough we are downsizing to knock down our mortgage payment, and to free up money for additional savings goals. We’d like to put a significant amount down (not including small equity in our current home) to minimize monthly payments on the new, smaller house.

    I’ve established an account an ING and have my biweekly transfers scheduled. Like Attagirl points out, I get anxious waiting for the transfers and typically find ways to make extra deposits in the interim (rolled coins, eBay sales, yard sales, etc.)!

  7. The Rock Garden is trying to move also. We have been putting my wife’s whole paycheck in there since September, but I like the idea of windfalls too. I might consider putting the windfall of my January raise in there too.

    I agree with everyone else too that savings is addicting, the only downside is the transition from savers to hoarder.

  8. Johanna says:

    “If you’re attempting to save 50% or more of your monthly income for this goal, you’re probably not going to make it.”

    The heck you say. Didn’t you write a post a while back about how new graduates should aim to save 50% of their income?

    True, if you’re used to spending 100% of your monthly income, then making the switch to living on half of that is going to take some serious lifestyle adjustments – more than just cancelling the Netflix subscription and installing CFLs. You may have to move to a cheaper place, get a roommate (or two or three), and get rid of a car (or two or three). But if those are changes you’re willing to consider, the savings can add up quite handily.

  9. Imani says:

    Another newly-converted/addicted ING savings person here….for the first time EVER, I have been able to shake free $3000 between November and December and put it in an ING account.

    Lived hand to mouth, paycheck to paycheck before that for good reasons, single mom, two sons, private universities because they were excellent students with good grades(yes, they still have some loans to pay). I sacrificed plenty, believe me, and I was frugal.

    Like many others here, I totally cannot express how WONDERFUL it is to know I have a little something to fall back on…it is a HUGE stress reliever.

    Better than that, it really is addictive. I arranged for auto payment of 10% to ING from my checking account every beginning of the month. Then I raised it to include the 5.8% increase I get starting this month. I have banged in any money left at the end of both months. Now it is a game to see how much I can have left over to add.

    For January, I budgeted $470 for fuel oil. I was able to get 200 gallons for $86 less than that. What did I do? Added $14 and banged in an extra $100.

    I’m not bragging at all. Just trying to express how good it feels to finally be on the saving side of the equation. My name is Imani and I am addicted to saving.

  10. Luke says:

    “Utilise windfalls effectively, even small ones”. I’m usually good with putting the small windfalls to work for me. However I recently received my first ever leave loading bonus (extra 10% of salary for length of holidays). It was a real surprise, so was how quickly it disappeared. Since it was so unexpected and arrived in the middle of the holidays I just spent it! So silly in retrospect since it was nearly as big as a years worth of dividends, and I’m careful not to spend those. Oh well, you live and learn.

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