You may have decided that you are ready to buy your first property, whether it’s somewhere to live or something to invest in. A key step of course is to make sure you can afford to buy and in particular, that you are able to save up a deposit. For many saving a decent deposit can seem like a daunting task. Sure it might be difficult and require some sacrifices along the way, but it’s not impossible! In my experience as far as saving a deposit is concerned, there are five important steps you should follow which will help make your dreams of home ownership a reality.
Step 1: Set your target
To start with it’s important that you set realistic goals around the type and cost of property you are looking to buy, because this will have a big influence on how much of a deposit you may need to contribute. Try to take the emotion out of the purchase decision and stay within your means.
Next, you need to set yourself a reasonable timeframe in which to save your deposit. This requires you to balance what you can comfortably set aside each month with how quickly you’d like to buy.
You can work out roughly how long it will take you to save by dividing your deposit goal by what you can save per month. So if your goal was 20,000 and you could set aside 500 per month, it would take you around 40 months or just under three and half years to reach your goal.
Step 2: Prepare a budget
There is a universal truth when looking to buy a home or investment property. And that truth is that unless you can master the skill of preparing and sticking to a budget, your dreams of home ownership or property investment will become extremely difficult to achieve. Why? Because a budget is more than a means of monitoring spending. It’s a valuable tool for planning, managing and controlling almost every aspect of your personal finances. And when we’re talking about buying property, a budget not only helps you save for a deposit, it also helps you manage your mortgage.
It’s important to remember that saving for a deposit is only one the costs of buying your property. Others may include stamp duty and other taxes, legal fees, conveyancing costs, bank fees and moving costs. On top of this, you have your day-to-day living expenses to meet, as well as other financial commitments like car loans and credit card bills.
Preparing an annual budget is the best way to not only get an understanding of your income and expenditure, but to identify whether your savings goal is achievable. If there is a shortfall, a budget will help you identify areas where you can cut back.
Step 3: Identify savings
A budget can be very revealing. You may be surprised to learn how much you’re currently spending and where your hard-earned cash is going.
It’s almost inevitable that you’ll have to cut back on some luxuries and endure some short-term pain while you’re saving your deposit. Think about where your cash is going and start cutting out on those non-essentials. You should also look at how you may be able to increase your income like working overtime, selling unwanted items or even taking on a second job.
Step 4: Set up a separate account for your deposit savings
As your savings start to grow, you might be tempted to dip into it – don’t do it! Hang in there and remember the end goal. Ideally, you should keep your home deposit savings in a separate account, well away from your day-to-day transaction account.
Think about how and where you invest your hard-earned cash. It might be tempting to invest in some higher yielding accounts but remember, with higher return comes higher risk. You should always be mindful of protecting the capital value of your savings. For instance, if you put your money into riskier assets (like shares), and your investment goes pear-shaped, it could take you years to recover. If in doubt, speak to your bank or financial adviser.
Step 5: Regularly review your progress
Having set yourself a financial target, you should monitor your progress monthly. Sit down and compare your actual savings progress to budget to make sure you’re on track. If things aren’t going well, use your budget to see where things have gone wrong and take steps to fix the problem. If you’ve made a mistake with your budget, redo it and amend your financial plan.
It’s essential to stick to your budget and quickly identify problems if and when they arise.
Peter Boehm is the Finance Editor with www.onthehouse.com.au and a video presenter and regular contributor to Yahoo!7 Finance.