High Savings "Diet" for the Down Payment
It’s time to get fit on your finances and beat other buyers on the race to homeownership
On another post, we talked about the maximum you can afford, but today we’ll translate that information into a savings goal that will require discipline to go on a financial diet.
Take your current annual household income before taxes. Let’s call that number an “X”. Your goal is this:
You’ll buy a home by giving 1x as down payment, borrow 4x from a bank, for a total of 5x.
For example: Rosa is an accountant with a salary averaging $50,000 a year in Seattle, WA. She’s married to Jacob who works as an automotive technician making $40,000. They currently rent an apartment south of Downtown near the stadiums – 2 beds, 1 bath, 732 sqft for $2,650 a month.
In this example, Rosa & Jacob’s goal is to save 1x ($90,000) for down payment, borrow 4x ($360,000) and buy a 5x ($450,000) home. Using our calculator, the exact maximum is $432,753, but that’s ok. When you are saving, you should overestimate a little bit because unforeseen costs might appear. Life happens.
Hopefully, this 1x goal helps you put this in perspective: how much you save will directly affect your speed to buy. Saving 1/4 of 1x? It will take 4 years; saving 1/10 of 1x? It will take 10 years; and so on.
Start with the most expensive categories and work your way down. Your current top 1 spending category is probably “Housing”. Number 2 is probably “Taxes”, followed by “Transportation”, “Food”, “Healthcare”. Everything beyond these should be smaller and smaller. You are going to have to create a high-priority category: “Savings”, and it will take number 2 on that list. The idea is change from “spend first, then you get to save what remains” mentality to “save first, then you get to spend what remains”.
Your spending on a high-savings diet would look somewhat like this: Rent/Housing = 25%. Savings = 25%. Effective taxes = 17.5%. Transportation = 10%. Food = 7.5%. Healthcare = 5%. Everything else = 10%.
Back to our example: Rosa & Jacob are currently spending 35% of their income on rent. Many apartment companies will let them sign a lease at 30%, 40% or even 50% ratio, but it’s too hard for them to save when such a big slice of the pie is sunk on a single category. They look around and find these options: (A) smaller 2 bed, 1 bath, 635 sqft apartment for $1,900 on First Hill; (B) 2 bed, 1 bath, 890 sqft apartment on an older building for $1,795, close to where they already live.
Between those two choices, it’s up to them to decide (for a $1,875 budget). Notice that their rent payment right now should be less than their housing costs once they buy a home. That creates room to save.
Saving on rent can be a double-edged sword: if you live too far from where you work, you’ll end up “paying it back” as higher transportation costs, time lost commuting, etc. Aim for a balance, and remember this: the time you spend to make better choices is time well spent. Invest on your apartment hunt.
You don’t have to truly buy a home following the 1x-4x-5x goal, this is just to help you put things in scale to visualize your potential saving rate. Maybe you end up buying something less expensive, maybe you end up putting a different percentage in down payment, or buy a little earlier or a little later. But, if you follow a goal like this, you should be in a better position when the time comes for your big purchase, no matter what you decide to do.