Good, I assume you’ve decided to buy a home in the near future and want to learn how to save for a house downpayment. If you just randomly come across this article, I have another post on Should You Buy or Rent a Home — 3 Street Smart Answers. That should help you change.
Save for a house downpayment sucks. We all know about it. Depending on which area you want to buy, the housing prices can be crazy or very affordable. For example, the median price for a single family house in San Francisco is $1 million. The housing price there is just INSANE.
Nobody tells you to buy in San Francisco right away, unless you have rich parents that can help you out.
Sorry, my last name is not Gates, Buffett, or Bezos neither.
I’m going to show you 4 life hacks on how to save for a house downpayment to the point that you can even afford to pay down for expensive housing area, like San Francisco.
Save for a house downpayment takes years. It can be 3-5 years of hard work depending on your housing area. Is a 5 year journey long? Actually, not quite. Assume you will die at the age 80 and you are 30 years old now, you can enjoy your house/investment for the next 50 years. It’s just 5 / 50 = 10% of your remaining life span to save up on a house down payment.
If you further zoom out to your entire life, it’s just 5 / 80 ~= 6% of your life.
Seriously, it’s much much shorter than the time you spent on gaming and entertainment throughout your life time.
Good thing is, unlike many other investments, housing prices always appreciates. Land never depreciates. If one day your house is burnt down to ground zero, your land still has value.
On the other hand, let’s day dreaming a bit, if you have a time machine to go back to The Great Depression period in 1930s and assume you have some cash saved up during that time, will you rack up 10 blocks of houses in New York Manhattan?
I definitely would.
Anyways, just expect your life style will change for the next several years if you want to save for a house downpayment. At the end, you will never regret. Your hard work will pay off.
Hack #1: Be Frugal
Daaah, is this the best advice you can give? Sounds boring. Yo, don’t go away just yet. Sure, it sounds easy but you’ll be surprised many people are not as “frugal” as they think.
Rent a Minimum Viable Space:
I assume you are single or have a spouse. So, 2 of you, right? Do you even need a 1 bedroom apartment? Can you live in a Studio in a safe neighborhood that’s close to work for about 5 years?
That can probably save you about $500 (in San Francisco) per month. If you add that up, that’s $30,000 extra savings in 5 years.
You have 24 hours per day. 8 hours of sleep on the bed, where you are not awake anyways. 10 hours for work and commute. 1-2 hours for dinner, workout, or entertainment. You are only down to roughly 4-6 hours/day that you are consciously at home. 25% of the entire day only.
Of course, you may stay at home longer during the weekend.
I’m not saying you should rent a trailer or sleep in a RV, that’s a bit extreme but I know someone does that to save for a house downpayment. I’m treading on the equilibrium where I can still enjoy my life at my acceptable standard on one hand, and save up money on the other hand.
Everyone has different “acceptable” standard of living. Find what’s the minimum standard you can accept first.
I used this formula and it worked for me. I lived in a 400 sq ft studio in a safe decent neighborhood for 5 years. Commute to work was literally 5 mins. That saved me up good money to eventually buy a home in San Francisco Bay Area.
Get a Used Japanese Base Model Car:
I see many fresh college grads get a nice Bimmer, Mercedes, or even Porsche Boxster right after they have a full time job. But do you know for the same amount of money that you put on a car, you can save that up for a good portion of a house downpayment?
Car depreciates most of the time, unless you own those America Classics. If you buy a new car, you lost at least $5000 right out of the gate. Period.
Let’s check out the True Cost of Ownership (TCO) between Toyota Prius C vs. Mercedes C Class in a 5 year period:
This is the TCO for Toyota Prius C according to Edmunds.com:
Now, look at the TCO for Mercedes C-Class from Edmunds.com:
Freaking $32,000 difference. If you start off with a used reliable Prius C, that’ll be closed to $40,000 in saving for the next 5 years. Think about that.
“Oooh, I want to enjoy life. I want to get that zoom zoom feeling behind a nice European car, dammit!!”
I get it. Me too. Get a Mazda first.
Trust me. You and your skill sets will appreciate. Your salary will increase. Car, depreciates. Just wait for another 5 years first.
I continued to use my old beat-up Honda Civic college car even years after I got my full time job. Eventually, I saved up enough to buy a house. Then a couple years later, I was still able to buy a BMW 5 Series.
Again, you will appreciate. Cars don’t. Hold onto your desire. It’ll pay off.
Reduce Dining-Out Frequencies
Do you know as a general rule of thumb, a business has to jack up any services at least 3x in order to make money? 1 part is for employee’s salary and bonus/commission, 1 part is for material and operating cost, 1 part is the actual profit from the product or services.
In other words, if you see a $9 meal, the cost you make the same thing at home is about $3 or less.
I’m not saying you should go to Panda Express or McDonalds for every meal from now on. That’s brutal and unhealthy.
But I’m also not saying you should go to Gary Danko or House of Prime Ribs for every meal neither.
What I’m saying is cook more frequently at home. Limit to treat yourself and your spouse at some good restaurants like 1-2 times a week max. You’ll be surprised on how much you can save.
After I changed this dining habit a little, I saved extra $400-$500/month. That saved me about another $30,000 in 5 years.
There you go, just by changing your life style a little and be more frugal, you can save about $100,000 in 5 years. I’m not even counting your salary increase for the next 5 years.
Hack #2: Screw Maxing Out 401k Contribution Limit
Sure, 401k gives you some good tax benefits. You can even possibly lower your income bracket. You can defer your tax, blah blah blah. I get it. But the main point is, I NEED THE MONEY NOW.
“You can always borrow from your 401k with 5% interest.”
Come on, that’s my own damn money. Why the heck I need to pay interest for something that belongs to me? That just doesn’t sound right.
If you want to further learn more about how much borrowing a loan from 401k can hurt you, you can check out this article at Motley Fool.
Anyways, this is the rule I follow and it has been working quite well for me so far: only contribute to 401k for the max % that your company matches.
In other words, if my company only matches 6% max, I’ll only put in 6% of my salary into 401k. That’s it. If my company doesn’t match, I don’t put any in 401k.
“How can you retire with such minimal amount in your 401k??” Well, I don’t think I can retire comfortably if I max out my contribution limit neither. However, for the same amount of money that I don’t put into 401k, I can put it into the housing market. I can save up to buy another house and rent it out.
30 years after when I paid off both my primary residence house and the investment house, I can either generate monthly rental income or sell off the appreciated housing value after retirement. It just feels more substantial and I can be in more control on my own finance.
Hack #3: Combine Buying Power
You don’t really need to use this hack if you are in a less competitive housing market. But in a crazy housing market like San Francisco, it is just hard to save for a house downpayment all by yourself.
If you have a stable relationship and want to build the family together with your boyfriend/girlfriend in the future, maybe it’s time to discuss on this strategy.
If you are a player, combine you and your boyfriend/girlfriend’s buying power ONLY if you want to be on the Jerry Springer show.
By combining you and your boyfriend/girlfriend’s finance even before marriage, your buying power will likely double. That means you can save for a house downpayment much quicker than all by yourself.
The risk though, what if you guys break up within the next 5 years? What if you guys divorce in the next 10 years? One good thing about mitigating this risk is to put the right title ownership when you buy the house.
In a nutshell, if you two buy a house before marriage, go with “Tenancy in Common.” Assume each of you hold 50/50 of the house and in case you two breakup, you guys can liquidate the house and get back your own portion easily.
Let’s take it to the extreme and let’s say your boyfriend/girlfriend hates you to the guts and kills you silently, your 50% will belong to your parents or siblings. It’ll not automatically give that to your spouse, even after marriage. The main reason is that you acquired the house before marriage, not after marriage.
There you go. Tread carefully with this hack but if you can get this working, you will be on the accelerated path to save for a house payment.
You can check out my other article around this topic at: Should You Buy or Rent a Home – 3 Street Smart Answers.
Hack #4: Buy at High Growth Vicinity City First
Again, you don’t really need to use this hack if you are in a less competitive housing market. But in a crazy housing market like San Francisco, it’s almost impossible to save enough for a house downpayment there right away.
Of course if you can buy at the center of the economy in your area like San Francisco, Palo Alto, or Manhattan, do it. Yes, you are paying a bit more “premium” at first but it’s relatively more resistant to the economic turbulence.
What’s the second best option though? Buy at a nearby city that is close to the center. The general rule of thumb though, don’t buy further than 40 miles radius from the center.
The reason? Do you want to commute for more than an hour to work? I guess not, nor the other people. If most people have their jobs at the center and you buy a house that’s super far away, sure it’s cheaper but if the economy tanks, your house will be the first to go underwater because nobody likes to commute.
You have to find the fine balance between price and market desirability.
For example, if buying a house in San Francisco is your goal, buy in San Bruno, Daly City, South San Francisco, etc first. Your salary should increase in the next several years, so will the real estate market in general. When you observe the right timing, you can sell off your first house, add in more fuel, and swap to a bigger house.
- Be frugal for about 5 years: rent a minimum viable space, get a used reliable Japanese car, and tune down the frequencies you dine outside.
- Only put in what your company max matches you in 401k: You want financial flexibility when you are young, not when you are old. Borrowing from 401k is actually quite expensive.
- Discuss with your spouse about future: Relationship stability first though. Combine both of your buying power and mitigate the risk of breakup with the right title ownership.
- Buy at the economy center area and no more than 40 miles radius from the center: That’s the best equilibrium I feel among price, market desirability, and resistance to market turbulence.
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Disclaimer: This is based on my personal opinion. You should always consult your financial or tax adviser for any official financial matters.