Pay Off Debt and Save For A Down Payment At The Same Time
Many a prospective homeowner has been frustrated by long-term debt that seems to quash any hope of saving enough for a down payment on a home. In fact, among renters who wish they could own a home, debt is cited as the number one roadblock to doing so. Debt payments, especially of the high-interest variety like credit cards, can eat up a large chunk of the monthly budget, causing a problem that is twofold: not enough funds for a monthly mortgage payment, and no down payment savings.
The good news is, there is a financially sound path forward for prospective buyers who are willing to exercise true patience and commit to a plan for both paying off debt quickly and saving for a down payment at the same time.
Step one is to know your budget intimately – that is, be acutely aware of where every dollar you spend is going. Create a monthly budget spreadsheet – or utilize one of the dozens of budgeting apps available – and track your spending for a full month. Try not to alter your normal habits during this thirty days, as you want a true representation of your spending habits.
Next, identify areas where you can truly commit to cutting your monthly spending over the long-term. For instance, if you have a pricey coffee habit, commit to brewing a pot at home three days a week. Once you’ve identified your areas for savings, add up the total amount of “extra” money you’ll have left each month. Divide this amount by two, and you’ll have your monthly “starter savings” amount.
Once you’ve identified your starter savings amount, you’re ready to open a high-yield savings account that is to be used solely for your future down payment. Set up an auto-transfer so that your starter savings amount will be automatically saved each month. Commit to letting this money grow uninterrupted until you’re ready to buy your first home.
Now, you’re ready to tackle your debt. Since you’re only using 50 percent of your extra monthly funds for your starter savings, you can use the other 50 percent to employ what’s known as the debt snowball method. Identify your debt with the smallest balance, and put that extra money toward it each month until it’s paid off. Then, move on to your next smallest debt, putting all your extra cash into paying that one off, and so on.
For consumers who exercise patience and commitment, this is a plan that will soon yield less debt and more savings simultaneously.
Image via Flickr/frepal