Start saving for a deposit now
Growing up during the recession has installed a certain pessimism in many millennials when it comes to future financial prospects. It’s true that previous generations had a much easier time getting a leg up the property ladder; however, home ownership is not an unreachable dream for today’s young adults. In fact, taking certain steps to save and build up enough equity to be able to finance a mortgage will pay off in less time than you may think. Here we guide you through five important steps you need to take to be able to save enough to put down on a home.
1. Figure out how much you can afford
While it still may be a way down the road before you make that big purchase, you need to figure out right now how much you will be able to realistically afford for your first home. First of all, you need to consider your income. Property experts suggest that you don't spend more than 28% of your monthly income on a mortgage. Do some research on the housing market where you live, try to think in which area you will want to buy, and decide what kind of property will suit your future needs. Leave some legroom—-depending on where you live, property prices are generally on the rise, so make sure you include that in your calculations. From there you can conclude how much you should have in equity for a down payment (be sure to research mortgages and interest rates, and decide how many years you want to spend paying off your loan). Remember that you likely won't be able to save 28% of your income for a mortgage while you're paying rent, so be realistic in how much you can afford to save every month. Write that number down and set yourself a reasonable time limit to save such an amount. This way you have a specific goal in mind and a foreseeable date to get there, making it much easier to stay motivated to save.
2. Create a separate savings account
For a huge purchase like a home, it’s not as simple as saving up your pocket change until you have enough for a down payment. If you’re serious about property ownership, you need to start early and create a separate account entirely devoted to your future home. With some bank accounts, it's possible to set up a monthly direct deposit from your main checking account into your savings, so that you don't even have to think about it. With your savings for your down payment put aside, you will consider it a monthly expenditure. That way you won’t be dipping into your savings for anything else. Look into banks which offer accounts that will grow with interest. It would also be smart to have an emergency savings account for unexpected costly incidents that won’t affect the capital you need for buying a home.
3. Prioritise your spending
It’s no shock that millennials love to eat out. And while there’s no reason to cut all joy from your life to save up, it’s important to prioritise when it comes to spending cash on inessentials. If you find yourself eating lunch out three days a week, try cutting back to just once. Making these expenses feel like a treat will not only free up extra cash, but also increase enjoyment for those things you really love. Pro tip: for every time you would have bought an iced coffee or ordered Chinese food, put the money saved directly into your savings account so that you can’t touch it. It should also be noted that other expensive purchases, such as cars or big trips, should be kept modest. Remember that a new car is a depreciating asset which quickly loses its value. And traveling cheaply while you’re young has never been easier—save the luxury vacation for when you’re older. Making these sacrifices now will enable you to save much more for a deposit on a home over the long run.
4. Create a manageable budget
If you’ve never saved for anything before, it will inevitably be difficult to start sticking to a strict budget. That’s why you should first figure out how you will prioritise your spending, and once you’ve adjusted to cutting back on frivolous purchases, create a budget that fits with your lifestyle. It’s not reasonable to think that you will be able to save 500€ every month if you’re used to spending every penny of your paycheck. Start small and try and increase your savings little by little until you’re used to being in a ‘saving’ rather than ‘spending’ mindset. Create a monthly budget for yourself, and at the beginning of the month put aside a certain amount directly into your savings account so that it’s out of the way. Start by understanding what your monthly fixed costs are (rent, bills, all recurring monthly payments), cut any that you deem unnecessary (when was the last time you went to that expensive gym, or read that subscription magazine?). After you’ve calculated your fixed costs, apply the 50/30/20 rule: 50% of your paycheck goes towards the necessities (groceries, insurance, rent, utilities, transportation), 30% goes towards unnecessary wants (dining out, entertainment, travel), and 20% goes to saving for a down payment. Depending on your financial situation, cuts should be made from the ‘wants’ portion in order to pay off debt, or to put aside for emergencies.
5. Think big picture
Your dream home may be a coastal mansion, but that kind of property is probably not in the cards just yet. Don’t give up on your dreams, but take one step at a time to get there. Instead, calculate how much you can realistically put down towards a property in the coming years, and only look at buying homes that fit that smaller price tag. Buying small now--and putting your money towards a mortgage instead of down the rental drain--could allow you to sell at a higher price later, giving you more capital in the future to put towards the house of your dreams.
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