Save for a House in 5 Years - Planning for a Down Payment

Updated on April 16, 2018
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Katy has mentored young professionals beginning their careers and financial journeys to make informed decisions.

When you reach a point in your life where you can see yourself staying in the same place for a while and you decide it's the best thing for your family to buy a home that doesn't mean your finances are there yet. But the good news is with enough time most people can get to home ownership.

For the purposes of this guide 5 years is the timeline used to save up for a down payment. With a stable income and a solid budget, 5 years is a realistic timeline for many people to save up for their first house. If you're able to save more aggressively and/or buy a less expensive home you will get to your goal faster than 5 years, it's just a starting place.

Make your dreams of home ownership attainable and actionable by creating a 5 year plan to save up a down payment and prepare your credit for purchasing a house.

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Prerequisites for Saving for a Down Payment

The first step to saving a large amount of money ($15,000 to $50,000 or more) over 5 years time is getting your finances in order. A solid personal finance base will let you consistently pitch a large sum each month to your down payment savings. Let's look at what is required to make this happen.

Establish an Emergency Fund Before Saving

Many people skip this step or roll it into the bigger sum they put aside to buy a house. Both of these are dangerous mistakes to make. Over the course of your 5 year journey you are likely to experience some sort of financial downfall like a medical emergency, a car braking down or losing your job.

How are you going to pay for a $500-$2,000 financial emergency? Do you have an emergency fund built for exactly that purpose, or will you be dipping into a partial down payment fund or borrowing money to cover it?

Many people approach this problem by saying, I'll use my down payment savings as an emergency fund if I need it. There's nothing wrong with dipping into down payment savings to get you out of a bad financial situation especially if you would have to borrow to cover it otherwise. But keep the roles of Emergency Fund and Down Payment Fund clear when it comes to buy a house. The same rules apply when it comes to buying the house: can you afford an emergency if you're committing your entire savings account to a down payment?

To avoid the mistake of mixing emergency fund and house savings, get separate accounts for each. You will be able to clearly see which fund is for what purpose and whether you are able to pull the trigger on buying a house yet.

Budget for Monthly Expenses

Establishing a budget that predicts all your monthly expenses and monthly income is the only way to predict how much you can save each month. The more accurate your monthly budget is, the more likely you'll be able to reach your desired saving goal each month.

Take a look at the previous 6 months of typical expenses and be honest with yourself about how much you'll be able to consistently save each month.

You'll compare this with the amount you find later that is needed to achieve your down payment in 5 years. If you're not able to save enough there are adjustments you can make to your spending habits to get there.

Decide How Much You Need for a House

Look at houses in the area you want to buy. Calculate a 10% or 20% down payment based on your goals. This is the amount you need in savings at the end of the 5 years. It's wise to add in an additional $10,000 to cover closing costs and moving costs. You don't want to have to dip into your emergency fund to cover housing during the move because you forgot to calculate it in your 5 year plan. The total might seem like a lot right now! Don't let the sticker shock frighten you too much, that's why you're allowing yourself 5 years to plan for it.

Divide the down payment goal plus a $10,000 by 60 for the number of months in 5 years. Now it should be more manageable. You might be able to save more in some months than other but now you have an idea of what the average needs to be to get there in 5 years.

See the table below for common house costs and the amount per month you would need to save assuming a 10% down payment and a 3% closing cost estimate.

Monthly Savings Required for Common House Costs

House Cost
Down Payment (10%) + Closing Costs (3%)
Monthly Savings (Over 5 Years)
Monthly Savings (Over 1 Year)
$100,000
$13,000
$217
$1,083
$200,000
$26,000
$433
$2,167
$350,000
$45,500
$758
$3,792
Rounded to the nearest dollar. 10% down payment and 3% closing costs are average estimates and may not match your situation.

Why Take 5 Years to Save for a House?

You can see in the table above that increasing the savings timeline from 1 year to 5 years makes the monthly savings amount so much more manageable.

Trying to save for a house within one year can be very hard for a lot of individuals and families. You still have to pay rent while you're savings for a down payment and sometimes expenses just can't be reduced. But planning for a 5 year saving period allows for a lower, more sustainable savings rate.

Consistency is Key for Saving Large Amounts

Someone who is wise with finances will value consistency in their monthly budget over depriving themselves for long periods of time or trying to work too much to save up quickly. Long periods of forcing yourself to pinch every penny often results in uncontrolled splurges, setting you back worse than if you had just saved slow but steady.

Save Up For a Down Payment Faster

If your current situation means you can't save up the required amount you calculated there are a few adjustments you can make to get there. There’s really only two ways to save more: either reduce your expenses or earn more money.

Cut Expenses

This is where the monthly budget you established will come in very handy. Look at your biggest recurring costs. Is there any way to reduce these? Over the timeline of 5 years just a little bit of a monthly adjustment can make a big difference. Do you have student loan payments that are keeping you from saving more? Evaluate what is more important to you.

Earn Extra Income

If the 5 year wait is too long in this plan or your calculations show you want to buy a more expensive house than you are able to save for then one option is to increase your income. That can be by getting a second job, a money-earning hobby, getting roommates or looking for a better job. These are all viable options but you have to assess them for yourself.

The best one for you will be the one that you can sustain over the 5 year time span. Be honest, will you be able to work overtime or a side job for 5 years to get this done? Getting more roommates or asking for a raise is usually a more sustainable option.

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Where Do You Store Your Down Payment Fund?

Where are you going to store all this money you're saving up over 5 years? There a few options for you. It helps to store down payment savings in a separate account that is easy to see grow and easy to put money in to but is more difficult to take monet out of.

Do Not Invest Your Down Payment

With a timeline longer than a year or two many folks are tempted to invest the money they put aside for a down payment. Why not use that sum to make money for you?

Unless your time horizon for buying a house is 15 years or more, don’t put your down payment in an investment with risk.

Best Bank Account for Saving for a House

Just because investment isn't an option doesn't mean that storing you down payment savings in cash under your mattress is the way to go either.

A high interest savings account is a good solution for most people. You can earn 1%-2% interest on your fund while it accumulates. Every little bit helps!

Also consider CDs to store your house fund once you have some savings accumulated. CDs are a low risk way of ensuring your money is safe. Just make sure all the terms are up by the time you intend to buy your house so you don't pay early withdrawal fees.

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    © 2018 Katy Medium

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