Couching Your Savings Correctly
I recently read an article online about a gentleman who set a goal to purchase a home and then mapped out very specific steps as to how he would reach that goal. Personally, I was extremely impressed by his discipline and foresight. His goal had two parts to it: save $150,000 for a down payment and purchase a home. Before you choke on your coffee or spit soda through your nose, let me disclose here that the gentleman who is the subject of the article was purchasing a home in the New York City area. Now that your blood pressure is returning to normal and you’ve spared your freshly ironed white shirt from staining, I’ll give you a breakdown of his plan:
• Starting in 2007, he looked at his annual salary and then took a look at the amount of credit card debt he was carrying; he cut back on as many expenses as possible so he could pay off that credit card debt in the first year. Touché!
• He kept his lifestyle scaled back to the point where he had set it to pay off his credit card debt and put that additional money in the bank.
• After two years of doing this, he had quite a chunk of money set aside, and he invested it in a mutual fund for faster growth. Touché again!
• He continued in this vein – socking money away where he could and being careful about how his money was invested – until 2014. Yes, I did the math – that’s seven years!
• With $150,000 saved, he got prequalified and started looking for houses just outside the city. It took him until September 2015 to find what he wanted and within his price range, but his hard work and patience paid off: he purchased his first home.
There are some wonderful lessons in this gentleman’s story: the value of setting goals, the discipline to follow a plan, patience paying off, etc. These are all things that a lot of people have forgotten or refuse to implement in their own lives. There’s one more lesson that this story brings to light – and it’s one that the new homeowner in the article could have used.
The notion that you need to save 20% for a down payment is outdated – and it’s one that can really do a disservice to you. There are MANY programs available that require little or no down payment. Yes, I did say “no down payment” – and I’m not talking about a VA loan (which TOO MANY people fail to use although they’re eligible – that’s another subject for another day). Let’s say you had the foresight, patience, and fortitude to save just a third of what the gentleman in the article saved – that’s $50,000 that doesn’t need to go as a lump sum into a down payment. With interest rates as low as they are right now, pursuing a mortgage with a 3% down payment requirement, for example, allows you to take a VERY LARGE chunk of that $50,000 and do A LOT of great things – one of which, of course, is to reinvest it in something that is earning more than what mortgage interest rates are doing right now. Also, by taking advantage of one of these programs with a lower down-payment requirement, you can get into a house A LOT sooner – which could mean you could move out of that apartment where your roommate has a couch that smells like beef and cheese, and you’d have a little extra cash to buy a new couch. Touché!