How you can save $20,000 two years from now to buy your first home

Thinking of buying your first home and ready to start saving for a down payment?

It is understandable that you want to have a house. There is some pride in saying, “this is my house.” There are other reasons as well, like bad landlords not fixing anything, knowing you could be paying your mortgage instead of putting money in your landlord’s pockets each month, building equity, or/and thinking about starting a family and raising them in a home that is yours

Whatever the reason, I think ‘own’ rather than ‘rent’ is a much better idea, and I’ll explain why.

My favorite reason is that every time you pay off your mortgage, you get richer. Each month that he pays off his mortgage balance, after interest and all other fees, he owns a larger percentage of the house he lives in, making him wealthier. For example, if he buys a house for $100,000 and pays for it over 10 years: Let’s say he pays $600 per month for 10 years, he has paid approximately $72,000 during that time. And during that time he has increased his net worth by approximately $72,000. The $72,000 is part of your overall net worth because you own that part. If you sold your house, that is the amount you would earn. If you rented all that time, you would still be worth the same and not richer.

There are many other reasons why owning is better than renting, but that is not the topic of this article. But hopefully, now, he’s convinced that he’s making the right decision to move out of his rental.

Let us begin!

How are you going to save for that first house, even if you feel like you don’t have money left over every month?

As a former financial planner, I quickly discovered that your income does not determine how wealthy you are. It is how much money you save from what you have earned that determines how wealthy you are. Someone who earns $1,000 a week and spends $1,000 a week is poorer than someone who earns $500 a week and saves $100 a week.

I have met countless lower income people with much larger bank accounts than those making double or triple. The truth is that the more you earn, the more you spend.

So the fact that you feel like you don’t have money to spare is a result of your spending habits, and not just your income. So before you say you don’t have money, I’m going to stop you by saying ‘Yes’ you do have money.

The trick is to invest small increments of your current income to achieve ‘BIG SAVINGS’. By allowing the bank to automatically withdraw small amounts of your income each week without you realizing it, you will slowly increase your wealth each time you get paid. Professionals call this strategy the “pay yourself first” strategy. Before you spend anything, you pay yourself first, when you invest a portion of your paycheck each week.

Even if you spend every penny you have left afterward, you’ll still get richer every week.

So how does this work?… It’s called ‘inverting’.

Investing is so simple. The trick is to let your advisor do most of the work and not pay attention to the markets and all the other distractions that come with it. Go to your bank and make an appointment with a financial adviser and tell them that you would like to start saving $100 a week to start saving for a house. It is important that you tell your adviser that you will need to withdraw the money in the near future so that you do not put your money into a “locked” account that you cannot touch until after a certain period of time. In Canada, we have TFSA accounts (Tax Free Savings Accounts) where you can deposit and withdraw your investments at any time “tax free”. If you don’t live in Canada, ask your adviser which account he recommends you put your money into to get a good return and take it out within the next 2-3 years with the least possible fees and taxes.

This is what happens when you invest only small amounts of your money each week.

If you invest $100 per week with an average annual return of 5%, you will have a return of approximately $5,460.

Year 1 savings: $5,460

If you save $100 per week for two years at a 5% return, you would have approximately $11,193 at the end of year 2.

Year 2 savings: $11,193

Banks these days only require a 5% down payment. If you buy a house that costs $200,000, you’ll only need $10,000 for a down payment. In 2 years you will definitely have your house.

Now, what if you have a spouse? That’s a second income and if he/she also saves $100 per week, then things start to get interesting.

If you and your spouse invest $100 per week with an average return on investment (ROI) of 5%, then you can save up to $22,386 in just two years! Amazing!

Year 1 savings: $10,920

Years 2 Savings: $22,386

The good thing about putting a large down payment on your house instead of the minimum (5%) is that you get better mortgage rates, lower your monthly mortgage payment, and pay off your house sooner.

Hopefully this helped and motivated you and your spouse to start saving. Trust me, you will feel so… good when you have the keys in your hand to your first house.

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Other tips and tricks to save extra money.

Put away the pennies and pennies: One of my suggestions outside of investing is to put away your pocket change. Every time you buy something and receive change, instead of spending that change, you save it. Do it for a whole year and see what you have left.

I found a nice video of this couple saving all their change for a whole year and saving $1,902.50.