How To Quickly Save For A House While Renting

Certified Mortgage Advisor
NMLS 1701021
Published 
March 20, 2020

How do you save money to buy a house when you are renting?

All right, so it can be frustrating. Rent is increasing as time goes on, rent prices, keep going up and you're seeing everybody around you, who's purchasing homes. It can be really discouraging if you're renting right now, no matter what age group you're in to continue renting because everyone keeps saying you're throwing away money. You're paying your landlord's mortgage. And frankly, I just don't believe that's true.

Don't rush, this is not a race

Then we're going to talk through some things like the mindset and ways to accelerate. Paying towards a house. If you are renting right now, just know that you're not alone. It's okay. It's okay to be on your timeline and to be where you're at other people's opinions of where you're at, shouldn't dictate what you're doing and the plan that you have moving forward for you and your family.

I know it can be frustrating, but have some patients it's going to be okay. Get a plan and you'll get there.

Mindset

So let's talk about our mindset of why do we feel like we need to save for a house in the first place? Outside of why you want to house, maybe it's you want it to be an investment for you, or you want it to be you want to have your own domain over the property that you're purchasing, but we can feel this pressure because it seems like everyone else is buying and we get this fear of missing out. Other people are purchasing and I must be doing something wrong if I'm not in that place.

Don't doubt yourself

For instance, I'm 23. So a lot of people that I know are getting married and starting to have kids, they're working on their family, they're buying houses, they're getting new jobs. There's so much change getting put out there that I see. And then I have to look and think, am I on the right track? Am I doing this right? Because I'm not following these steps. I'm not following what other people are doing.

So if you're in that place, just know that's external pressure, and we have to realize that see how it feels in our body. Then learning how and experience with that teaches us about where we're at. So a lot of times that pressure is external.

You're not throwing money

Also, you're not throwing money away. Dave Ramsey talks about this a lot. He talks about renting as buying patience. It's not throwing money away. Because you're focusing on, long-term not short-term goals.

When is it throwing away?

I'll tell you what is throwing money away. If you purchase a home and you live paycheck to paycheck and you don't have savings and you have a lot of debt and then you buy a home and then your furnace goes out and you have issues with maintenance and you need to buy furniture. So you put it on another credit card that is throwing money away.

Renting vs. Financial choices

Renting is not throwing the money away. Making poor financial choices is. You're going to focus on your long-term goals. Short-term maybe renting is not what you want to do, and eventually, you want to move into purchasing a home, but your long-term goal needs to factor in, Hey, maybe short-term I need to sacrifice some things that I want to get the things that I want in the future. Or in Dave Ramsey's words, he's going to talk about life like no one else now. So that later you can live and give no one else.

Plan

So now that we've gone through our mindset here, let's talk through a plan. We can't just say, I want to save up for a house I'm tired of renting and then just stop there. Because we're always going to rest in this friction of saying I don't have enough money for a house and I'm never going to be able to save in it's always something that I'm never gonna be able to do. And then five years later, we look back and we didn't have savings.

Figure out how much money we need

So we need a plan and we need to figure out exactly how much we need because without a number, we're lost. So here's what you're doing to do.

Find the property you want to purchase

Number one, you're going to find the property that you want to purchase. So it might be the average property in your area, or in an ideal location for a first home, not your dream home. Just the first starter home.

So find that average property and then pick out your down payment. So we're going to need to figure out the minimum versus the ideal. So I have videos on minimum down payments.

Minimum vs. Ideal

You need to figure out either going to do a minimum or ideal. So a minimum is anywhere from zero to 5%, depending on the type of loan you're using. Now, ideally, you'd want to be putting somewhere around 10% or more. The reason why is because that's going to put you in a better equity position. So if you ever need to sell the property, you have a bit of a cushion there. It's also going to lower your payment. So 10% down or more is ideal, but you can also look at a minimum down payment if you need to.

In this circumstance, let's say that we're looking at let's say we're looking at a hundred thousand dollar house for some of you, that's not realistic at all. In our area, I live in Dayton, Ohio. That's very realistic to buy them. You can buy a two, three-bedroom house for a hundred thousand dollars. And it's not going to be a dump if you were in California. I'm sorry. Good luck. I don't know what to tell you there. They're a starter home is probably going to cost you 500,000 out that way, but it depends on your area. We're going to stick with a hundred thousand just to make the numbers simple.

Let's have an example

So let's say in this instance, I know a hundred thousand dollar home is a great place to start. So then what I need to do is figure out mydown payment. So I need to figure out my down payment, let's stick with an ideal first. So if I was going with my ideal down payment, then I would be looking at needing to. $10,000. If I was looking at the minimum, I would need anywhere from $0 to $5,000. So you can see if you're buying, an average, lower-cost area. You're not saving a ton of money, saving up $5,000 for, even in a worst-case scenario, as a down payment is not terrible. You can probably achieve that pretty quickly.

What's your timeline?

Then what we need to do once we know the number of how much we need to save up, we need to look at our total. So something to know about these down payments is there, there are the down payments, you have closing costs that are going to be added on top. But what you can do with closing costs is get the seller to pay a majority of those. So we're going to act like closing costs. Maybe we don't pay them in this scenario, but if you need to add in a cushion of some extra money if you're not planning on having the seller pay some of those closing costs.

So we know the number now let's say it's 5,000. Let's say $5,000 is our target as a down payment. So now we need to figure out our timeline. So you might have kind of the house fever and think, oh, there's no way I can purchase right now. Then you give up on the idea. You're just going to have a longer timeframe than that. Remember, we're looking at the long-term goal of this.

Be realistic with your plan and what you can save

For $5,000, how long would it take me to save up that money? Over a period of time. So let's say I want to save that over a year. So if I'm going to save this over a year. So if I wanted to save $5,000 over one year, I'm gonna take $5,000 and divide that by 12. In that case, I would need to save 400 in $16. If I wanted to save that money over two years, I would take 5,000 and divide it by 24 months and I would need to save 208. So you're going to be able to look at your budget and see what's going to work for you to be able to get to that savings point.

If you want to save $5,000 and you can only afford to pay $200 a month towards that savings, then it's going to take you two years to save up for your down payment.

Target, Timeline and Goal per month

So once you're realistic about it, you can then create a plan. Your plan is going to involve having a target that you're shooting for the timeline that you're looking at and your per month, right? It is 1, 2, 3 to get to that point. It is, does not have to be more complicated than that. You need to figure out the target number that you're going for, how long it's going to take you to get there, and then make your goal per month of savings that's going to fit in your budget.

Some things to consider

As you're going through this process because again, this is a long-term mindset that you need to have. So there are other things that we need to consider here first, before we just rush into a long-term decision and say, absolutely, I need to buy a house. I need to get a down payment.

Things you need to pay down

Let's look at some other things first. So first look at some things that maybe we need to pay down. So for instance, if you have maybe credit cards, you have personal loans, especially if they're like a payday loan, we want to get those paid for those are high-interest debt. We're going to pay a lot of money and interest on these. So let's take those down.

Even things like car loans or leases could be beneficial to get paid for upfront. A home is not going to be a fun thing for you. If you have a ton of other debt. Then you go and throw a mortgage payment on top of it. It's going to be so stressful because you have your mortgage payment and utilities, and maintenance costs that you have, you might want to repay or re-carpeting or add furniture. You're going to need to stock up on all kinds of things for this house.

So if you have a bunch of other debt, that's already feeling like it's too much, buying a house is not going to make that experience more fun. So, maybe, we take that $5,000 and we redirect it towards paying off debt, at least some of the high-interest debt. I wouldn't go, as far as Dave Ramsey would say, he would say remove all debt before you purchase a home.

What I would suggest

Let's at least at minimum, Pay off high-interest credit card debt and high-interest unsecured loans like personal loans before you buy a home. I don't think you need those before you purchase a house. So we're paying down things if we need to.

Where's your money going?

Also, we need to track what we spend our money on. If we go back to that scenario, if we're saving $200, $208 a month over the next two years, that money isn't just getting created out of thin air. We need to figure out where's our money going, and how are we going to specifically set aside $200 every month to make that work?

Budget

So this is where what everybody talks about is a budget comes in. I'm going to talk about zero-based budgeting here in a second, but a budget is so huge that you're not just going to say, "oh, I want to save $200 a month". And all of a sudden you're going to save $200 a month. If you don't have the tools to make that happen, it's not going to happen. You're gonna end up spending it.

Where do you put your money

When you're saving this money, where do you put it? So when you're saving for a down payment, this is not an investment, so you're not going to go put your money, for instance, in the stock market. Now, some people would argue I'm going to get a high return in the stock market and I want to get that high returns on the stock market.

Is stock market good for your savings?

Here's the problem with that. Let's say you have money saved up in there for your down payment and something that happens to our economy. Like currently, it is going downhill because of the national emergency of the Coronavirus outbreak. So people are losing tons of money. You don't want to save up all this time for a down payment and then all of your earnings are lost through a stock market dip.

Where to save your money

So put your money in a money market account or high yield savings. So you can get accounts that are averaging anywhere from 1.5% to 2.2% on average right now. That's in a high interest, high yield savings account. Your money's going to be secure in there and it's going to continue to grow some interest, which is going to be nice. Mainly this is going to protect against inflation more than anything else. It's not meant to be an investment account though.

Zero-Based Budgeting

So as far as budgeting, you can use a tool called Zero-Based Budgeting. Zero-Based Budgeting basically means every job in every dollar in your bank account gets a job. So if I get $1 that comes in, I have to go assign it to a specific category. So I have to say, this dollar goes to gas or this dollar goes to groceries. This dollar goes to rent.

That way, if I ever need to pull out extra money for something I have to go take it out from another account. For instance, let's say that right now, you don't budget, and let's say, currently your bank account has $2,000 in it. And somebody says, Hey, let's go out to dinner and you say, sure, no problem. You pay for dinner. You look at your bank account and say, oh, I have $2,000, a $40 dinner, no problem. I have $2,000 in there. It's not going to impact me.

What can Zero-Based Budgeting can do for you

But here's the difference. Let's say that you're using zero-based budgeting. In zero-based budgeting, you would take that $2,000 and you would say, I have this much money set aside for rent this much money set aside for groceries. This much for eating out this much for utilities, this much for gas and the list goes on. And then somebody says, Hey, let's go out to dinner and you look at your eating out category and it only has $30. Okay, then at that point you can say, I consulted my budget. Hey, what if we just stayed in and had some pizza instead? Or we did something like that.

Doing zero-based budgeting basically forces you now to look at how much money you have in that category. And if you end up going over that category, you have to pull it away from some other account. You know that if you overspend somewhere, it's going to take away from somewhere else in your spending category. So this is one of the most effective ways to budget.

YNAB

So I use a tool called it's called You Need a Budget. Some people call it why YNAB. It's the software tool that I use. It's super helpful taking the money that comes in and helping you set it aside for things that way you're always prepared for those bills when they come in and you can actually consult your budget and see, can I do this or not ahead of time, instead of other sites that just give you like an expense report at the end of the month.

And they're like, great, you spent this much money on Chipotle and you're thinking cool that doesn't tell me, do anything for the upcoming month.

Accelerate

So as far as accelerating this, what are some things that you can do? Obviously, there are so many things that you can do to save money to generate income, right? You can get new jobs and you can all these different saving hacks, but here are some big ones that might be helpful.

Pause retirement savings

Number one is looking at pausing retirement savings because a lot of people have retirement savings set up as an auto withdraw from their paycheck. So you can look at your paycheck and see is money automatically being spent on something like a 401k or his money automatically going into an IRA.

And if so, you might look at what, if we paused retirement savings in the short term. Safer the down payment and then restart because that might help you get to that down payment mark quicker because then maybe instead of saving $200 a month, you're now able to save 300 or 400 a month because you're not contributing to the retirement account. Then once you buy the house, then go ahead and start retirement savings again.

Job

Another option is a second job. There's no shame in getting a second job. If you have an aggressive savings goal because that could shorten your two-year cycle to save for a house down to maybe a year or maybe six months if you've got a side job.

Eat at home

Also, this is a huge one. Eat at home. Eating out is so expensive. I have had to cut back a lot because I used to eat out a lot and I think I still eat out a lot, but really if you budget for it. Eating at home, you're going to save so much money.

Get a roommate

Another option too is getting a roommate. You don't have to live alone. You might be able to, if you have a family, you probably shouldn't get a roommate, but if you are single, then look at having one. Friends who might be able to live with you. That's a great way to take down those costs and that way you can use the extra savings towards something for a down payment in the future.

Stick to your plan

So this should give you a solid idea of how to save for a house if you're renting. Again, stick to the plan that you're in. So many people are going to tell you It's throwing away money and you're paying your landlord's mortgage. You might as well pay your own, but they don't know your situation.

They don't know the things that you want to do. And frankly, they probably don't have your best interests in mind. Most of the people who are saying that are people who are loan officers or realtors, or, I see it all the time. That's a lot of the sales training for us is to talk about how bad.

Frankly, I just don't believe that's a thing. You have a plan that, you know, and I want you to stick with that and not feel ashamed because other people are moving at a different pace in life than you are.

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