For the past few years, I’ve been on auto pilot with my finances. My retirement savings are automatically withdrawn every pay day, and at the end of the month whatever is left over, I put into a general savings account. It’s what I’ve always wanted for myself – to be savvy enough to create a budget and (for the most part) stick to it every month, and to have enough income coming in that I could afford to do the things that I want to do, without financial struggle.
Because my finances are automated for the most part (I still manually pay all my bills), I haven’t had to put in effort to save for anything … and this realization actually made me feel pretty bad about myself. That’s in part because, aside from my long-term goal of early retirement or the occasional big trip somewhere, I haven’t had an actual financial goal in years. I’m talking about a big financial goal that would require me to create a plan and actually work hard to achieve it.
Since RD and I have made it our goal to one day buy a home (probably, maybe sometime this year), all of a sudden my new goal is to save for a down payment, because the amount we put down on our future home is riding on how much I personally can save.
Right now I have $53,000 earmarked specifically for a future down payment (this lives outside of my general savings and my emergency fund accounts). RD has much more than that – so much more that it would actually be impossible for me to match his savings even if I tried my hardest this year. And since we are planning to go 50-50 on the down payment, the amount we will have saved really depends on how much more I can squirrel away.
It seems weird to even talk about saving for a down payment, when I was so sure we would be renters for years. But now that we both understand we’ll be here long-term, it actually does make sense to buy if we can find a place that costs about the same to own as to rent. The only problem is, those places are very rare, and we’re willing to wait until we find a home that we can love for 10+ years – and until the Vancouver real estate market settles down … which is why we have no idea when we’ll end up buying.
Related: How I saved for my down payment
My dream is that we’d have $150,000 combined for a down payment and closing costs, which means I’d have to save $22,000 more to come up with my half. Admittedly, this is a somewhat unrealistic goal considering our travel itinerary this year and the fact that I refuse to lower my retirement contributions, but there’s an outside chance I can get there. Of course, it depends on when we actually decide to buy, but I will still try to come up with some sort of plan to get me as close to my goal as possible. Stay tuned!
Somebody recently asked me how I was able to save up for a down payment on my townhouse. I wrote this post, and then sat on it for a while (like I usually do, because blogging is scary). I realize that sometimes I can sound so ridiculously positive that it might be perceived as if I don’t know how hard it is to actually save money. My goal is never to alienate anyone, or make it sound as if I don’t understand. I’ve come a long ways since being a crazy shopaholic in debt, but I certainly haven’t forgotten what it felt like. Anyway, onto the post…
I live in Vancouver, and most of you know how ridiculous the real estate prices are here. To give you an example, according to the Real Estate Board of Greater Vancouver, in June the benchmark price for a detached property in Vancouver was $901,680 – which is up 13.4% from June 2010. And the price of an apartment unit? $405,200.
Do you want to know what the median household income is for Vancouver? $47,229.
Still, the statistics didn’t make me any less determined to become a homeowner. It was the biggest reason why I wanted to get out of debt so quickly after college. I knew that in order to be able to buy a place of my own, I needed to live a debt-free life. Getting rid of my debt meant I could save money faster for a down payment, and position myself in the best possible way to qualify for a mortgage.
Here’s how I did it:
Getting out of debt & saving for a down payment became a priority
From when I graduated in 2006, up until the present (5 years), I grew my net worth from -$20,000 to +$63,000 (a difference of $83,000). It wasn’t easy. Especially on a modest salary. Since graduating, I’ve made an average of $44,000/year at my full-time job over 5 years and 6 jobs. Not a lot of money, right? So I knew that in order to make my dream of home ownership a reality in Vancouver, I’d have to make some serious cuts to my budget and increase my income significantly.
So in the past 5 years, I went about creating multiple streams of income, and did everything I could to make extra money. I’ve had two full-time jobs at the same time (a 3-month time frame). Took on graphic design contracts. Started freelance writing. Sold stuff on eBay. Worked for $8-10/hour at a part-time job for years. YEARS. The list goes on. Sometimes you have to do un-glamorous work in the short-term in order to achieve a big goal. You may not like it, but if it serves a purpose and is helping you get to a better place in life, then it’s worth it. Just stay focused and keep your eye on the prize.
I built my budget backwards
When I decided to become a home owner, I knew that I did not want to give up my $700 per month contribution to my RRSP. The idea of owning my home is a big deal, but retiring early and comfortably is my most important financial goal. So, keeping that in mind, I started by subtracting $700 from my net income. Then, I subtract my mortgage. Then, amounts for traveling, emergencies, property tax, home repair, auto insurance, and general savings. The money that was left over after all of my savings goals were met, is what I live off of every month.
So when you’re trying to save up for a down payment, you can utilize the exact same method. Figure out how much you want to save, and the number of months you will be saving for. Then each month, pay yourself first by deducting the required amount of money from your net income, and live off of the remainder.
You might find that by building your budget backwards, you won’t have enough leftover money to live on. This is when you have to decide whether to save at a slower rate, or increase your income. My choice was to increase my cash flow. I don’t work multiple jobs because I can’t get by on just one income – I work multiple jobs so that I can save faster.
Utilize the Home Buyer’s Plan
The Home Buyer’s Plan allows you to use up to $25,000 of your RRSPs towards the purchase of your first home – tax free! You have up to 15 years to repay the amount used, so for each year of your repayment period, you have to repay 1/15 of the total amount withdrawn.
So in order to maximize my ability save for a down payment, I tried to build up my RRSP account as quickly as possible. Then, I would reinvest my tax refund back into my RRSP for an even bigger gain. In 2007 (the year I got out of debt AND worked two full-time jobs at the same time), I was able to max out RRSPs with a contribution of $15,213 (and a tax refund of $4,500)! Yeah, I was an animal back then. Haven’t been able to do that since. :(
I had realistic expectations
It is so easy to get carried away in buying that dream property. But I knew that as a first-time home owner living in the most expensive city in Canada, I needed to scale back my expectations. It’s very rare that you will live in your first home forever, so there’s nothing wrong with spending a little less and buying a smaller place.
When I was looking at listings with my Realtor, my decision came down to two properties. One was a small one-bedroom townhouse, and the other was a larger two-bedroom townhouse. The price difference was about $30,000. In the end, I chose the smaller house (even though I could comfortably afford the bigger house) because 1) I know I’m not going to live there forever, 2) $30,000 is a lot of money – even spread over 25 or 30 years, and 3) I don’t need anything more than a one-bedroom home at this point in my life.
Over the last 5 years, I’ve had so many urges to buy a home, but I knew I couldn’t take the plunge until I was completely ready financially. That meant having no credit card debt or any kind of loan. It also meant having a healthy savings account, and most importantly, the ability to budget and manage my money responsibly.
Some of you might have noticed that I have a new sidebar up now. The Future Home Fund is a joint savings account for – you guessed it – our future home. We don’t know what city we’ll be living in, or whether we’ll have a house, townhome or condo – all we know is that we want to start saving up for a home together.
This money isn’t even earmarked for anything. It could go towards the down payment, closing costs, or home renovations. I have $25k from my RRSPs that I had always envisioned using for the First-Time Home Buyer’s Plan, so that’s always an option for a down payment. Plus, I will be saving money outside of our joint account (as will BF, once he starts his career).
Anyway, right now we’ll each be contributing $75 bi-weekly. Not a lot, but it’s a start for now! In the future I’m sure we’ll be contributing more. Our time frame for buying a house will be around 4 years from now – so that BF’s career will have started and he can establish a somewhat steady income (and we can figure out where the heck we’ll be living!), and my car loan will be paid off.
And you know what’s great? I can check “establish a joint savings account with BF” off of my list of annual goals for 2010! Woo hoo!