Stop Spending and Start Saving to Buy a Home

Tired of renting but still complaining about the high cost of buying a home? Put your money where your mouth is. Most people literally eat up their savings by dining or ordering out, or indulging in other spendthrift habits. Here's how to save.

You can't put money away if you've already spent it. The problem is, most people have no idea what they're spending. It's easy to track bills on your check register or credit card but harder to track cash. All you have in your hand is a bunch of ATM receipts but no idea where the money went. If you really want to get serious, do a self-audit. Take a whole month and record everything you bought with cash.

Congratulations, you just took the first step to buying a home. Now you know where most of your discretionary income is going. Surprised? Bet you didn't notice you were eating lunch out everyday. Do the math and you'll be shocked by how much that costs you. For example, a $5.00 daily lunch tab adds up to no less than $1,200 a year! Start packing your lunch. Hold your brown bag high as you stride into work. If anyone snickers "brown-bagger," just invite him or her to a barbecue at your sprawling, new home.

Your other eating and entertainment expenses will become painfully obvious. $30 here for dinner, $20 there for pizza delivery... you don't need to give up fun, just have cheaper fun. Try a picnic instead of eating dinner out, or replace an evening at the theater with a bargain matinee movie. Set a maximum monthly spending limit for eating and entertainment and stick to it. The big-ticket items can put a dent in your savings, too. Clothes, vacations, electronics, computer equipment, (you're reading this on a computer, aren't you?) sporting goods... put those purchases off for a year. Take care of your minimum living expenses, and then save any additional, discretionary income for a down payment on a home.

Now go out and do some preliminary home shopping. Tour homes in your price range and divide the prices by about 10 percent. That's your minimum savings goal. Unless you qualify for FHA, VA or another program with a low to zero-down payment, you'll need anywhere from 5-10 percent for just the down payment. Add about 3 percent more for closing costs. Remember that even if your parents or other family members are willing to help you, lenders almost always require you to put up some of your own cash. For example, a lender would probably allow parents to cover the closing costs, so long as the buyers have good credit and enough money of their own for 5 to 10 percent down.

The cardinal rule is to make saving automatic. Figure out how soon you want to buy a home, and how much you need to save on a monthly basis. Consider enrolling in an automatic savings plan to make sure it's deducted from your paycheck.

By Cliff McCreedy