Articles, Buying Real Estate

How to save money for a house in 6 months

Written By: Jason Hewitt
Reviewed by: Mike Reyes
Last Updated October 16, 2021

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There are countless ways you could save money for a house in six months. While there is no guaranteed formula that will help you achieve that goal, there are tried-and-true tools, techniques, and strategies you can learn that will help you understand how you can save money for a house in six months or achieve any financial goal.

Even if you have financial obstacles like debt that seem to be in the way, you can use tools such as a debt snowball calculator to help you navigate your way out of debt and towards reaching your financial goals.

In this article, we will explore using some of the common strategies that will help a young adult named Alex save for a house in six months while also continuing to pay off debt. Here, you will be able to follow Alex’s journey, from the process of saving money and paying off debt to the art of budgeting and planning as they navigate possibilities and options. 

As you follow Alex’s journey, you will also be able to consider different ways you can pay off your own debt and/or save money for your own house in just six months. You may face similar decision points, and you may make different decisions or employ different strategies. The important thing to remember is to always make informed decisions with your finances. 

Want to save money for a house in 6 months? First, make a budget

The first step to saving money for a house in 6 months, and for almost any financial plan is to make a budget, taking into account your savings goal, projected income, and estimated expenses (including debt). These calculations will help Alex understand how long it will take to meet their savings goal, and how they might be able to reach it faster.

1. Begin with the end in mind: calculate your savings goal 

Your savings goal is a means to an end—in this case, buying a house. In order to buy a house, you could save up until you can afford to buy it outright, or you could save up for a downpayment on a mortgage, which is a type of loan people take out to purchase a house. 

The amount you “put down” on a house may vary, but in most cases, you’ll be required to pay at least 20% of the value of the home for a downpayment, and also prove that you will be able to make monthly mortgage payments. Your budget will help you forecast what monthly expenses, including your mortgage, you can afford after you make your downpayment. But first, let’s determine what your downpayment might be:

First, determine how much the house costs. For example, the house Alex wants to buy is $500,000.

Let’s assume there is a 20% minimum downpayment on the mortgage, which means Alex will need to save at least $100,000. It’s also good to add other expenses such as fees for realtors, attorneys, titles, etc. to the savings goal. These usually amount to an additional 2-5% of the total loan, so in this scenario, it would be ideal for Alex to budget at least $125,000.

2. Calculate your income

For budgeting purposes, Income is money you earn from employment or a business.

To calculate income, Alex must determine all of their sources of income and calculate how much money they earn (after taxes) from each source per month. For example, Alex earns $60,000 per year after taxes from a full-time job, so they earn $5,000 per month from that job. Alex also works a side job on the weekends, earning another $1,000 per month. 

Find the sum of the total monthly income. In Alex’s scenario, the total is $6,000. 

The lender will likely use your income, credit score, and debt-to-income ratio to determine whether or not you can afford your mortgage payments, and these factors will also likely determine what your loan terms and interest rate for your mortgage will be. Your debt-to-income ratio is determined by finding the sum of your monthly debt payments, divided by your monthly income. Generally speaking, lenders want your debt-to-income ratio to be below 43%. 

If Alex’s total monthly debt expenses are $2,000, which includes credit card payments, student loans, and car payments, their debt-to-income-ratio is 33%

For your own financial planning purposes, your debt-to-income ratio can help you get a sense of how quickly and aggressively you can pay off debt. The lower the ratio, the more flexibility you have to pay off debt faster

3. Calculate your expenses

Expenses are all the things you spend money on, including but not limited to food, rent, bills, and nights out with friends. 

1. To calculate expenses, Alex should write down a list of all the things they spend money on, and then calculate how much that amounts to on a monthly basis. For example, each month Alex pays $750 for rent and utilities, $50 for phone, $250 on groceries, $300 on going out with friends, $150 for student loans, $250 for car payments, insurance, and gas, and $500 on new clothes. 

2. Find the sum of all monthly expenses: Alex’s total monthly expenses are $2,250.

3. Subtract monthly expenses from monthly income in order to determine discretionary income. In Alex’s case: $6,000 – $2,250 = $3,750 

4. Divide the savings goal by the discretionary income to find out how long it will take to reach the savings goal: $125,000 / $3,750 = 33.33 months. 

As you can see, Alex is not on track to meet their savings goal in six months. It’s going to take roughly 3 years, or five times as long to reach their goal. What can Alex do to reach it in six months?

Alex can increase their income, decrease their expenses, or do both. 

Increase income to save for a house in 6 months

Increasing your income can be a great way to meet savings goals faster, help pay off debt faster, and take some pressure off reducing expenses. 

1. Increase stable income

In addition to your regular income, what else can you do to make some extra money? Whether it’s taking on a part-time job, offering your services as a freelancer, or selling something, there are all sorts of things you can do to increase your earned income. 

If possible, find something that will offer a stable or guaranteed income so that you can more accurately forecast your financial plans. For example, if Alex gets a part-time job that guarantees an hourly rate of $20 for 10 hours a week, they can budget for an extra $800 per month of income. 

2. Bonus income from a business or side hustle

Alex could also decide to freelance or sell unwanted items around the house, but these methods will be harder to forecast the numbers because there’s no guarantee that someone will hire Alex or that the items will sell. These are great ways to potentially make some fast bonus money, but unless Alex is already an established freelancer or e-commerce seller, it can take time for those operations to generate substantial and dependable income. 

In other words, if Alex depends on these more unreliable methods, there is some risk that Alex may not reach their goal in six months. However, there is also some potential that Alex could reach their goal in less than six months if these endeavors are exceptionally successful. 

Each person can evaluate their own circumstances to determine whether or not they want to pursue starting a business or side hustle in order to help them reach their financial goals. 

Can cash tips help you save for a house in 6 months?

If you take on a job that earns tips, such as being a server at a restaurant, it’s fair to expect that you’ll earn some tips, but also good to remember that there is no guarantee that you will. You can estimate the amount you will earn in tips every month in addition to the base guaranteed income, but be sure to include some days where you don’t earn tips in your calculations so that you can avoid unpleasant surprises.

That way, any time you have a generous customer or an opportunity to pick up a shift, you’ll be pleasantly surprised at how much closer you are to reaching your goals.

Read more: Best Jobs For Millennials Without A Degree

Should you invest to save money for a house in 6 months?

It may be tempting to invest in art (think NFT’s), cryptocurrency, the stock market, even another business in hopes of making some quick money to help reach your savings goal in six months, but that’s usually not an advisable move due to the risk of quickly losing your investment. 

Investing is usually more of a long-term strategy, and a savings goal of six months is not just going to require hard work to increase your income and sacrifice to decrease your expenses, but also some stability with your finances to ensure you don’t forfeit your progress.

If you’re interested in investing your discretionary income, be sure to consult a professional advisor about your best options. 

Reduce your expenses to save money for a house in 6 months

In addition to increasing income to help reach a savings goal, it’s always worth considering what expenses can be reduced. 

1. Reduce fixed expenses

Fixed expenses are constant expenses that don’t change every month, such as rent or a subscription to a streaming service. In most cases, the only way to reduce these expenses is to cancel them outright. It can help to look at fixed expenses first because the impact of reducing them is predictable. 

For example, Alex can cancel their streaming service subscription which costs $10 per month and see their total expenses reduced by $120 per year, bringing them $60 closer to saving money for a house in six months. 

2. Reduce variable expenses

On the other hand, reducing variable expenses can require more discipline and maintenance. 

Variable expenses vary month-to-month and may include things like groceries, going out with friends, or buying coffee from a cafe. You can simply reduce these expenses by deciding to spend less at the grocery store or go out with friends less frequently. 

For example, Alex might set a spending limit of $100 per month on going out with friends and put $200 extra towards saving for a house.

3. Buy in bulk and plan ahead

Saving money isn’t just about reducing how much you spend on groceries, for example. It’s also about planning ahead and being intentional about how you buy.

For example, Alex could decide for the next six months to eat nothing but rice in order to reduce grocery expenses. Rather than making weekly $40 purchases of rice, Alex can save money by purchasing rice in a bulk quantity for $100 that will last an entire month. The upfront cost is more expensive, but if Alex were to make weekly purchases, it would cost $160. 

This concept applies to almost all commodities. You don’t necessarily have to give up coffee in order to reach your savings goals, but if you buy coffee in bulk, you’ll end up spending less while still satisfying your need or desire to have coffee every morning. 

4. Take advantage of credit card cash back

Credit card cash back deals are considered discounts, so even if you elect to have cash back deposited into your bank account you will not be taxed on that money because it is considered a discount.

Taking advantage of credit card cash back deals can be a great way to reduce your expenses so long as you pay your credit card bill off in full every month on or before the due date so that you don’t pay interest on these expenses. 

Should you make minimum debt payments to save money for a house in 6 months?

Alex could decide to reduce their monthly student loan payments in order to save money towards a house faster… but this means Alex will pay more interest on the student loans over time. It is potentially a very risky move financially. 

You can use a snowball debt calculator to see how much it will cost overall if you make minimum payments, and how much you will save on interest if you pay off your debt(s) sooner rather than later. 

Let’s consider student loans

For example, if Alex’s student loan balance is $10,000 with an interest rate of 5% and they increase their monthly payments to $250, they will pay $962 in interest and it will take nearly 4 years to pay off the debt. If Alex wants to pay less money towards the debt in order to save money for a house in 6 months, it’s important to understand what that will cost in terms of interest and the time it takes to finish paying off the debt.

Alex doesn’t necessarily need to pay off his student loans overnight. And, having debt doesn’t necessarily mean Alex can’t buy a house, but depending on how much debt Alex has, it might be worth considering a less expensive house or taking more time than 6 months to save money for a house. 

At the end of the day, when it comes to saving money for a house, your debt payment(s) is an expense that you should include in your budget because it will impact how soon you can reach your savings goal. How to approach paying off debt given your unique circumstances is a separate issue, but is absolutely worth taking into consideration because it will help you make an informed decision about what savings goal to set, and how soon you can plan to reach it. In any case, keep in mind that purchasing a home is a big decision that involves taking on more debt, so make sure you’ve proven to yourself that you can manage debt effectively.

Take advantage of special grants or programs to save money for a house in 6 months

In addition to the aforementioned strategies, there are all sorts of grants and programs that you can take advantage of to help you save money for a house in 6 months.  

1. Homeowners assistance grants and loans

A grant is a monetary fund given to an entity or individual to be used for a specific purpose. The US Department of Housing and Urban Development offers many different types of grants that aim to help qualifying individuals afford housing.

There are also loans, such as the FHA loan issued by the Federal Housing Administration, that help first-time homeowners get more affordable deals. These types of programs are often available to individuals with low income and/or low credit who otherwise wouldn’t qualify for mortgages to buy a home.

In the near future, there may be additional grants available to help first-time buyers, such as the $25,0000 Downpayment Toward Equity Act of 2021, which intends to help with any upfront costs of buying a home including downpayment, closing costs, and other purchase expenses. As of October 1, 2021, this bill has not yet been passed into law, but many states have similar programs in place that you may qualify for. 

2. IRA Exemption for first-time homeowners

If you qualify as a first-time homebuyer according to the IRS, you can withdraw up to $10,000 from your traditional IRA and use the money to buy a house without facing penalties or taxes. However, if you use that money to buy a house, you will lose out on the time value of compounding interest on that money. 

Read more: How To Save $5000 This Year

What to do with the savings you already have

Generally speaking, if you have savings, it’s good to put them in a separate account, such as an interest-bearing account so that they will grow with time. For example, if Alex has $1,000 in a savings account that earns 1% interest per month, they will earn $10 in interest the first month, and then assuming they don’t withdraw from the account, they will earn $10.10 the next month, and the interest will continue to compound.

Keeping money where it can earn compounding interest is always ideal, and the higher the interest rate, the better. However, you want to keep in mind that some accounts have minimum deposit and balance requirements to avoid being charged a fee. 

A checking account is usually not an ideal place to keep savings because of the lack of interest checking accounts offer. Checking accounts are designed to give you unlimited and immediate access to your funds, whereas savings accounts and money market accounts may restrict how often you can withdraw your funds but usually pay significantly higher interest rates. 

1. Consider a savings account

A separate account, such as a savings account can be a great place to keep the money you’re saving for a house in 6 months. Not only are most savings accounts insured by the Federal Deposit Insurance Corporation (FDIC), but you can also earn interest on your balance and you can usually access the funds at any time without penalty.

The biggest potential disadvantage of a savings account is that it may not earn as much interest as you would like, and you could be earning more by keeping your money somewhere else. Some banks also have special restrictions and impose maintenance fees if certain requirements are not met. 

2. Consider a Money Market Account

A money market account is a type of account offered by banks and credit unions that usually pays a higher interest rate than a savings account while also offering the same insurance protection and sometimes even with check writing and debit card privileges.

The catch is, there is usually a significant minimum deposit to open a money market account, and there is usually a high minimum balance that needs to be maintained to avoid fees. All things considered, money market accounts can be a great place to put away savings for a large goal, provided that you won’t need to take much money out of the account very often. 

When you’re ready to use your savings, consider how quickly you can replenish the funds to meet the minimum balance requirements, or consider closing the account to avoid paying additional fees. 

Use the right strategies and tools to reach your savings goals

While there is no formula for reaching your financial goals, learning prominent budgeting strategies and knowing where to find useful calculators will empower you to find your own way. Whether you need to save money for a house in 6 months, retire before the age of 62, or just get out of debt as quickly as possible, the sky’s the limit when you take control of your finances and put everything you’ve learned to good use.

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