Ask YNAB: Five Ways a Budget Can Help You Save for a Down Payment
Saving for a down payment can be a monumental task. But with the right plan, knowing what you can afford, and a little hard work, saving is more manageable.
We asked our friend Todd Curtis, Chief Knowledge Officer at YNAB, to explain how having a budget can help make your down payment a little more attainable. Here's what he said:
Let’s face it, a down payment is big chunk of money. We’re talking tens of thousands of dollars here. Thinking about saving up that much money can be intimidating.
Thankfully, a budget can get you there. Not with a bunch of fancy tricks and tips, but by aligning your spending with your goal of becoming a homeowner.
- The power of everyday decisions. A budget is about the day-to-day. The reasons why you budget are bigger, but a budget works because it impacts and guides what you do today and tomorrow. Your down payment is a lot of money, but you’re not going to save for it only in big chunks – if only a check for $4,000 would arrive in the mailbox. Ain’t gonna happen! But the power of day-to-day decisions is more important.
Use your goal – your down payment that gets you your own home or a bigger yard – to stay focused on what your money is doing today. Could you afford the vintage t-shirt? Yes, you can afford it. But would you rather that $23 go there or towards your new home?
A budget can keep you asking this question, and these day-to-day decisions will add up to a big difference before you know it.
- Avoiding spending black holes. When you start using a budget to guide your spending and check your budget before spending, a funny thing starts to happen. You realize what you’re spending. This awareness grows when you track the spending you do follow through on and compare it to your plan. It’s a super-reliable for pointing out your spending black holes.
For me, this was coffee. I used to commute a fair distance and then drive around during the day. There were coffee shops everywhere. And, well, coffee is my only vice. So it was really easy to stop. Often. Too often.
Talk about the power of everyday decisions. You’d be amazed at how quickly two or three bucks adds up quickly to a meaningful sum that I’d rather put towards an important goal.
Whether it is eating out or a weakness for just the right pair of shoes on sale, your budget will point out your black holes for you.
- Don’t pay another penny in credit card interest charges. An effective budget means working with the money you have right now. You’re not forecasting what you might be able to spend if everything came together just right. Instead, you allocate the money you have on hand right now. When you do this, you’re going to spend less than you earn, which means no more reliance on credit cards.
Sure, you might still use one to earn cash back (which you will, of course, use to fund your down payment.). But every penny of your spending on a credit card will be accounted for in your budget. Which means no more interest charges. And those are dollars you’re sending to some company that already has millions (or billions) of them, instead of making them a part of your down payment.
- Reduce impulse spending caused by decision fatigue. When you’ve made a lot of decisions in a day already, your ability to make the next one (and especially to make the next one a good one) suffers. This is called decision fatigue and it impacts your ability to make effective trade-offs. Whether your decisions earlier in the day came from work, family, or the scores of decisions involved in trying to manage buying a home, they make it harder for you to say no to spending. A budget solves this problem by having you make your decisions about spending ahead of time.
When you’ve already decided what your priorities are and allocated your dollars towards those priorities, your decisions are already there for you. Decide what to make from dinner or order out? Check the budget. Did you decide (earlier, when you set your budget) that you had enough money to go out for the third night this week? No. It’s settled then, and you just saved $45 for your down payment.
- Budget for the fun stuff, too. Everything to this point has been about saving. About not spending. But it may take a while to build up your down payment (unless you’re living with your parents rent-free, walking to work, and eating pasta every night, all of which are viable options). But it turns out a little bit of spending on things besides your down payment is actually helpful. A little bit of spending on your hobbies, your vices, date night for the two of you, can keep you motivated to save for your down payment. It keeps saving from feeling like a burden, like something too heavy.
Of course, the key is budgeting for these “just for fun” sorts of things. Think of it as fun money, blow money, or whatever you want, but plan as a part of your budget to do a little bit of spending that you’re not going to worry about. Then go ahead and spend it guilt-free, knowing you’re making great progress on your down payment with everything else you are doing. You’ll be more likely to tuck a few bucks in your down payment knowing some fun is still in the plan.
In the end, a budget is going to get you to your down payment because a budget all about your priorities; budgeting is the act of aligning your money with your priorities. And when you’re dreaming of owning your own home, there’s not much higher priority than your down payment.
Todd Curtis is the Chief Knowledge Officer at YNAB.