How to Save $20,000 for a Down Payment in Just 2 Years

Woman looking at house savings
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Making the move from renter to homeowner is challenging for nearly everyone, and the highest hurdle for most first-time buyers is saving enough money for a down payment. If your No. 1 priority in the next few years is to become a homeowner, financial experts say you'll likely need to make some aggressive moves to cut your spending, boost your income, or both.

The National Association of Realtors reported that the national median home price in June 2013 was $199,900 (and prices are rising again). For the purposes of this article, we assume that your goal is to buy a house in two years with a 10 percent down payment of $20,000.

To get started, set a timeline and break up your savings goals, suggests Anna Behnam, an Ameriprise financial advisor in Rockville, Md. To save $20,000 in two years, you'll need to save $833 a month for the next 24 months.

"Create an account that will hold only savings designated for your new home," Behnam suggests. "This can help keep you organized and track your progress."

Start Big

If you're truly committed to buying a home and can handle some big changes in lifestyle, you could move in with family for a defined period of time. You could also move to a smaller apartment.

"Going from a two-bedroom to a one-bedroom can drop your rent by 25 to 30 percent, depending on where you live," says Rob Jupille, president of RTJ Financial Management in Los Angeles. "If you have a spare room, take in a renter until you save what you need."

Another possible lifestyle change is to bring in more income by working overtime if possible or taking on another job.

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Timothy Murray, a certified financial planner and owner of Murray Financial in Chantilly, Va., suggests looking for a job doing something that interests you outside of your current career, such as working at a Lowe's or Home Depot if you're a home improvement enthusiast or want to learn more about how to take care of the home you plan to buy.

"If your savings goal is aggressive, you may decide that you're willing to make large trade-offs to meet your goal," says Behnam.

For a significant boost to your down-payment fund, consider more substantial cost-cutting and money-raising measures, such as selling your current car and trading down to a lower-cost vehicle.

Small Steps That Add Up to Big Savings

Finding other expenditures to trim requires creating a household budget to see where your money is going.

Some of the easier expenses to reduce or eliminate include new clothes, shoes, and other stuff; daily expenses like your morning specialty coffee; monthly expenses like a Netflix subscription; and gas and parking costs (consider carpooling or take public transportation), Behnam says.

"Keep in mind when you're in super-saver mode to ask yourself out loud, 'Do I need this or want it?' before you buy anything," says Behnam. "Shop in physical stores if possible (rather than online) and use physical cash rather than credit."

Take a critical look at all of your expenditures -- gym memberships, vacations, entertainment -- to see where you can cut back to meet your savings goal. While you don't want to drain all the enjoyment out of your life, you can keep spending in check without sacrificing much. For example, if you like to go to restaurants with friends, Murray says, limit your meals out to one a week, and invite friends over for potlucks instead.

Retirement Savings vs. Funding a Down Payment

If you're contributing more to your 401(k) than the company will match, temporarily scale back your contribution to the company match for a couple of years and put that extra cash in your down payment fund, suggests Jupille.

Scott Cramer, a financial planner and president of Cramer & Rauchegger in Maitland, Fla., says you might want to consider boosting your IRA contributions so you can use the funds for your down payment.

"The first-home exemption rule allows individuals to use up to $10,000 in IRA funds toward the purchase of a first home without incurring the 10 percent early withdrawal penalty that applies to withdrawals made from a traditional IRA before age 59½," says Cramer. "If you're married, you and your spouse can each pull from your retirement accounts, giving you $20,000."

Before you do this, though, be aware that even though the penalty is waived, you have to pay income taxes on the withdrawal. A Roth IRA withdrawal is considered a "qualified distribution" if you've had the account for at least five years, and Roth IRA withdrawals are tax-free, Cramer says.

Where to Stash Your Cash

When you're saving for a short-term goal, financial experts recommend you stick with a low-risk investment such as a high-yield savings account or a CD. A credit union or an online bank usually offers better interest rates on savings than most traditional banks.

While it is tempting to invest your down-payment savings for a higher return, be aware that there's always a risk that an investment will lose money. Murray says that the rate of return on your down payment savings is less important than making sure the money is available when you need it.

Whether your goal is to buy a house or meet some other financial obligation, you'll need discipline and an aggressive savings plan to achieve it. But following the savings tips above will help put your goal within reach.

Michelle Lerner is a contributing writer to The Motley Fool.