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."
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.
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.
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.
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.
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How to Save $20,000 for a Down Payment in Just 2 Years
Risk level: High
What do success stories like Henry Ford, Steve Jobs and Mark Zuckerberg have in common? They all made their mark (and their millions) by coming up with a better idea and running with it. Starting a business is a proven path to wealth, and the best way to get there is to start small and scale up -- which usually means being bought out by a larger company, selling franchises or licensing your product.
An ambitious goal is critical if you want to expand your business, says Barbara Findlay Schenck, a small-business strategist and author of Selling Your Business for Dummies.
Before you apply for loans or sign up investors, polish your business plan. And don't overlook sources of free help. For example, you could tap your alma mater's alumni network for potential mentors. You can also get advice from more than 13,000 small-business volunteers through Score, a nonprofit organization supported by the Small Business Administration. (For more, see Six Steps to Starting Your Own Business.)
Risk level: Medium
Creating a product and licensing it or selling it through retailers is another route to making money from your good idea.
One of the biggest mistakes that aspiring inventors make is to create a product before they've determined whether there's a demand for it, says Sidnee Peck, who teaches classes in entrepreneurship at Arizona State University's W.P. Carey School of Business. She encourages her students to talk to potential customers in person before they develop their products.
Nancy Tedeschi came up with the idea for SnapIt, an eyeglass-repair device, after her mother used an earring to jerry rig her broken glasses. Convinced that she could improve on the tiny tools contained in most eyeglass-repair kits, Tedeschi invented a small screw with a snap-off extension. Tedeschi got the attention of Walmart (WMT), the nation's largest retailer, by entering its "Get on the Shelf" contest, an "American Idol"-like competition for aspiring entrepreneurs. She was one of two runners-up, and her product is now available on Walmart.com.
Online surveys and social media provide an easy way to reach a lot of people, Peck says, "but you don't get to see people's eyes light up." Tedeschi also attended housewares and hardware trade shows, where she introduced her product to representatives of other big retailers. Those contacts helped her get SnapIt on the shelves at Walgreens (WAG) and Ace Hardware.
Risk level: High
You can make a lot of money fixing up run-down houses and selling them for a quick profit, but you need cash to venture into this business. It's tough to get a mortgage for a property you plan to flip, but a home-equity line of credit against your primary home is a good source of funds for first-time flippers. Short-term bridge loans from private lenders, known as hard-money loans, are a higher-risk way to get the cash -- and charge higher interest rates.
Look for ugly ducklings in upscale neighborhoods where the market has picked up. Before buying a property, research recent sale prices for nearby homes to get an idea of what you can make, and find out how long the homes were on the market. Successful flippers usually sell their properties in 30 to 60 days, says Letitia Patterson, a real estate agent who has invested in properties in the Detroit area.
Don't forget to factor in the expenses you'll incur while you're holding the property, along with closing costs. Justin Pierce, a real estate investor who flips properties in the Washington, D.C., suburbs, says he starts by estimating the sale price of a fixed-up home. Once he comes up with that number, he subtracts buying and selling costs (typically 10% to 15%), a profit margin of 15% to 20%, and the cost of repairs. With those numbers in hand, he can determine how much he will offer.
Risk level: Medium
The average interest rate for a 30-year, fixed-rate mortgage on a rental property is only about 4%, according to mortgage Web site LendingTree. That means your monthly rental income should cover the mortgage, which wasn't possible when rates were 7% or higher, says Michael Corbett, an adviser to the real estate Web site Trulia and author of Before You Buy! Plus, the National Association of Realtors projects that average apartment rents will increase 4.6% this year, following a 4.1% increase in 2012.
Once you've purchased your first property, you can use the equity to buy additional properties, typically through a cash-out refinancing, says Doug Lebda, chief executive officer of LendingTree. Most lenders won't let you take out more than 80% of the equity you have in the property.
Fayz Khan, a former auto engineer, ventured into the rental market in 2008 because he believed he could earn better returns in real estate than he could get from the stock market (see "What It Takes to Be a Landlord,"). He now owns eight rental properties in the Baltimore area, and the return on his investment has far exceeded his initial expectations. Khan and his business partners are exploring opportunities in North Dakota, where the oil boom has led to an acute housing shortage.
Risk level: Low
You don't need talent or money to cash in on YouTube. In fact, all you need is a camera, something unique to share and plenty of luck. "A lot of people make over six figures a year on YouTube," says Ross Ching, a commercial and music video director.
A good one-off viral video is under three minutes and it gets you hooked within the first ten seconds. But it's tough to be a one-hit wonder. A more reasonable goal for amateur filmmakers is to score viral fame with a YouTube channel. That means making a series of videos, each of which can run a little longer than three minutes. Try highlighting a specific skill or theme -- say, cooking or standup comedy. Your videos will drive traffic to one another while you perfect your craft and earn "subscribers."
Reach out to media outlets and bloggers with a link to your video. Don't expect your audience to find your video without some direction. A link-back on a popular site can skyrocket views.
You can earn cash with YouTube advertisements, which can run about $2 per 1,000 views. But the real money is in endorsements and product sales. Industry experts estimate that Korean pop star Psy earned about $8 million in 2012 from his addictive YouTube music video "Gangnam Style." As his video accumulates views, his single racks up iTunes downloads and he picks up lucrative contracts, such as his pistachio-promoting Super Bowl commercial.
Risk level: High
If you can withstand 12-hour workdays on an oil rig in the North Sea or maintain your composure during military coups, you may be rewarded with free housing, a six-figure salary and the chance to see the world.
According to Rigzone, an oil and gas industry data provider, entry-level workers on a rig earn more than $68,000, on average; the pay ratchets up dramatically as you gain experience, which is easy to do in an industry that believes heavily in on-the-job training, says Rigzone president Paul Caplan. Drilling positions are most lucrative, with an average salary of $126,471.
If physical labor isn't your thing, you could get a gig with the State Department. The harsher the environment, the better the incentives: Foreign Service jobs add up to 70% of base salary for certain field positions in Iraq and Afghanistan.
A bonus: Hardship posts in a remote locale afford few opportunities to spend -- so there's not much to do with your money but watch it grow.