With the cost of living continuing to rise, saving any part of your paycheck can seem like a small miracle, – and saving up a deposit for a home can seem like climbing an impossibly tall mountain. Luckily, equipped with the right tools, any homeowner can reach the summit. A well thought-out strategy can allow your savings to grow at a surprisingly fast rate, cutting the time you’ll need to own your first home in half.
This may seem like an impossibility; house prices have soared in recent years, increasing the size of the deposit required for most home buyers substantially larger. As a result, homebuyers need to be shrewder when it comes to their saving and overall banking habits.
There are two ways to save your deposit faster: save more or spend less. That may seem overly simplistic, but choosing either path is not the same as following it. Saving money is not easy. It takes discipline and a little bit of creative thinking. Here are some ideas to get you started on the path of home ownership.
Work out your budget
The key to saving is doing it systematically. Putting your spare change in a jar each week is technically something, but change, by definition, is left over from your purchases, which may or may not have been necessary.
Determining how much you actually need to be spending every month is a must – and you should prepare to give up several things that, while enjoyable, are hindering your ability to save. What you need to do is budget sensibly by putting together a realistic savings plan that doesn't compromise you or your family's lifestyle too much.
Constructing a budget shouldn't take long; two hours should do. Work out your monthly income and expenses. Estimate your regular expenses such as transport, groceries, lunches, childcare, etc. Include any debts you may be carrying, including credit cards, car loan or anything else that you are obligated to make a repayment on.
The hardest part is identifying and cutting out unnecessary expenses. What items and activities that you enjoy are actually luxuries you can reasonably afford to give up? Most of us don’t realise just how much money we waste on consumer goods that add no value to your life or lifestyle. Consider what you spend in a month on coffee, lunches, event tickets and alcohol. Take a minute to calculate how much you spend on these things and see if you’re not shocked.
You don't want to give up everything, but even doing something simple such as bringing lunch from home three times a week, avoiding your thrice-weekly chocolate bars and reducing your alcohol intake by one drink a night means you will save about $2700 a year. Cut out the coffee break and a packet of cigarettes a day and you’ll save another $3500. Not bad for just a few slight changes in your spending habits.
Manage your debts
There are few financial products out there as ubiquitous as credit cards. There is no doubting their convenience when you are running short on cash, but in an age where a few taps on your phone can get you a $20 Uber or a $200 patio set, a credit card balance (not to mention the resulting interest charges) can explode almost instantaneously. It's no mystery why so many of us find ourselves trapped under a small mountain of credit card debt we couldn’t foresee. You can't save effectively if you are paying off debts. You will have no choice but to cut down on your credit card purchases – and on the cards themselves if you’re using more than one. Consolidate your debts, including car and personal loans, and do everything you can to become debt free. Few people can live without a credit card, but limiting your use of one will cut down on unnecessary spending.
Optimize your banking
Another way of saving is to choose the least expensive and most generous (which seems like an ironic choice of words considering the conglomerates we’re now talking about) options offered by your bank. As with your weekly coffee purchases, these relatively small charges add up over the course of a year.
Avoid putting your money away in just any bank account. (The most popular form of saving for first homebuyers is an at call deposit account, available from most traditional lenders. The advantage of at call accounts is that your money is available whenever you want it.) There are a number of factors at play when choosing the right account for your deposit saving needs, including interest rate, transaction costs and the items contained in the following list:
FIVE QUESTIONS TO ASK IN ORDER TO IMPROVE YOUR BANK ACCOUNT
- Is interest calculated daily? Make sure that it is. Some bank accounts still pay interest on the monthly balance, which means you will get interest calculated on your minimum monthly balance.
- How frequently is interest paid? The more frequently interest is paid, the better the return on your savings. This is because the interest 'compounds' or accumulates on itself.
- Are you being offered a stepped account? Many banks have deposit accounts that pay the full interest rate on every dollar in your account. This is good. Some, however, offer different interest rates on different portions of your account. These should be avoided unless you are sure that you will always have a large enough balance to receive the highest interest rate.
- How much is your account costing you? What are you spending on fees and charges for writing cheques, making deposits or withdrawals? Look for an account which is free of charges or which allows a number of free withdrawals each month.
- How many transactions do you make each month? If your answer is “A lot”, a transaction account with low (or no) charges could be the way to go. To cut down on your transaction fees:
- Pay your bills with automatic debiting from your account. This is usually a free service.
- Use EFTPOS to access cash when shopping. It only counts as one transaction.
- Avoid using another bank's ATM for your transactions. The charges are generally much higher.
Do some serious saving
Once you have saved a few thousand dollars it's time to move to the next stage of your saving strategy - the term deposit. While you won't have the same access to your money as you would with an at call account, the interest rate is much better.
These accounts typically offer a fixed interest rate for a fixed deposit amount over a fixed term. Essentially, you put your money into an account and leave it there for an agreed term, anything from seven days to five years or more. You are able to access it if you really need the money, but generally you only have access at the expiration of the term.
While locking away your money for months or years at a time may seem restrictive, the benefits of using a term deposit are considerable:
- Having your money out of reach cuts down on splurges and impulse buying
- Because the interest rate is determined by the length of the term, you have some control over how much your money earns you.
- There are usually no account keeping fees. As you cannot put money in or take money out of the account, there are also no transaction fees.
- You can arrange to have your term deposit roll over to another term deposit automatically, avoiding any hassles of having to withdraw your money and then reinvest it.
- You choose the term you want.
- Because your rate will be fixed for whatever term you agree to, if interest rates drop your rate remains the same.
On the downside, if you need your money for whatever reason before the term is finished, you will be penalised for withdrawing it. Some term deposits offer a portion of the deposited amount at call but tend to offer lower interest rates than standard term deposits. Do your homework. It will be worth it.
Ask mom and dad
There's nothing more satisfying to a parent than being able to give their child a head start in life. But it's a big ask to expect parents to contribute $50,000 – or even $5,000 – in cash to help you buy a place of your own.
But what if your parents had started putting a little bit aside when you were born? Just imagine how much could have been saved if, starting with $1,000, they added $100 a month to their account for a term of 10, 20 or 30 years?
If it’s too late for your parents to start saving for you, it’s a strategy worth considering once you have a child of your own.
Another tangible way family can help is by providing you with rent-free accommodation. For example, if you are paying $300 a week in rent, 3 years of rent-free accommodation adds up to $46,800. As a gift, it’s invaluable.
Housesitting
If you don't have the advantage of rent-free accommodation, there's something almost as good. House sitting allows you to live in and maintain another person's home in their absence in return for accommodation that is often rent-free.
A typical arrangement lasts from a few days to a few weeks, although some last years. The cost to you is minimal, worked out on a case-by-case basis and may involve you having to look after the owner's pets or garden. Usually you only have to pay the standard utility bills (electricity, gas, phone) or, for longer arrangements, some of the long-term bills such as council rates, water rates and perhaps a token amount for rent.
You will be required to pay a deposit which is refundable when the owners return to their home (and find that it is in the same condition they left it in, of course). Many of these houses tend to belong to affluent owners so, as a bonus, you may find yourself living in a sprawling home in a beachside suburb while saving more money than if you were renting a one-room basement hovel.
Make use of homeowners grants
Most first homeowners are eligible for the First Homeowners Grant. The amount of each grant varies from state to state – the original amount was a tax-free $7,000 but has increased greatly in some areas -- so look into what your state currently offers. The requirements are fairly simple:
- You cannot have received the grant before
- You must be at least 16 years old
- You must be an Australian citizen
- It can only be used for your first purchase
- You must occupy the home as your principal residence within 12 months of settlement or construction.
There may also be other state schemes you might qualify for. Ask about those too.
You may be eligible for substantial exemptions or concessions on stamp duty, so they're worth investigating. Check out our stamp duty calculator to see how much you may need to pay.
Practical Tips
A good saving strategy is like a marathon, it doesn't matter what you do in the short term as long as you finish the race. Here are some tips to help you save more effectively:
- Start as early as you can. The sooner you start, the more time compound interest will have to kick in and help build up your savings.
- Every little bit counts, so always be on the lookout for more opportunities to save.
- If you are renting, try to get out of rented premises as soon as you can. Rent is wasted money.
- Try and save at least 20 per cent of the purchase price so you can avoid paying lender's mortgage insurance.
- Make sure you have a demonstrated savings history - lenders will not lend you money if they don't know you are responsible when it comes to finances.
- Work out ways to save small sums of money regularly and add them to your savings. If will help establish a savings history and boost your savings.
- You can get better returns over a mid- to long-term period of time with non-banking financial institutions. But you must balance risk against return - and you may not get a positive return.
- Share returns historically outperform other investment types over time but are volatile and may have large establishment fees. If you have time before you buy, it's an option worth considering.
Saving enough money for a deposit is a challenge, but it’s one of the most rewarding challenges anyone can endure. With sacrifice and no small amount of will, you can make owning your own home a reality.
Surround yourself with a team of professionals who can provide you with ongoing support and expertise in securing your financial future.
The Addisons Team are here to help!
