by Kelly Holck
on Wednesday, October 24th, 2018 at 1:07pm.
One of the top five most exciting yet stressful moments of your life is when you buy your first home.
This is when many of us actually feel like we’ve reached the highest, tippity-top level of “adulthood”. The first level of adulthood is when you buy a really nice vacuum cleaner and rush home to try it out. Unlike purchasing a vacuum cleaner, however, you need to be in a pretty stable financial standing to buy a home.
If you'd like to avoid looking like the (fur)ball of stress above when it comes time for this major purchase, then read on.
I’d like to start out by saying I am not a qualified or professional financial planner. I’m just someone who has had A LOT of experience with debt. I’ve also had a long struggle with saving money. For most of my early twenties, I saw credit cards as “free” money. I thought, I can start saving money when I’m old and when I’m ready to buy a house. Boy, was I wrong. The old saying "there's no better time than now" fully applies to getting your financials in order. If you want to buy your dream home with little to no problems, you'll need a solid savings account along with a good credit history and score.
First thing's first, establishing that savings account.
Not only do you want a savings that will cover at least 3-5% of your home's purchase price for a down payment (more if you want lower mortgage payments), but you’ll want plenty of funds set aside for all of the maintenance and issues that may come up with owning a home. Because you've never owned a home before, I'll let you know that these issues will probably be costly. You may also want to have an account that contains plenty of money to fall back on for your monthly mortgage payments. This is just in case an unexpected life event occurs (as they often are unexpected). Losing your job, your car breaking down, etc. will likely cause you a lot of financial hardship. Save yourself the worry and develop an emergency fund. This will allow you to focus more on the issue at hand and less on How am I going to pay my bills?.
Here are some tips that have personally helped me build my own savings account:
• If you’re an extremely motivated person, get a second job bartending or serving a few nights a week. You can establish that cash flow as your spending money. Then use the money you get from your steady paycheck for bills. If you're bringing in a lot of cash, take a portion of that cash and put it directly into your savings. I use extra cash for gas and groceries so I can put a larger portion of my paychecks into my savings.
• If you’d rather just stick with one job, then make sure to set a weekly budget. This will reflect what you can spend on nonessentials, like going out to eat. For some, this weekly budget is 5% of their income. For others, it's more. You can meet with a professional financial planner, or you can start simple by making an Excel spreadsheet of your budget. Make sure you focus first on all of the things you have to purchase in order to get through the month alive. This includes recurring bills, gas, groceries, etc. Whatever you have leftover, can be doled out between savings and spending money. I personally like to keep a set amount of cash on me and once that cash runs out, I’m not allowed to spend any more.
• If you're really terrible at saving, start a savings account at a bank separate from where your checking account is. This will make it more difficult for you to steal money from your savings account for unnecessary spending.
• Set a saving goal: if you give yourself a goal to hit, then you’re more likely to keep contributing to that fund. Start small and once you’ve reached that goal, increase it. It’ll feel good to be accomplishing tasks.
• Designate a specific amount of money that you should be depositing into your savings with every paycheck. The number that’s worked best for me is 10% of my paycheck. If you can’t afford to do that, then put less in. You can even specify, I'll put $25 from each paycheck into my savings. As long as you’re continuously contributing to the account, you’ll build it up in no time.
• To add to the tip above, set up your direct deposit or your bank account to automatically send that designated amount into your savings account. This way, you won’t even see the money and, most likely, you won’t even realize you’re missing it! You can even download an app to your phone to do the work for you. Two apps that work great are Digit and Qapital. Find out what's safe to save on a daily basis with Digit. Set specific "saving rules" with Qapital. Both of these apps will help you better plan how and where you can save extra money.
Now, it’s time to focus on getting your credit in good health.
Increasing your credit score and maintaining a good credit history are both things that can take a lot of time. My credit score has taken years to get back into good standing after a little too much fun with credit cards. And my credit history? Well that's still haunting me from my college years.
Whether you're in good standing with the credit bureaus or you're working on getting your score in a more solid place, here are some tips on how to better manage your credit:
• Keep a watchful eye on your credit. A super helpful app I downloaded is Credit Karma. The three major credit bureaus in the US that capture your score are Equifax, Experian, and TransUnion. Credit Karma uses TransUnion and Equifax so you can see and better understand where your credit is. Not only does it show you your credit report from these two bureaus, but it also gives you tips on how to improve your score. The best part? You can download it right to your phone and get notifications when changes to your credit are reported!
• If you have multiple credit cards open with debt building on each, then pay off your credit cards with the lowest balance first. First, make a list of your cards. Include what you owe on each card. Number them from the least amount of debt to the most amount of debt. This is the order in which you’ll pay them off. This method is called the Debt Snowball Method and it works. You'll realize just how possible it is to get financially stable once you get one piece of debt completely paid off and, in turn, will build the enthusiasm and drive you need to tackle the rest.
• Make sure you're paying your bills on time. Credit cards aren't the only thing affecting your credit. Make sure you have monthly reminders of when your cell phone bill, car payment, electric bill, etc. are due. Of all people, I understand how easy it is to forget to pay a bill. Unfortunately, the companies holding your bill won't forget to report your late payments to the credit bureaus.
• Do you have a credit card that you want to stop yourself from using, but might need in case of emergency? I saw a hilarious tip online of freezing your credit card. When I say "freezing" I don't mean freezing your account. I mean actually freezing your card. Throw it in a plastic baggy or cup with some water and then toss it in the freezer. When you want to use it for something, you'll have to think Is this really something I need to put on my credit card? while you thaw it out.
Though these tips aren't coming to you from a professional financial planner, I can tell you that it's working for me. My credit score is increasing and I have a larger savings now than I ever have before. And now that I'm in the real estate business and am working my way into financial stability, I can't wait to buy my first home!
So find what works for you, and start saving!
Until next week on "All Things Dane County", K
Here are some more good resources for you to use in your saving journey: