How
I Went From Being Flat Broke to Owning My Own Home, Mortgage
Free, in Just 5 Years.
Step One: Start Saving for a Down Payment
If you're paying rent, as many people are, your rent may
be so high that you can't afford to put any money away for
a home of your own. If you already have a large mortgage,
a huge chunk of your monthly budget is probably going to pay
the interest on your loan. In either case, you'll want to
reduce your monthly housing costs so you can save some money,
if you can. Even if you do start a small business on the side
or take a second job, you should still reduce your housing
expenses if possible, because it's such a large chunk of your
budget.
This part of the plan took me three years. My income continued
to go up, but my rent stayed low, and additional money was
beginning to come in from my online business. All the extra
money went to my savings account. Since saving money doesn't
come naturally to me, I asked my employer to automatically
deposit part of my paycheck into my credit union.
During this time I also signed up for classes offered by
a local organization that helped first-time buyers, so I could
learn about any special loans and other subsidies that might
be available to me if I chose a house in the right area. I
continued to save up a few dollars each month, until I had
enough local employment history and enough money saved for
the down payment for my first house.
This part of the process may take you longer than three years,
or you may be in a better financial situation than I was,
so you can skip straight to Step Two.
To help save money, renters can almost always find a smaller
apartment or house than they are currently renting in order
to save more money. It may be a little farther from your job,
it may not be in the best neighborhood, and it may not look
all that great. But it will help you save up for your mortgage-free
house.
There are other ways to lower your monthly housing costs,
of course. Instead of moving to a smaller house or apartment,
you may be able to rent out an unused room in your current
home. You may have some negative memories of your roommates
during your college days, but there are many quiet older people
who would be good house-mates. They may be looking for an
inexpensive living situation so they can save up for their
own home!
Co-housing is becoming more and more popular, in fact. If
you decide to rent out one of your rooms, you could make a
good friend while putting some extra money in the bank. There
are pitfalls, of course, so before taking this step be sure
to check all references and get legal advice if you think
it's needed. My friend Candace, as one example, chose to rent
a room in her house to a male friend for the extra income,
instead of taking a second job.
If you now have a large mortgage but little equity, you may
want to consider selling your big house and buying a smaller
one – in other words, go straight to step two. Even
if your current home has no equity at all, you may be able
to reduce your mortgage in half by getting a smaller house.
There are many other ways to reduce your expenses so you
can save the money for a down payment. I strongly suggest
that you read Your
Money or Your Life: Transforming Your Relationship with Money
and Achieving Financial Independence by Joe Dominguez
and Vicki Robin. You can find study groups for this program
and local support at the http://www.yourmoneyoryourlife.org
website.
Going through the steps in their program will help you see
where you spend money needlessly, so you can put that money
into the bank, instead - where it will help you reach your
goal of buying a house with cash.
If you join one of these study groups, you'll make new friends
who are also working towards owning their own house and getting
out from under their mortgage. These new friends will help
counteract the pressure you may receive from your old friends,
who won't understand why you stop going with them to expensive
restaurants, or why you don't choose to buy the newest high-status
automobile. You don't need to give up your old friends, of
course – that would be a bit too drastic. But you should
try to find new friends understand you financial goals and
who will give you some emotional support.
You'll probably be amazed at how much money you spend on
the things you now buy on a regular basis, but don't really
need. The biggest shock for me came when I added up the cumulative
cost of buying a daily coffee from Starbucks on my way to
work. The $3.50 didn't mean much to me in the morning, but
it was $105.00 a month that I didn't need to spend. (Yes,
I bought my coffee on the weekends, too, at the Starbucks
around the corner from my apartment.)
Once I realized how much I spent each month on my morning
coffee, I took out the calculator and added up what I could
save in three years by drinking my coffee at home, because
that's how long I thought it would take me to save for my
down payment. I was astonished that my minor indulgence would
cost me $3,832.50 – almost enough for a down payment
on a small FHA-financed home. I bought a thermos for my coffee,
and starting bringing home-brewed java to work.
If you buy lunch every day, you can save a ton of money by
bringing your own. To give yourself a bit of incentive, do
as I did and add up the amount that you will be spending over
the time that you estimate it will take you to save for your
first down payment. Do you spend $5.00 a day, or even more,
at the company lunch counter?
Multiply the amount of money you spend on lunch by the average
of 20 work days per month, and then multiply by 12 to get
the yearly total. Multiply again by the number of years you
think it will take to save up for your first house. Do you
drive your car to work and pay high monthly parking fees,
even though your company would pay for a monthly bus ticket?
Do the math to see how much it really costs you.
Do the same calculation for every non-essential luxury that
you now buy with the thought that "it's only a few bucks,
so I can afford it." This includes meals at restaurants
(even the fast-food joints!), items that you could buy for
less (like the $65.00 haircut that you could get for $25.00
at another salon, for instance), and even the purchase of
a new car simply because the one you have is a few years old
and looking a bit out of date.
If you really can't talk yourself into giving up these little
luxuries, write down everything you spend for a month or two,
so you really see where your money is going. Put it all on
a graph so you can see which expenditures are necessary, and
which ones are frivolous or spur-of-the-moment buys that you
can't even remember a day or two later.
Then ask yourself before every purchase if the coffee or
lottery ticket or pair of shoes you intend to buy is more
important than owning your own home. Even better, join a local
chapter of the Your
Money or Your Life organization, and follow their simple
steps towards financial freedom.
If you learn to spend consciously (as few Americans ever
do), you'll soon have the right attitude that will eventually
help you buy a house for cash.
The people who will have the least trouble with this plan
probably grew up in families that valued self-reliance and
frugality more than they valued owning stuff – and since
they already know how to do it, they probably don't need to
buy this book. Immigrant families certainly understand the
importance of saving for a home, while many Americans have
come to expect to spend every dime they have, every single
month. If you don't happen to be lucky enough to come from
an immigrant family, you'll need to get creative. Have fun
with it – you'll soon learn to enjoy putting money in
the bank.
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