Millennials: Get Creative with Saving for Your First Home

It is no surprise that many Millennials struggle with saving for a down payment in today’s environment. As Millennials are more burdened with Student Debt as well as other debt such as Credit Card, the ability to save as become more challenging for this group. Many Millennials find themselves in large metropolitan areas because of stronger job markets but cost of living in these areas is elevated compared to non-metro areas. In some instances, wage growth has lagged behind rising home prices, creating an additional challenge.

However, a recent Bankrate Survey has revealed some surprising tactics that Millennials are taking in order to make a down payment on their home purchase. The results revealed that Millennials are more likely to dip into Retirement Savings or live with Family for extended time to save. According to the survey, 13% of Millennials dipped into retirement savings compared to 8% of GenX and 7% of Baby Boomers.

Millennials are highly important group the Housing Market, and they are getting creative with ways of saving a down payment at levels that are not seen in many other generations. Millennials understand the value of owning a home and how it contributes to wealth accumulation, so they are tackling savings issues head-on. We often see that Millennials are very excited about purchasing a home.

While we are not Financial Experts, there are certainly ways to creatively save towards a down payment by making simple adjustments to your everyday life. Below are some creative ways to save for a home down payment: 

We are not Financial Advisors and would urge any prospective Home Buyer to consult their Financial Advisor to understand the implications of tapping into Retirement Savings for a down payment.

Ways to Save for a Down Payment

Reduce Your Rent: If you are currently renting, review what you are currently paying and see what options you may have. If you have been a good tenant, use this as leverage to negotiate with your landlord for a better rate or no increase in rate. If it is feasible, have you considered living with parents or friends while you are trying to save?

Track Your Spending: In a so-called "cashless economy" it is easy to lose sight of how much you are spending, when most transactions are done on credit cards and Apple Pay. Consider making a spreadsheet to track expenses or using a tool such as Mint to keep track of your spending. You might be surprised at how much you are spending on Taxis or Ubers in a month's time. It is a great way to find areas to cut down on spending.

Make It Automatic: Take advantage of automatic savings that may be offered by your bank. Look into options such an auto transfer of X amount of dollar each month to savings or programs that round up each purchase to the nearest dollar and transfer that to your savings. Additionally, utilize your employer's direct deposit option and add your savings account as one of the accounts to receive the pay. You can specify the dollar amount to be deposited to your savings from each paycheck. This aligns perfectly with the old saying, "Out of Sight Out of Mind"

Use Work Bonuses: If you receive an annual bonus at work, consider putting that into your down payment savings account each year. While it is important to have fun and celebrate your success, the wealth that owning a home generates will pay off more than that night out at the club.

Reduce Happy Hours: Everyone loves a good happy hour to help get through a tough week. If you are making it a habit 2 times a week it is costing you. Consider the average happy hour drink costing $7 with tax and tip. At twice a week, thats $728 a year on happy hour....assuming you only get one drink at each of those happy hours!

Check Monthly Bills: What monthly bills are you paying that might have areas to reduce the cost? Cable and cell phone bills are great places to dig deeper at the features you are paying for. Do you really need HBO at $12 a month PLUS Netflix for another $10 month in addition to the hundreds of cable channels you are getting? 

Don't Forget Family & Friends: Discussing money with anyone is always a sour subject, especially with family and friends. However, they can be an excellent source for help with your down payment. Consider asking parents for help as an early inheritance or as your wedding gift now in exchange for not receiving a a gift at the time of marriage. Instead of dinners from friends for your birthday or gift cards, let them know you are working towards purchasing a home and cash would be the best thing you could receive right now! True friends will understand. 

Gym Membership: Your gym membership is a great opportunity to cut down on monthly expenses. With so many fitness apps such as ClassPass, YouTube Videos, and equipment, exercising at home has never been easier. If you are an avid gym user, this option is probably not for you, but if you use your gym occasionally, it is something worth considering. Your $250/month Equinox membership is costing you $3,000 a year...that is a lot of money! If you cannot give up your memberships, look into options such as corporate discounts or special incentives that your gym or workout venue of choice offers. 

Get Your Caffeine Dose at Home: Sometimes a morning cup of coffee (or 3) feels like it is the only thing that will get you moving...trust us we know! However, your daily trip to Starbucks during the week for a grande nonfat latte at $4.78 is costing you $1,243. Save that money and drink your coffee at home and imagine how good coffee will taste in your new home!

Ways to Save: Buying vs. Renting a Home

Buying vs. Renting is a debate that takes place often in the real estate world. The debate is influenced by many factors: location, affordability, proximity to public transportation, carrying costs, school district zoning, and proximity to nearest park.  Additionally, other factors such as how long you plan on staying, mortgage rates, inflation, and other economic factors can impact the cost to own versus the cost to rent a home. There has even been studies as to what the “breakeven” point may be in NYC neighborhoods!  

While saving for a down payment has become challenging for many of today’s Millennials given high student loans and low wages that barely cover costs of monthly rent plus expenses, the equations frame the decision on whether to buy or rent.

How to Use Your Home as a Vehicle to Save

It is important to understand that owning a home is one of the biggest vehicles to wealth accumulation over the long-term. In fact, for many middle-class Americans that have built equity into a property, their home is the single biggest asset! This is a proven fact.

If you are feeling hopeless and not able to save for a home, here are some helpful tips to save for a downpayment for your new home:

Consider the following:

• You decide to purchase a home with a price of $1,500,000. With the standard 20% down payment, $300,000 is required to purchase the home with a mortgage.
• A conservative approach to estimating the future value of the home could be to link it to the Fed mandated target of 2% inflation. Exclude any neighborhood or real estate market increase. After 30 years, this property would have a value of $2.71M when tracked to 2% annual inflation.
• In this scenario, the buyer has paid mortgage payments, taxes, etc. instead of paying monthly rent. His or her payments have gone to building equity in the home to the tune of $2.4M

Consider the same $300,000 down payment “saved” in a traditional sense- in a brokerage account investment in a stock index. Assuming a 7% average annual return for the next 30 years, that $300,000 would become 2.2M while being subject to all the risks of equity markets. Put that in a traditional bank savings account with the current interest rates at virtually 0, and the needle barely moves on the $300,000.

At time of retirement, the above home could be sold for $2.71M with the owner opting to downsize into a smaller home, with an anticipated, smaller price tag. The incremental price increase could be captured as “savings” for this home owner used in retirement.

Renting a Home and Saving in a Traditional Sense

Buying a home can be intimidating and seem too expensive in the minds of many. Those that feel like home ownership is out of reach continue to rent. When renting a home, saving must take place in the traditional sense – a savings account, brokerage account, etc.

Consider the follow:

• A Median rent in Manhattan for a 2-bedroom apartment of $5,400. Assume no change in rent for 30 years (we will know this is not the case) this renter would spend $162,00 over 30 years, of which none is going towards any ownership.
• The renter in this scenario has $300,000, the amount required in the above scenario to buy a home.
• The renter decides to save this $300,000 traditionally and invests the $300,000 in the stock market in hopes of growth and outpacing inflation. Assuming a 7% average annual return for 30 years, the $300,000 becomes $2.2M.

In this scenario, the renter has paid $162,000 to owner nothing after 30 years while traditionally saving $2.2M. While these examples are simplistic at best, they demonstrate the way in which owning a home can be a vehicle to accumulate wealth and part of a larger financial plan.

Fun Ways to Save

1. If you love going out for a drink with friends consider going during Happy Hour, when drinks are usually half-price.

2. Do you love Starbucks in the office? Consider buying a coffee machine for the office. You save $4/day, 5 days a week, for 52 weeks per year, and that equals $1040 per year!

3. Want to try a new restaurant? Try going during "Restaurant Week", where the menu is pre-fixed, and less expensive, but just as good.

4. Automatic withdrawals from your paycheck to a high interest savings account

Do you have questions on whether now is the smart time to buy a home and stop renting? We are happy to discuss the current state of the market and review options for financing. Contact us to set up a confidential conversation.

The Best Wedding Gift You Can Give

Wedding Season is here!

Whether you are about to tie the knot and are looking to setup your registry, or you are attending a wedding in the coming months, consider why saving for a down payment at this major life milestone could be one of the best decisions to make or why helping someone attain this goal is is the best gift to give. 

Forget the Tiffany china and Frette linens as cash is king! Giving yourself the gift of a home is the best gift you can give yourself, so kindly ask for cash in lieu of a registry and let all your guests know you are working towards owning your dream home. 

Attending a wedding soon? While cash me not be your idea of a great gift, consider how much it could help a young couple looking to purchase their first home.

Gifting a Down Payment

A wedding is a great time to gift money towards a down payment. We previously wrote about 10 Ways to Save for a Down Payment, and it is no surprise that gifting was one of the ways to work towards this goal. 

Often times, first-time homebuyers think that a gift cannot be used to make a down payment on a home as it will not qualify them for a mortgage. While it is important to note you must be qualified under normal mortgage lending guidelines to receive a loan, it is also important to stress that, yes, you can use a gift to make a down payment on a home. If you have questions about mortgage approval and how it may relate to a gift, this is a great time to connect with us as we can refer to a qualified Mortgage Broker to discuss specifics as each lender has its own Best Practices. 

You may be thinking that cash sounds like a boring gift or that you do not like to give cash, however, cash is the most valuable gift when it comes to working towards owning a home. It can feel awkward asking people for money, but a wedding is a great opportunity. 

Let attendees know how important owning a home to you is, and that you are diligently working towards it so cash for a down payment is high on your wish list! In fact, the cash for a down payment may more than pay for itself in the long run.

Owning a Home is a Vehicle to Wealth

Owning a home is regarded as one of the biggest contributing factors to accumulating wealth. In fact, a self-made millionaire told CNBC that not owning a home is the single biggest Millennial mistake. Those that own homes are wealthier by a large margin than those who do not own a home. 

Many people, especially Millennials, find themselves in a situation where they are struggling to pay high rent prices in many urban and metropolitan areas which leaves them for little discretionary income to spend, and, more importantly to save. Crippling student debt and credit card loans leave many with no option but to continue to rent. This does not mean, however, that some of these individuals would not be able to qualify for a mortgage. They simply are unable to save money for a down payment given wages vs debt obligations. 

This is where taking the opportunity to receive gifts as cash be can a wise decision as it can boost a "down payment fund" to the next level. Instead of paying rent each month towards something that is not owned, home owners making mortgage payments are paying towards something that will be theirs, something that will increase in value, and thus increase their wealth. 

10 Ways to Save for a Down Payment

Photo: ALAMY

Saving for a down payment for a home purchase can be one of the biggest obstacles for many in the home buying process. There are many factors that can determine which way of saving may be appropriate for you. If you have a longer time horizon for saving, perhaps getting into the markets may be a very viable option for example. It is always best discuss your savings and financial portfolio with a certified financial planner, however, there are many, easy way to save that you can implement in your daily routine to get you started on the path to home ownership. We aren't saying these methods will give you a $50,000 down payment overnight, but, if implemented, can certainly chip away at it over time.

Ways to Save for a Down Payment

1. Reduce Your Rent: If you are currently renting, review what you are currently paying and see what options you may have. If you have been a good tenant, use this as leverage to negotiate with your landlord for a better rate or no increase in rate. If it is feasible, have you considered living with parents or friends while you are trying to save?

2. Track Your Spending: In a so-called "cashless economy" it is easy to lose sight of how much you are spending, when most transactions are done on credit cards and Apple Pay. Consider making a spreadsheet to track expenses or using a tool such as Mint to keep track of your spending. You might be surprised at how much you are spending on Taxis or Ubers in a month's time. It is a great way to find areas to cut down on spending.

3. Make It Automatic: Take advantage of automatic savings that may be offered by your bank. Look into options such an auto transfer of X amount of dollar each month to savings or programs that round up each purchase to the nearest dollar and transfer that to your savings. Additionally, utilize your employer's direct deposit option and add your savings account as one of the accounts to receive the pay. You can specify the dollar amount to be deposited to your savings from each paycheck. This aligns perfectly with the old saying, "Out of Sight Out of Mind"

4. Tap Your IRA: If you have been saving for years in an IRA account, you may consider taking a withdrawal as part of your down payment. The IRS has an exception which allows first-time homebuyers to withdrawal up to $10,000 without facing the normal early withdrawal penalty for people under age 59 1/2. Your withdrawal from a Traditional IRA will be subject to income tax while a withdrawal from a Roth IRA will come out tax free (assuming the account has been established for 5 years). If you are considering an IRA withdrawal, speak to a qualified tax professional for your unique situation. 

5. Use Work Bonuses: If you receive an annual bonus at work, consider putting that into your down payment savings account each year. While it is important to have fun and celebrate your success, the wealth that owning a home generates will pay off more than that night out at the club.

6. Reduce Happy Hours: Everyone loves a good happy hour to help get through a tough week. If you are making it a habit 2 times a week it is costing you. Consider the average happy hour drink costing $7 with tax and tip. At twice a week, thats $728 a year on happy hour....assuming you only get one drink at each of those happy hours!

7. Check Monthly Bills: What monthly bills are you paying that might have areas to reduce the cost? Cable and cell phone bills are great places to dig deeper at the features you are paying for. Do you really need HBO at $12 a month PLUS Netflix for another $10 month in addition to the hundreds of cable channels you are getting? 

8. Don't Forget Family & Friends: Discussing money with anyone is always a sour subject, especially with family and friends. However, they can be an excellent source for help with your down payment. Consider asking parents for help as an early inheritance or as your wedding gift now in exchange for not receiving a a gift at the time of marriage. Instead of dinners from friends for your birthday or gift cards, let them know you are working towards purchasing a home and cash would be the best thing you could receive right now! True friends will understand. 

9. Gym Membership: Your gym membership is a great opportunity to cut down on monthly expenses. With so many fitness apps such as ClassPass, YouTube Videos, and equipment, exercising at home has never been easier. If you are an avid gym user, this option is probably not for you, but if you use your gym occasionally, it is something worth considering. Your $250/month Equinox membership is costing you $3,000 a year...that is a lot of money! If you cannot give up your memberships, look into options such as corporate discounts or special incentives that your gym or workout venue of choice offers. 

10. Get Your Caffeine Dose at Home: Sometimes a morning cup of coffee (or 3) feels like it is the only thing that will get you moving...trust us we know! However, your daily trip to Starbucks during the week for a grande nonfat latte at $4.78 is costing you $1,243. Save that money and drink your coffee at home and imagine how good coffee will taste in your new home!

When you make the decision to start saving for a home, speak to a real estate agent about what you are considering purchasing. They will be able to connect you with a mortgage broker so you have a full understanding of what you can afford, and, thus, how much you have to save.