How you can get that home deposit
How can I save for a deposit? Where do I start?
Every day we hear different things from different people. We hear that the Sydney market is so hot it is going to pop. We hear the Reserve Bank saying they are worried about the heat in the market. We also hear that on a global scale the Sydney property market is cheap. We hear some say rates are going up, and some say they are staying down. Are any of these helpful?
One of the questions we get asked most often is how can I get enough money for a deposit. We are not saying it is easy but you can do it.
How to start saving for a deposit
This can sometimes seem insurmountable, saving enough for a bank to lend you enough to buy a major asset is a big step, and the values involved can sometimes feel daunting. Fear not it can be done. You need a plan and a clear goal.
The first step of this journey is understanding your money habits, what you get, what you do with it and how you can be more effective. At the outset we are not saying that this is a goal that everyone has, some people choose to live their life differently and in the now – this is not for them. This is for people who see the long term value in building assets.
Step 1 – How much money have you got?
How much money do you end up with in your hand every month? That is your total after tax income. This should be expressed as a figure, but we will also apply it as a percentage to give you context as to how much of your value you spend, and give you a gauge to weigh up the importance of some things.
Step 2 – Just what do you spend your money on?
Have you ever written down everything you spend money on in one month? You might be surprised as to where it goes. Start a spreadsheet and list every single cent you spend, and on what for a month. Then have a look at it, are you surprised?
Not everyone is, but most people are surprised as to exactly what they spend their money on.
Step 3 – What metric do you use to judge the value of that spending?
You say huh? We mean how do you subscribe a value to whatever you are spending your money on.
For example: Let’s say Geoff is 26 and a lower tier professional who takes home $1,000 a week after tax. He lives with flat mates but his parents have been urging him to save for a deposit and buy a property.
Geoff’s monthly spend look like this:
Dining out $240
Stuff I just bought $120
The above is only one month, it doesn’t include that holiday to Bali, or $300 tickets to a concert. Based on this simple column Geoff could be saving just under $1,000 a month, but the reality is different.
What is the opportunity cost of each item and how are we measuring its value?
Opportunity cost is about what you could otherwise be doing with that money. Should I buy that new pair of jeans or should I pay off my credit card? It’s a simple idea that is an economic fundamental.
Now the other one, and perhaps most important is the metric we spoke about earlier. In this case, it would be expressing the cost as a percentage of the take home wage.
So, if $4,000 is 100% of the take home 1% is $40. Therefore, Geoff spends nearly 30% of his money on rent. That’s the metric, now the opportunity cost here is the loss of freedom he may incur if he moved back in with his parents and saved that money.
Over 4.9% of his hard-earned wages goes on lattes that could be substituted with the coffee supplied at work. All the small things add up.
Understand what you are spending
By creating a spreadsheet, you will have an understanding of what you are spending, which will help you make better judgements as to why you are spending that money. Cut down where you can and put it into savings.
Have a savings plan
Sure, Geoff has some spare money left over, but with no clear goals or a plan it generally gets frittered away. Have a clear plan and stick to it. Separate your bank accounts into spending and savings, your savings account should not be easily accessible.
Never have credit card debt
Do you really need a credit card? Probably not, but if you do, never run a debt, it is the most expensive form of borrowing out there. Before you do anything, pay off any credit card debt.
How Geoff can now save for the home deposit
He has moved back in with his parents, cut down his coffees, cancelled Netflix, pays his parents board, but a lot less than living out of home. He no longer needs to pay for internet (uses mum and dads), and goes for a run outside rather than spending money on a gym membership.
These changes have Geoff now saving over $2,000 each month.
Getting a deposit is about lifestyle as much as it is about economics. Having a budget and a savings plan will show a lender that you are serious and can make commitments to financial goals.
None of this is easy, but it is worthwhile. Let us help you with your financial freedom, call us on 1300 186 483, or fill in the form below and we will get back to you shortly.