How to Save $20,000 for a Down Payment in Just 2 Years

Woman looking at house savings
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Making the move from renter to homeowner is challenging for nearly everyone, and the highest hurdle for most first-time buyers is saving enough money for a down payment. If your No. 1 priority in the next few years is to become a homeowner, financial experts say you'll likely need to make some aggressive moves to cut your spending, boost your income, or both.

The National Association of Realtors reported that the national median home price in June 2013 was $199,900 (and prices are rising again). For the purposes of this article, we assume that your goal is to buy a house in two years with a 10 percent down payment of $20,000.

To get started, set a timeline and break up your savings goals, suggests Anna Behnam, an Ameriprise financial advisor in Rockville, Md. To save $20,000 in two years, you'll need to save $833 a month for the next 24 months.

"Create an account that will hold only savings designated for your new home," Behnam suggests. "This can help keep you organized and track your progress."

Start Big

If you're truly committed to buying a home and can handle some big changes in lifestyle, you could move in with family for a defined period of time. You could also move to a smaller apartment.

"Going from a two-bedroom to a one-bedroom can drop your rent by 25 to 30 percent, depending on where you live," says Rob Jupille, president of RTJ Financial Management in Los Angeles. "If you have a spare room, take in a renter until you save what you need."

Another possible lifestyle change is to bring in more income by working overtime if possible or taking on another job.

Timothy Murray, a certified financial planner and owner of Murray Financial in Chantilly, Va., suggests looking for a job doing something that interests you outside of your current career, such as working at a Lowe's or Home Depot if you're a home improvement enthusiast or want to learn more about how to take care of the home you plan to buy.

"If your savings goal is aggressive, you may decide that you're willing to make large trade-offs to meet your goal," says Behnam.

For a significant boost to your down-payment fund, consider more substantial cost-cutting and money-raising measures, such as selling your current car and trading down to a lower-cost vehicle.

Small Steps That Add Up to Big Savings

Finding other expenditures to trim requires creating a household budget to see where your money is going.

Some of the easier expenses to reduce or eliminate include new clothes, shoes, and other stuff; daily expenses like your morning specialty coffee; monthly expenses like a Netflix subscription; and gas and parking costs (consider carpooling or take public transportation), Behnam says.

"Keep in mind when you're in super-saver mode to ask yourself out loud, 'Do I need this or want it?' before you buy anything," says Behnam. "Shop in physical stores if possible (rather than online) and use physical cash rather than credit."

Take a critical look at all of your expenditures -- gym memberships, vacations, entertainment -- to see where you can cut back to meet your savings goal. While you don't want to drain all the enjoyment out of your life, you can keep spending in check without sacrificing much. For example, if you like to go to restaurants with friends, Murray says, limit your meals out to one a week, and invite friends over for potlucks instead.

Retirement Savings vs. Funding a Down Payment

If you're contributing more to your 401(k) than the company will match, temporarily scale back your contribution to the company match for a couple of years and put that extra cash in your down payment fund, suggests Jupille.

Scott Cramer, a financial planner and president of Cramer & Rauchegger in Maitland, Fla., says you might want to consider boosting your IRA contributions so you can use the funds for your down payment.

"The first-home exemption rule allows individuals to use up to $10,000 in IRA funds toward the purchase of a first home without incurring the 10 percent early withdrawal penalty that applies to withdrawals made from a traditional IRA before age 59½," says Cramer. "If you're married, you and your spouse can each pull from your retirement accounts, giving you $20,000."

Before you do this, though, be aware that even though the penalty is waived, you have to pay income taxes on the withdrawal. A Roth IRA withdrawal is considered a "qualified distribution" if you've had the account for at least five years, and Roth IRA withdrawals are tax-free, Cramer says.

Where to Stash Your Cash

When you're saving for a short-term goal, financial experts recommend you stick with a low-risk investment such as a high-yield savings account or a CD. A credit union or an online bank usually offers better interest rates on savings than most traditional banks.

While it is tempting to invest your down-payment savings for a higher return, be aware that there's always a risk that an investment will lose money. Murray says that the rate of return on your down payment savings is less important than making sure the money is available when you need it.

Whether your goal is to buy a house or meet some other financial obligation, you'll need discipline and an aggressive savings plan to achieve it. But following the savings tips above will help put your goal within reach.

Michelle Lerner is a contributing writer to The Motley Fool.

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August 07 2014 at 7:22 PM Report abuse rate up rate down Reply

Save $833 a month?!?! Is this a joke? I have a M.S. and a good job, working full-time at a university. I am frugal, but between rent, student loans, and the general cost of living, this is totally unrealistic. I appreciate the advice, but I think that the writer is completely out of touch with the real world.

July 23 2014 at 10:01 AM Report abuse rate up rate down Reply

Whats wrong with renting or saving your money for later? Many American have a steak taste on a hamburger budget . That's part of the problem we now face from a long time ago. Barrow to the max and then whine about now having enough money . Nice house , car or truck and boat. Can you afford them or does it really matter at this period of time?
Me - I’m going to rent until I have enough money to buy a comparable place in full. And only when I find a place I want to spend the rest of my life in.
While waiting for that, I will make smart decisions with my money:
1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.
2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($25/month from Insurance Panda… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.
3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.
4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.
5) The most important one - make as much as I can. Save as much as I can.

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January 13 2014 at 7:14 PM Report abuse rate up rate down Reply

I bought a home at age 23. I was naive and didn't know the bubble was about to pop. I wish I could tell my young self not to rush into buying before all my debt was paid and I had money in the bank to cover future home costs. Ten years later, I am a landlord of that property and renting a home for myself and my family at a lower monthly cost. I wish wish wish there had been more information presented to me before buying and the hidden costs. Thankfully I never became a fore-closer statistic, but I have lost thousands on a house I was not ready for and renters who took advantage of the local laws, leaving me to pay their bills for months during a slow eviction process. The American dream of owning a home is a joke when people don't play by the rules and take advantage of the broken system.

November 30 2013 at 4:53 PM Report abuse rate up rate down Reply
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November 11 2013 at 4:50 PM Report abuse rate up rate down Reply

October 30 2013 at 10:05 PM Report abuse rate up rate down Reply

Should be $40K,(20% like it use to), not 10%.

September 07 2013 at 10:41 PM Report abuse rate up rate down Reply

I make $40,000 a year and I managed to save 10,000 last year living on my own , what the heck are you spending your money on if you make 200,000 a YEAR and you're having a hard time saving up a pitiful 10k... Are people that terrible with their money? If i was making 200,000 a year I would be saving up at least $130,000 a year and I make be making atleast a 10% profit yearly from investing that money.

September 07 2013 at 1:59 AM Report abuse rate up rate down Reply
1 reply to v's comment

I agree. But do remember higher taxes on the higher wages does have a negative effect (unless you were referring to take home $$). My wife and I live on $40-45K per year (but make much more). Our daughter (29, single) still lives on $25-$30k per year, even though she is now a young doctor. She was able to pay back her $60K student loan and save $50K for a down payment for a rental property in just over a year while max out 401, etc. So there are a few that do it, just how you were raised.

September 07 2013 at 10:52 PM Report abuse rate up rate down Reply