Saving Up for A Down-payment Seems Damn Near Impossible
Saving up to buy a house or a condo seems virtually impossible nowadays when you take a look at soaring house costs versus stagnant wages. Between 1945 and 2008 (inflation-adjusted), the average North-American person's disposable income was rising steadily but has since falling flat.
What that means is that the average person making a typical salary has a hard-time saving money. Most of their dough is tied up in bills, loans, and paying off bad debt. As mentioned in a previous budgeting post, your bills should not exceed 50% of your total income. For those of you who still don't get it, here's a basic example: If you make $2000/month, your bills should only be $1000. Sadly, this is not a current reality for most people. So, if you want to save-up for a house so you can finally move out from your in-laws closed-in basement, read on.
Opening A Savings Account
Putting money aside is simple, but you gotta have a place to put it. Open a savings account. Uhhh... duh! BUT WAIT! Now you're at the bank and the money-man is asking you what kind of savings account you want to open. High-interest? Sounds pretty good... TFSA? WHAT THE HELL IS THAT? Do you want to invest your savings in a mutual fund or keep them as cash?
Now you're lost. Don't panic.
What's A TFSA? A TFSA is a tax-free savings account. When you put money aside in this special savings account, it technically reduces your total yearly earnings in the eyes of the government. Let's say you made $40,000. If you put $5,000 aside, the government will assume you only made $35,000, so when it's tax time... CHA CHING! Big return.
Which Type Of Savings Account Do I Use To Save For Down payment?
I would suggest the TFSA as a better option. TFSA is much more reliable and their rates are more consistent and trustworthy. Only thing one should keep notice of is if you withdraw a certain amount and re-contribute in the same year, there could be penalties. Check with your bank. If you are planning on saving up for 1 to 5 years, keep it as cash (not-invested) You won't be making much interest - only around 1 to 2% - but it's much safer for the short-term. If you are planning on saving up for more than 5 years, invest it in a mutual fund.
You are set to save money! Now what?
Simple Math - 15%
Let's assume you are making $1000 every two weeks. All it takes to save 15% (20% is ideal based on the 50/20/30, but $150 is fine)is $150. Now assuming that you can follow a basic budget, this shouldn't be too hard to accomplish. $150! That's it! Think about what you can buy for $150. Not much right? A few pieces of clothing, or maybe a video game or two. If you like to drink maybe that's a couple of cases of beer.
Ask yourself: Can I live without this new shirt, or these new pants? Am I buying them to fill some sort of void? Do I really need to drink more than one case of beer a week? Can I go just two weeks without playing the latest video game? These are just random examples of course, but the point is clear. Cut back on these financial vampires, this useless shit that you buy out of habit. Even just small, minor changes in your daily spending habits can account for $150.
If you're alone, that's $300 per month you are putting in the bank! Way to go! If you have a boyfriend or girlfriend, husband or wife, or whatever - great! Even better. If you climb this mountain with a partner, that's $600 per month. MONEY IN DA BANK!
I'm fairly certain the average person in North-America makes around $40K/year. Do the math - that's about $1200 (give or take) after taxes and deductions, and there are 26 pay periods in a year. 15% of 1200 is 180. 180 times 26 is $4,680. With two people, that's $9,360 you're saving, and that's without interest! If you factor in compound interest - just 2% - that's almost 60 mother-fucking grand in 5 years! $60,000!
And you thought you didn't have what it takes to save for a down-payment. Feel stupid yet?