Building an Investment Plan to Buy a House

Do you dream of a white picket fence and kids running around in the backyard? Or maybe hanging out on the stoop of your own urban brownstone in the heart of the action? Perhaps lounging in your oceanfront condo? Owning a home is a cornerstone of the American Dream, and the appeal is easy to see. A home is a place to make your own and perhaps raise a family. It can provide security, both financial and emotional. And as the saying goes, renting means you’re paying someone else’s mortgage.

Even though a fair amount of people aspire to own a home, not everyone is able to make that dream come true. The homeownership rate among Americans is 64% , down from close to 70% before the 2008 recession. Purchasing a house is one of the biggest expenses you’ll have in your life, and it’ll take some careful planning. That’s compounded by the fact that housing prices are on the rise in many parts of the country.

Saving enough for a down payment can seem intimidating, especially when you might have to balance that with student loans, retirement planning, and other financial commitments. But being a homeowner is possible if you think ahead and make the right savings and investment plan to buy a house.

How To Save For a House

Here are the best tips for how to save for a house and make your homeownership dreams a reality:

1. Track Your Spending

To start saving for a home, you’ll first have to get your finances in order. Spend at least one month tracking your expenses, along with your partner if you’re planning to buy a house together. There are plenty of apps that can help with this, but a spreadsheet also works well.

Break your spending down into two major categories: fixed expenses (those that are the roughly the same every month and can’t be eliminated, such as rent, utilities, or a car loan payment) and variable expenses (those that change and aren’t set in stone, such as eating out and shopping).

Add in the expenses that may not have come up that month, but that you pay once or twice a year (for example, divide an annual car insurance payment by 12 to get the monthly cost). Understanding where you are spending your money is the first step in getting your finances in line, so you can meet your financial goals.

2. Make a Budget

Now that you understand your monthly expenses, it’s time to make a budget. As you make your budget, don’t just copy the numbers you tracked. With each category, ask yourself: Is there a way I could cut expenses here?

Start with fixed expenses, such as rent, loan and insurance payments, and utilities. Could you downsize to a smaller apartment, get a roommate, or move in with family? Would refinancing your student loans lower your monthly payment or interest rate? Can you get a better deal from a different insurance or internet provider, or do away with your cable subscription?

Next, turn to your variable expenses, where there’s usually a lot more room to trim. Can you jog outdoors instead of paying for expensive fitness classes? Or having a potluck with your friends instead of going out to restaurants every week? Once you’ve trimmed what you can, develop a reasonable budget for yourself noting how much you will spend monthly on each category. Track your expenses on an ongoing basis in an app or spreadsheet to make sure you stick to the plan.

3. Consider Ways to Boost Your Income

When you subtract your monthly budget from your monthly income, there should be some money left over for saving. (Remember to use your take-home pay, which is your total income minus any taxes or deductions taken out in your paycheck.)

If there isn’t much, or anything at all, left over, you’ll need to grow your income so you can put that money away for a home. It’s always a good bet to start by asking for a raise in your current role. If you’ve hit a ceiling in your existing position, consider applying for new jobs to try and boost your salary. Another option is to get a side hustle going, perhaps one that offers passive income. Options include renting your room or apartment, renting out your car or wrapping it in ads, or creating an online course.

4. Figure out How Much You Can Save

Once you have a budget and have maximized your income, calculate how much you have left over every month. Before you put all of that cash into a house fund, make sure you have taken care of some other financial basics first. If you have any credit card balances, or other high-interest debt, your priority should be using all your extra money to pay that off first.

Once you’ve done that, if you don’t already have one, use your extra cash to build up an emergency fund with three-to-six months of living expenses. Next, you want to make sure you’ve started saving for retirement, since your money will need time to grow. At the very least, you should be contributing enough to your 401k to take advantage of an employer match, if one is available.

Once you have these fundamentals taken care of, any money left over can be set aside each month for your future home. Setting up an automated savings plan, in which your institution will transfer a certain amount from your checking to your savings account each month, makes it easy to stay on track without thinking about it.

Keep in mind that, if you’re saving through a Roth IRA, you can always take your contributions out for any reason, including a down payment, without paying taxes or penalties. You can also take out up to $10,000 from Roth IRA earnings, or from traditional IRA earnings or contributions, without paying a penalty for qualified expenses as a first-time homebuyer.

5. Set a Timeline

Get familiar with how much a house is likely to cost based on the type of home you want and your desired location. Then consider what percentage of the total cost you’d like to save for the down payment. Many people try to save 20% as a down payment in order to avoid having to get private mortgage insurance (PMI), which can cost up to 1% of the loan annually, adding to your monthly expenses once you’re a homeowner.

PMI is also no longer deductible on your taxes starting in 2018. Divide the total you need to save by the amount you can save every month, and you’ll know how many months, or years, are left before you can buy a home. You may also want to make an appointment with a mortgage lender to figure out what size loan you would qualify for today and what, if anything, you would need to do to be eligible for a bigger loan or better terms.

6. Invest Your Savings

If your timeline for purchasing a house is less than one or two years, you may be fine keeping your funds in a checking and savings account like SoFi Checking and Savings. If your timeline is longer than that, investing your money and giving it the chance to grow could be the best way to save for a house.

When you open an invest account with SoFi, our financial advisors can help you figure out an investment strategy that works for your financial goals. With SoFi Invest, you can invest in a portfolio of Exchange-Traded Funds, or ETFs, that aim to reduce some of your risk by investing across many assets while keeping costs low.

Meanwhile, you’ll have complimentary access to human advisors who can offer customized advice and your portfolio is rebalanced at least quarterly to keep it on track with your goals and preferences.

SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
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