5 Methods to Save for a Down Payment
1. Pay yourself first
What this means is allocating a portion of your bi-weekly pay cheque to either a Savings account or an RRSP.
If you’re the type of person that doesn’t save money well, have a portion of your pay cheque come off automatically every two weeks rather than trying to save it at the end of your two weeks. Often times, people spend exactly to their means, or even beyond their means (i.e., credit cards, lines of credit, etc.) This is not a good habit to get into, and when I was young my mom set this up for me without me even knowing it. After an entire summer of working where I spent everything I had, she told me, “You have $2,000 saved!”. I couldn’t believe it. I had enjoyed my summer to its fullest and didn’t even notice that small chunk of money coming off of each pay cheque. At that point in my life, $2,000 was more money than I had ever had at one time. And I knew that if I was told at the beginning of the summer to save every two weeks so that I had $2,000 at the end of summer vacation, I would have had $0 to show for it. And what did I do with it? I bought my first car! Thanks mom, you taught me the value in setting up automatic withdrawals. I continue to do this 15 years later with bi-weekly deposits going into my different investment accounts.
Now, if you’re REALLY not a good saver and you are the type of person that would set up those automatic deposits into a savings account but also know that you can technically dip into that account every now and then (I have definitely been guilty of this!) you can take saving one step further: Have those automatic deposits go into an RRSP account. The reason RRSPs deter you from dipping into them is you actually aren’t supposed to – they are named Registered Retirement Savings Plan for a reason. Your money is locked in and you’ll get hit with a withholding tax if you withdraw, and this withholding tax is not insubstantial. For example, if you want to withdraw $8,000, you’ll need $10,000 to cover the withholding tax. You’ll also have to report this money as taxable income, causing you to be taxed a second time.
Now, the beautiful caveat of saving money in an RRSP is that they allow you to withdraw up to $25,000 from the account as your ‘Home Buyer's Plan’. You won’t get hit with any penalties or taxes, and you have up to 10 years to repay this money back into the account. I took advantage of this with my first house as I was grasping at every penny I possibly had to afford my portion of the down payment. Withdrawing that $6,000 from my RSP under the HBP made the difference in my being able to purchase a house.
2. Cut your spending
I’m sure you’ve heard this plenty of times, and while it sounds easy, it’s actually extremely hard to do. Allocating a portion of your pay cheque is one thing but having to forcibly change your habits to cut your daily spending is another beast entirely. The problem is that we get used to the daily conveniences of our lifestyle – driving to work, paying for parking, grabbing a coffee at the local coffee shop, buying lunch down the street, shopping for groceries at Whole Foods, going out to a movie with friends, and the list goes on. All of the activities I’ve just mentioned may seem like small expenses, but they really add up. I suggest you don’t try to change them all at once – that would be incredibly hard to maintain. Try instead changing one habit first, and then change another one down the road once you’ve gotten used to the first change. For example, when I realized how much money I was spending on coffee each day (approximately $40/week, or $160/month!), I was determined to make my own coffee instead. And while my excuse used to be “but I only like the fancy coffee that coffee shops make”, I decided to buy a decent coffee machine off of Amazon that came with a milk frother so that I could still enjoy my “fancy coffee” but not pay daily for it. I figured even though I paid $120 for the coffee machine, this was still less than my monthly coffee budget. After about two weeks of homemade coffee, the newly created habit took hold and I began to enjoy drinking my home brew :)
There are SO many small ways to save money, even smaller than making your own coffee. Can you buy groceries at “No Frills” instead of Whole Foods? Can you grocery shop on ‘student night’ (hello, Tuesday!) to save 10%? Can you watch a movie on Netflix rather than go to a theatre? Or better yet, use your parents’ Netflix account so you save that $10.99/month…
You can also park further from work so you don’t have to pay for parking; bike or take the bus to work instead of drive; pack your lunch instead of eating out; shop for clothing second hand, and the list goes on. When I bought my first house at 26, I was still going out on the weekends and partying with my friends - not exactly something you would associate with ‘cutting spending'. However, I didn’t want my lifestyle to change too dramatically by my saving, so that’s why I made small changes rather than large changes. Want to have a few drinks on the weekend? Split the 1.5 L bottle of wine with friends rather than each buying your own bottle. Heck, go crazy and split a box of wine between the whole group of you.
I am constantly looking for ways to save us money – it’s like my personal life mission. Today we switched internet providers to a cheaper option. Last week we bought reusable aluminum foil so that you never have to buy aluminum foil again, you just wash and re-use the same piece (also saving the planet; two birds one stone).
Do you guys have creative ways to save money? Please PLEASE tell me them so that I can do them too!
3. Partner with a friend
I know this tip doesn’t technically fall under ‘saving money’ but it kind of does because you save half of the down payment by having someone else pay for it! I have talked about the benefits and drawback of partnering in previous posts but I’m bringing it up again because honestly, this was the only way I was really able to afford my first house. I knew I couldn’t afford the entire down payment on my own, so I started to seek out friends who were in the same boat as me. As fate would have it, that’s exactly what happened. My friend and I needed each other to be able to afford what we both wanted – and so a necessary partnership was born.
Once again, I’ll caution that if you do partner with a friend or family member, make sure the proper legal documents are in place to protect both of you from the get-go.
4. Ask your family for help
Let me preface this tip with the caveat that a lot of people don't have this option, and you should consider yourself both lucky and privileged if you do have parents with the means to lend you large portions of money. However, if this option is available to you, you should absolutely take advantage of it. If you are worried about approaching your parents to ask them for a large sum of money, I suggest you come up with an airtight payment plan to ease their concerns before they even have them.
For example, let’s say you’re asking to borrow $10,000 from your parents and you realistically think you can pay them back $400/month (*ahem*.. perfect opportunity to set up that automatic deposit into a savings account). At the rate of $400/month you will have them paid back in full in 25 months, or just over 2 years. This is of course assuming they don’t ask you to pay them back with interest. If your parents do expect interest, it’s still a better deal than getting no money at all :) Going to your parents with a well thought out plan will show them you are serious, that you really want this, and that you’ve pre-emptively put the effort into devising a realistic payment plan.
Let’s say your parents shoot your down on lending you money, or they simply don’t have money to lend you. Can you think of another possible way your parents might be able to help you out….?
That’s right, you can move back home and allocate this saved rent money to your savings account/RRSP.
I know this might not be the most appealing option, but I know people in their 30s, living in Toronto trying to come up with the down payment for a house, and this is what they’ve done. Again, if this option is available to you count yourself lucky and privileged, but definitely take advantage of it. I lived at home during my undergraduate degree and was able to graduate after 5 years with less than $3,000 in post-secondary debt. While I did receive a few scholarships and worked a part-time job, the majority of my savings came from living at home, rent free (thanks mom!).
5. Get a side hustle
Ahh, the elusive side hustle. A.K.A: a second job. When I was saving for my first down payment I was working 35 hrs/week at the University for my salaried position, while also working about 15 hrs/week serving and bartending at a nearby restaurant. I would do my best to live off of my tips and put my pay cheques in a jar without even cashing them each week. After about 4 months of saved cheques I would deposit them all directly into my savings account. Managing money this way was helpful as it taught me how to live off of cash, something that I think is rarely done anymore. Anyway, safe to say I was exhausted from working so much but the idea of investing my hard-earned money into a piece of property that I could turn into even more money, was worth it.
Hate serving and bartending? Try driving for Uber or Lyft; picking up one of those pyramid scheme skincare/makeup sales jobs; get crafty and sell your bomb creations; pick up hourly work you can do in the evenings, etc.
Of the 5 tips listed above, I used 4/5 to buy my first house. And really, I attempted to use 5/5 but got shot down by my parents asking for cash ;) But that’s okay, because it taught me to pick up extra shifts, reduce my spending even more, and save extra hard to be able to make my homeownership dreams a reality.
Finally, if you’re trying to save money, don’t get a dog. She’s an expensive princess, but worth every penny.