How to Save for a House While You're Renting
If you're renting, but have big dreams of buying a home, check out these money-saving tips and watch your dream of home ownership come to life.
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7 Simple Money-Saving Tips for Renters
Get a roommate. One of the easiest ways to cut your rent in half and save some big bucks is by finding a roommate. Think half the rent cost, half the utility bills, internet and cable. That adds up to some serious savings, which you can apply toward your down payment. Check out these seven savvy tips for living with a roommate.
Pay off your credit card debt. This one might seem counterintuitive — after all, you're trying to save money, right? But it's important to remember that your credit score and debt-to-income ratio are pretty big factors that lenders consider when deciding whether you qualify for a loan. So, when it comes time to get a mortgage, you'll be glad you tackled that outstanding debt ahead of time.
Rent to own. This is an option for those who are interested in a property, but still need to save up cash for a down payment or build their credit score. To keep it simple, when you're in a rent-to-own agreement, you typically pay a one-time, non-refundable fee called "option money," which gives you the opportunity to purchase the house in the future. Usually this price ranges from 2 to 7 percent of the purchase price of the house — a price that you and the seller will agree upon. You can rent the property for a specific amount of time (typically one to three years), after which you have the option to purchase the property from the seller. Apart from the benefit of getting the property you want while still being able to save and build your credit, a percentage of your rent may also be credited to the purchase depending on what the seller decides.
For example, let's say your rent is $1,300 a month and you and the owner agree that 20% of that will be credited to the purchase price of the property. Since your lease agreement is three years, $9,360 will go towards the purchase ($1,300 x 0.20 = $260; $260 x 36 months = $9,360). That's a good chunk of change! Keep in mind, if you decide not to purchase the property, any money you've paid, like your option money and rent, will not be reimbursed.
Budget basics. Now that you've set a big financial goal, it's important to figure out a budget and stick to it. A good rule of thumb to follow is the 50/30/20 rule, where you allocate a portion of your paycheck into three categories: 50 percent towards essentials, like food and housing; 30 percent towards lifestyle, like dinner out or other entertainment; and 20 percent towards financial priorities, such as debt, retirement and savings. Since you have your sights set on a new home, try moving 5-10 percent of your lifestyle budget into the savings category. It might be challenging, but you'll reap the benefits when you see your home getting closer and closer!
Ditch the unnecessary. We're sure you've heard this one before, but we'll say it again: stop spending money on superfluous expenses. Eating out, ordering in, cable, shopping, movies, coffee — shall we go on? Sure, these are fun and entertaining indulgences, but they add up to hundreds, if not thousands of dollars, a year. For the time being, cut back on these impractical, temporary vices and be amazed at how much you're saving. It'll be worth every penny when you're turning the key to your new home.
Set up shop. Believe it or not, a garage sale can put some serious savings in your pocket. Since you're a renter, you might not have that much stuff to sell, but don't hesitate to reach out to family and friends for things they've got stocked up to get rid of. If you're renting an apartment, see if a family member or friend would be willing to let you set up shop at their home. Not only will you be making some extra money, you'll be getting rid of stuff you don't need, so when you finally move in to your hard-earned home, you'll have less to move.
Save your tax refund. Sure, it's nice to get that refund check come tax season. A shopping spree, a new bedroom set, maybe a beach vacation — all fun things you can do with that "extra" income. Resist the urge to spend it on the impractical and instead stick it in your savings account.
Your goal of saving enough for a down payment is within reach! Once you've saved up and are ready to cross the threshold, talk to your American Family Insurance agent and check out our homeowner coverages to insure your dream never goes unprotected. In the meantime, learn how renters insurance helps you proactively protect the things you've worked so hard for.