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4 Savings Goals Everyone Should Have Before Buying a House

Wouldn’t it be nice to fast forward to your first home purchase? Well, it doesn’t work like that. You should reach these 4 essential savings goals before you can start looking for a house.

Why does savings matter?

1. Your savings allows you to move forward in your personal finances instead of getting into debt, which sets you back.

2. Starting out right puts you ahead of your peers, and even, people who came before you. Many people stumble along when it comes to their money, because they don’t have proper guidance. 

3. Once you buy a house, you will have lots of financial responsibility and risk, if you have not set your self up correctly. 

Once you reach these 4 savings goals you will safeguard your money and be ready to take advantage of the benefits of buying a house, the accumulation of equity – the key to building wealth with property.

Savings Goal 01 – Save $1000

 $1000 isn’t much, but it’s enough to give you a starting buffer from small unexpected expenses. Having some money set aside in case you need to purchase a tyre or you forgot to budget for a once a year expense gives you peace of mind that you won’t have to go in the negative (going in debt) to pay for it. 

It also works as temporary savings until you can get through Savings Goal #2.

Savings Goal 02 – Pay off your short term debt

That’s right.

“I made my first million by racking up credit card debt to get Airpoints,” said no millionaire ever. 

Why? Short term debt puts you in the negative. No matter how good the quality of what you bought with the personal loan, car loan, credit card or store card, you are going to pay a lot more for it than it is worth. 

That means your money is stuck in the greatest trap there is – the debt trap. This is when you use debt to solve a cash flow issue, which means you increase your overall expenses in interest payments. Even if you sold the car, clothes, jewelry, etc, you could never make more money from it than what you paid for it when you add the interest you paid…or are paying as is true for millions of us.

Live short term debt free to increase your wealth

So this means the best decision you can make is to live debt free and learn how to spend within your income. If you want to spend more, you can either adjust your spending plan to take it from another areas or increase your income. 

Choose the right strategy for you

Here’s how it works. Use your savings budget, without touching your $1000 savings, to pay an extra repayment on one short term debt at a time until they are all paid off.

To pay off your current short term debt:

  • choose the right strategy for your situation
  • address any debt that is in the arrears
  • decide how much to pay as an extra repayment beyond your $1000 savings
  • execute your strategy until all your short term debt is gone

There are 3 main debt crushing strategies for those who don’t own a home yet. They are all in our Leaps&Bounds Debt Crusher, along with how to choose the right one and how to complete each, step-by-step. We suggest that you download the PDF now.

Whichever strategy you choose, commit to it, learn it and do it. You might struggle with getting rid of your beloved credit cards, but once you rescue your money from interest payments on items that are losing value and move it toward building wealth, you won’t miss them.

A man putting a coin into a piggybank

Savings Goal 03 – Save an emergency fund 

People with a Saver money personality are probably the only ones who think this goal is a breeze. Many people skip it all together. Please don’t make that mistake.

If you did, you would miss out on the first potential major turning point in your financial life – creating your own ‘insurance policy’.

Before we discuss more about that, let’s start at the beginning.

What is an emergency fund?

It is 3-6 months of living expenses that is set aside to the event of an emergency. If you have followed the first 2 steps to money success and hit Savings Goal #1 & #2, you would have $1000 as a small buffer and no short term debt. This means most of your discretionary money is available to increase your savings.

Why should you have an emergency fund?

We wish we could tell you that nothing will go wrong if you build wealth the right way, but it is simply not true. There will likely be unexpected events that could wipe out your income. So with this in mind, the smart action is to prepare for it while you have an income.

The 3-6 months of living expenses that sits in your emergency fund is designed to do just that – sit there. If the economy goes down and you lose your income, you will have 3-6 months of backup funds. This means you won’t go in the arrears on your bills within that time. 

The emergency fund buys you 3-6 months to replace your income, whether it be with another job or a business or both. In this way, it is your ‘self-funded’ insurance against unexpected events. Even if you didn’t have an income protection policy, which we suggest many people should, you would have a way to regroup and refocus your efforts. 

Savings Goal 04 – Save a 10% house deposit

In a housing market when the house prices are steadily increasing, like New Zealand’s, your savings won’t keep up the pace. That is why we suggest to ditch the 20% house deposit goal and aim for 10% of your proposed purchase price between cash savings and KiwiSaver. 

Some people have difficulty with this, because a 20% deposit gets you lower interest rates and removes the need to pay an LEM or LEP. 

To this we have two responses:

1. It is more profitable in the long run to get in the housing market at the soonest possible time with a 10% deposit. If the bank is willing to give you a home loan, why turn it down? This way you start building a valuable asset that can be used to build wealth. The alternative means you lose time, and risk not getting into the housing market at all.

2. With the right mortgage debt reduction strategy, many of our clients are only high LVR for 1-2 years. In this time the value of their house has risen and they have used their mortgage debt reduction strategy to pay their mortgage down, creating enough equity to renegotiate their interest rates and cancel their LEM.

To learn more about using a 10% house deposit, read our 5 Pros and Cons of a 10% Deposit post or watch the video.

Watch 5 Pros and Cons of a 10% Deposit