Saving for your first home is a daunting endeavour. How much will you need? How long will it take? How many smashed avo-free weekends will you have to sacrifice before you have enough for a deposit? The questions are endless. Buying a house is a big commitment, and, according to Chris Collard, Director of Mortgage Management business FinancePath, there are a few common mistakes people make when it comes to achieving their savings goals. These are eight of the biggest money blunders you probably didn't know you were making. You can hit your financial goals this year with a little financial planning.
Money mistakes you didn't know you were making
1. You don’t know your goal
One of the biggest mistakes people make when they set out on their saving journey is that they don't know what their purpose is. "There is no point saying, 'we're going to save for our own home' and then off you go," Chris says. "Often, people try and save, and nothing happens. Then, six months later, they're in the same position. They don't understand what their savings end goal is so, ultimately, they don't change any of their spending habits. If you're a runner, you train differently for a marathon than you do for a 100m sprint, but it's hard to tailor what you do if you don't know what your end goal is." Translation: Get clear about your savings goal, so there is no ambiguity in your mind about what you're working towards.
2. Your goal is too big
Too often, Chris says, people get so fixated on the amount they need to save that they get demotivated or psych themselves out. "Saving for a home can be one of the most daunting
things in your life, especially if you're aiming for that golden 20 per
cent deposit," he says. "With the average cost of a home edging up over
half a million dollars, the idea of having to sock away $125,000 can be
pretty overwhelming.
Saving for a house is all about baby steps. Sometimes the best approach is to break your goal down into smaller, more achievable micro-goals.
Saving $25,000 a year for five years seems much more achievable than
just telling yourself you have to save $125,000."
3. You don’t have a plan
As the adage goes; if you fail to plan,
you plan to fail. This is especially true when it comes to saving for a
deposit. "One of the biggest things we see is that people do not follow a
methodical approach to meeting their savings goals," Chris says. "To be
successful at this, you need to understand how much you need to save,
what options you have if you save that amount and the most effective way
to make that happen."
Every plan should have an emergency fund too - some extra money to spend
if something unexpected props up. Accidents, medical bills and even
your car rego can come from your emergency savings.
4. You’re not accountable
It's all good to have a plan, Chris
says, but what's even more important is making yourself accountable to
that plan. "It's no different from going to the gym and getting a
personal trainer," he says.
"Once you understand what your goal is – sit down with someone to map
out how you are going to achieve it. In most cases, that means you're
going to have to do something different from what you have been doing –
such as separating your savings from your living expenses and setting
yourself a simple budget. As a minimum, your savings goal should be
mirroring the minimum repayments you would be making on a home once
you're paying it."
If you don't have someone keeping you accountable to your plan, life
happens, and it's too easy to get busy and make excuses for why you
haven't achieved your goals.
5. You have too much personal debt
When it comes to applying for a loan,
Chris says banks and lenders look at your total finance net position.
"Too many young people now have high credit card limits and too much
personal debt before they apply for a home loan," he explains. "What
they often don't realise is that, when it comes to credit cards, it's
not what you have outstanding but your overall limit that is taken into
consideration."
Chris suggests paying off any outstanding amounts then reducing your
credit limit to $1,000 to minimise the chances of your debt getting in
the way of your homeownership dreams. Try to get your student loans, car
payments and credit card debt as low as possible.
6. You have a bad credit score
Another thing that bites a lot of young people is bad credit history. "If you've ever defaulted on a phone plan, didn't pay a telco bill or you've had multiple enquiries for short-term finance – to pay for a car or a holiday, for example – this all gets recorded against your credit history," Chris says. "All these things can serve as negatives for people applying for finance, especially if you're applying on a low deposit, which is anything under 20 per cent savings. You would have to have a squeaky-clean credit report for funders to look at you at those levels."
7. You have serious FOMO
Bernard Salt was onto something when he warned Millennials about their smashed avo consumption habits. These days, Chris says, lenders aren't just looking at your savings account, they're taking a fine-toothed comb to your spending habits in general.
"We had one client who was questioned by the funder over his living expenses because he had spent $350 on UberEats in one week," Chris says. "Discretionary spending during the savings period has to be watched because if it is too high, you might not qualify for a loan."
If you're serious about achieving your savings targets, Chris says you need to stop letting your savings goals get hijacked by social media-driven FOMO. "Some expenses are unavoidable," he says, "Like your car registration or insurance or energy bills. But typically for young people – a lot of their discretionary income is being spent on entertainment and eating out. These are exactly that, discretionary."
Chris suggests applying a lens of 'want' versus 'need' to your sundry spending will help you clarify whether something is essential or just nice to have. There's no better money-saving tip than staying in!
8. You can’t demonstrate good money habits
While it's all well and good to save a deposit, banks and lenders also want you to prove that you have good money hygiene. "You should be aiming to put away at least $2,000 per month plus a buffer because once you settle on a home, you'll have to pay it anyway," Chris advises. "It's all about mimicking those habits. Even if you have the money for a deposit, if you can't demonstrate the behaviours of having a home, you won't get access to the funds."
This isn't just for the bank or lender's sake, Chris says, but for your own, too. "It's as much as proving to yourself that this is the right decision for you as it is showing the mortgage professional that you can manage the repayments post settlement," he says.
Coming up with a monthly budget so you know what you can spend and what you must save is vital. This will prevent you from overspending and see you on your way to financial success and see you hit your long-term goals.
Having a strong, systematic savings plan and a clear goal will help you establish solid money foundations, which will set you in good stead for any future financial or monetary goals you may have.
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