04 February, 2021
First-time buyer guide #4: Building your deposit
“I don't know how much I'm supposed to save.”
“At the end of the month, I just don’t have anything left to save.”
“I just don’t earn enough to save”
I have heard many reasons people give for not saving.While there will always be some who genuinely struggle, most people are just not sure where to start.
#4 Building your deposit - Keeping on track and boosting your savings
As we progress into the world of homebuying, we now turn to the less exciting area of savings.
So far, we’ve established that buying a home usually requires a large deposit as well as the other costs set out in Part #2 - Set a target. The resulting total often seems unreachable, especially if you don’t have a plan.
It’s been said “success is a few simple disciplines, practiced every day; while failure is simply a few errors in judgment, repeated every day”. This resonates well with me for many forms of saving, especially saving a larger amount like a house deposit. So the first discipline is to build a plan.
A plan is simply ‘a set of actions that takes you from A to B’, but a good plan is ‘a set of actions that takes you from A to B, where A has been properly assessed and B has been properly defined’.
Note - I also have a definition for a great plan, but for now let’s get a good plan up and running and we can revisit great plans another day.
If you’ve read Part #2 - Set a target you’ve already made a start by defining B (your target). Well done. Now let’s define A and create the route to get you from A to B.
The high level plan to saving towards a home buying goal can be summarised like this:
- Get started
- Identify an amount to commit to
- Boost your savings
- Keep motivated
So let’s get started, getting started!
My first tip is really simple but critical: just start! However, start with a habit and start with a a small amount, so that it's so easy you simply can't say no to yourself.
I don’t care how much you save or even where you save it - it can be a jam jar or a 0% savings account. Let’s be honest, interest rates are so low you’re not missing out on much and you shouldn’t delay getting started. I’m not saying you shouldn’t use the right products and I’ll look at the main ones in a while.
But for now, just get started because:
- Simply saving something means the target amount is now slightly closer
- You’ve proved to yourself that you can set aside money - we’ll cover keeping it set aside later
- Emotionally, you will simply feel better for having done something
- Psychologically, you have won the first battle. You have put saving towards your home above something else. Don't let that be next week's rent payment though!
If you’ve already started - well done. If you started a while ago and still have it saved, then Multiply salutes you. If not, don’t worry: start right now and become one of the millions in the UK who are actively saving for a home.
Our example: Previously we met Ben who needed a total of £25,000 to be ready to buy. He’s a little down though because it seems so far off.
I told him "If you want to change something in your life, change something in your life!’ So, he’s put 5 £1 coins from his wallet into an old whisky jar his Dad had. He’s feeling a bit better and now wants to build on his plan.
Identify an amount to commit to
Right so you’ve started with something small. Did you notice how you did that without thinking about how much you can afford, or assessing your income and outgoings? That was deliberate - just starting is key.
However, to really build your savings you need to budget and follow a savings plan. The process is simple but it takes some time to do it properly:
- Establish your budget
- Estimate your income
- Estimate your outgoings
- Identify excess income
- Commit to saving
Establish your budget
The objective of this exercise is to better understand your spending and commit to specific amounts of spending through the budget period. I’m not talking about saving yet, I’m talking about fully understanding your spending and committing to the budget.
A budget is not a review of your previous income and spending. A budget is an estimate of your income and outgoings over a set period of time in the future. However, having your previous income and outgoings to hand is helpful and this leads us nicely into timescales.
Many people tend to budget in timescales aligned to their payday frequencies, typically monthly. It seems logical, but I often see these people struggle, or use the credit card, when the less frequent costs come along, e.g. Christmas and birthdays.
For this reason, we recommend you budget over a year and then divide it down to suit your pay frequency. That way, by the end of January, you’ve already got some money aside for next Xmas.
So on a piece of paper or spreadsheet carry out the actions below, understanding that ‘essential’ and ‘commitment’ have two different definitions. A commitment means you are currently committed to paying something, ‘essential’ means you ‘have to pay it’. I’ve given some examples to help. List out your:
- Your income (this bit is generally the quick bit!).
- Essential regular monthly (or weekly) commitments (e.g. rent, food, or loan repayments)
- Less frequent essential commitments (e.g. your TV licence)
- Non-essential regular monthly (or weekly) commitments (e.g. Netflix, Spotify)
- Less frequent non-essential commitments (e.g. birthday or Xmas presents)
- Ad hoc non-essential spending (e.g. your take-out Costa)
Now adjust the above to reflect any specific known changes coming up (e.g and increase in rent or an increase in your Spotify account)*
*Please don’t at this stage try and adjust your spending. We are just trying to understand and live within your current lifestyle. We’ll look at boosting these savings in a bit!
You should also remember that my view of which category an item goes into may be different to yours - It’s your budget not mine, so take control!.
What you should have established is a plan of your next year’s spending, which should include some short term provision for outgoings later on in the year. The fact that you have a plan of your spending means you are much more likely to keep to it (or much closer than before!).
Let’s reintroduce Ben. He’s written his list of income and outgoings and tweaked it to guess how it might change next year. He’s surprised himself, his take home pay after tax and pension contributions is £29,500 pa or £2,458 per month, but doesn't think that this will change next year.
His outgoings estimate has come to £26,000 per year, or £2,166 per month. He’s wondering why he hasn’t got anything left from last year, but guessed it’s just been frittered away because he didn’t have a plan - He’s probably right, but we can’t change the past!
Now he has a plan, he’s established that out of his monthly pay, £1,800 is needed for his regular monthly commitments, but he’ll now put an extra £366 a month aside for the less regular outgoings.
Identify excess income
The objective of the budget exercise is to identify a budget to live within.
However, if you are fortunate enough to have excess income over your spending plan, then you have also just identified the base level of savings you can commit to and an amount that should not impact your current standard of living.
Back to Ben - He’s identified that he can still save £200 a month right away and he’s already wondering if his Dad has a bigger whisky jar!
Commit to saving
So hopefully at this stage, you’ve identified a sum you can save if you stick to your spending plan. If not, and you’re spending everything, don’t worry. You might be able to eke out some savings when we look to boost your savings later on.
So far, apart from putting a few pounds aside in a jam jar, we’ve only carried out a paperwork exercise. We need to turn it into reality - we need to commit.
Here comes the next tip, which echoes the American business tycoon Warren Buffet who once said “Do not save what is left after spending; instead spend what is left after saving”.
In short: don’t wait until the end of the month. Save when you get paid. “Easier said than done”, I hear you cry. I hear you, but it’s the mindset you need to instill in yourself. That goes not just for home buying, but any goal that requires regular savings and especially larger sums that can seem daunting to achieve.
For example, all too often people defer retirement planning because it’s far off. Then one day it comes along to bite you, and you wish you started earlier.
Remember, all we’ve done is establish a sum that your own figures indicate you can save without impacting your lifestyle and I’m suggesting you decide to save this at the beginning of the month.
Ben gets paid on the 28th of the month, so wants to set up regular savings of £200 a month. He’s a bit concerned about keeping money in the house, so wants to know where he should save it.
Boost your savings
We’ve established a level of saving that you’ve calculated you can afford. Let’s call this your basic savings. This may be a small amount, or nothing at all.
Either way, you can now start to consider the following areas to boost your savings and bring your dream closer to reality.
- Use the right accounts
- Adjust your budget
- Become a smarter spender
Use the right accounts
I said earlier that a jam jar would suffice, but it won't be long before holding notable sums of money in a jam jar is not that safe an option.There are other products that could keep your money safe and maybe even pay you a bit of interest:
- Instant access /Short term notice accounts
- Regular savings accounts
- Lifetime ISAs
- Help to Buy ISAs (only for individuals who already them)
- Cash ISAs
Any traditional savings account will do the job and keep your money safe, but you should also consider an e-wallet, such as the easy access savings pot that comes with a Multiply account. The benefit of these is that they keep your money away from the rest of your day-to-day spending. However, the money usually remains completely accessible in the event of an emergency or a bit of over spending (no one's perfect).
If you are happy to commit to a certain amount of money, but not yet ready to lock the funds away, regular savings accounts can do the job and offer slightly higher interest rates than current accounts. The downside is that you’ll need to commit a certain amount each month to benefit from the fixed interest.
Here’s a tip: look into Lifetime ISAs. You can put in up to £4,000 in a tax year and get a government bonus of up to £1,000. If you're buying with someone else and they're also a first-time buyer, you can both do it. This is currently the best boost you can get for your home buying goal. Check you’re eligible first though!
Some people have asked me why I wouldn’t suggest a Stocks & Shares ISA. To be honest they are for medium to long term goals that are at least 5 years away.
Ben’s a first-time buyer, so he’s looking at the Lifetime ISA for his £200 a month savings.
Adjust your budget
Now things start to get a bit tougher. If you want to squeeze out some more savings, something has to give. So let’s start by going back to your budget and see what we can do.
When we created your budget, I suggested that you list out your non-essential regular and less frequent commitments. Revisit them now - is there anything on that list that you are prepared to give up or possibly reduce? Could you live without a Netflix subscription? Lockdown aside, are you really using the gym membership?
I’m not saying that you need to reduce anything, but your own budget may have some answers to where you could save a bit more. Failing that, do you get bored in your spare time? Fancy a second job or taking on some overtime, maybe just whilst you are saving for the deposit?
You’ll know about these savings up front, so you can increase your upfront monthly save!
Become a smarter spender
Now you are on top of your commitments and saving what you can, the next step is to look at the ad hoc non-essential spending. This is where it's hardest to save, but it can give you the biggest wins. One less takeaway, one less coffee, buying a medium rather than the large...all these mini savings add up.
As these are smaller, more ad hoc savings, you probably shouldn’t assume you can always make them every month. Therefore, for this type of savings I recommend you consider using a ‘round ups’ feature in an e-Wallet. You’ll hardly see the money go, but you’ll certainly see your savings start to build.
Ben’s sticking to his budget for now, but will implement roundups via his e-wallet. He doesn’t think he’d miss the money and he can always move some money back if he needed to. If all goes well he’ll look to move the funds over to his new LISA in the future.
This is a huge subject and is the subject of many good books. I’m not a psychologist, I’m a financial planner and whilst I know the value of keeping motivated when it comes to home buying, I’ll leave this to the experts. Suffice to say though, there are a few tips that are worth following to stay motivated.
- Keep thinking about your goal - e.g. keep up to date on house prices in your area
- Keep checking on your current account balance - you’ll find it easier to stay within budget.
- Keep checking on your savings accounts - eWallets with ‘round ups’ are great to see your balance growing.
- Review your budget to see if you can adjust your planned spending.
- If applicable take advantage of the Lifetime ISA - Watching that bonus going in each month really makes you feel good.
- Consider amending your screen saver or home screen to something that is related to your goal!
Phew...there we go: a deep dive into building up your deposit and boosting your savings. I’m sure I could add lots more to this, but maybe we can revisit this another day in another forum.
Just time for my top tips from this article.
Adviser Top Picks - Building your deposit
1 - “Carpe Diem” - Seize the day; just get started!
2 - Start small, but make it a habit - 21 times regularly repeated typically makes something a habit. Smaller savings make it easier to build this habit.
3 - Budget over a year, not just a pay packet - It will help you pick up all your irregular outgoings and better plan for those events like Christmas.
4 - Pay yourself first!! - I strongly recommend that you set aside your savings when you first get paid, not what you’ve got left at the end of the month.
5 - Take advantage of Lifetime ISA - If you're eligible, take advantage of the government bonus with a LISA.