Hands Down, This Is the Easiest Way To Save for a Down Payment—Even if You’re Living Paycheck to Paycheck

It seems like it was just yesterday when an Australian millionaire blamed avocado toast for the reason why millennials couldn’t afford to buy new homes. If only it were that easy—the market now is not what it used to be a generation ago. In fact, the cost of rent, houses, and college have all increased faster than incomes. You could never buy another avocado toast again and it wouldn’t likely make up that difference.

Even if you feel like you’re living paycheck to paycheck, your dream of home ownership may not be out of reach. Here's what you need to know about saving for a down payment and making your money work harder for you:

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How much of a down payment should you put down?

In general, down payments range from five to 20 percent of the purchase price of the home. So, if you’re eyeing a $1 million house, for example, you'd plan to put down $50,000-$200,000 upfront. Certain loans require different amounts—for example, Federal Housing Administration (FHA) loans only require a minimum of 3.5 percent down—but note, the higher the down payment, the lower your monthly mortgage will be.

Putting down 20 percent also helps you avoid paying private mortgage insurance (PMI), which protects the lender in case you default on your loan. PMI can add an additional 0.55-2.25 percent onto your loan. Although 20 percent is a good goal to strive for, it’s not required to purchase a home.

Keri Danielski, head of communications for Intuit’s financial health platforms including Mint and Turbo, says, “A good rule of thumb when buying a new home is to make sure that you are able to pay down your outstanding debts so that you can start saving for a sizable down payment.” Tackle any other loans or debt you owe so you can focus your money on buying a home.

Take a look at the average home prices in the neighborhood you want to live in and determine your timeline and ideal down payment percentage. Calculate back how much you need to save each week or month to hit that goal, and adjust accordingly. Most importantly, stick to your goal.

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What percent of your monthly paycheck should you be saving?

Danielski recommends following the 50/30/20 rule. That breaks down as: 50 percent of your paycheck goes to your essential costs like housing and utilities, 30 percent goes to lifestyle expenses such as restaurants and shopping, and 20 percent goes into savings or to pay down debt. Depending on where you are financially (or where you live), you may not be able to strictly adhere to this rule or stick to it every month, but it’s a good starting point. Following the 50/30/20 rule will also help you manage your spending on a regular basis.

What are easy everyday things you can do to save money that could make a difference in the long run?

Start a budget. 

Create a budget and track your monthly income and expenses so you know exactly how much money is flowing in and out and where it’s all going. You may be surprised to see just how much you’re spending on different areas of your life and where you can optimize or cut back. There are plenty of free tools—such as apps like Mint or budget sheets from the FTC—to help you budget effectively.

Make your savings work harder for you. 

Most regular savings accounts have low interest rates and your money won’t really grow over time. Consider looking into other account options like money market accounts or certificates of deposit (CDs), which tend to have higher interest rates than savings accounts. CDs are time deposits, meaning you agree to leave your money with the bank for a certain amount of time in exchange for a higher interest rate. This also means that you can’t withdraw the money in a CD until that time, or you may pay a penalty.

If your risk tolerance is higher, you can look into various other investment methods, like stocks or mutual funds, which have more potential upside because you’re taking a bigger risk. In addition, it’s harder to spend money you don’t easily see—automatically transfer a portion of your paycheck or any incremental bonuses directly into your savings account. Or open a separate savings account dedicated to your down payment and avoid using it for anything else.

Related: 50 Ways to Save Money: Our Best Tips for 2024

Look for hidden discounts. 

It doesn’t matter how much money you make, everyone still loves a good discount. Danielski recommends asking your HR department if there are employee discounts available on outside services (e.g., transportation credits, cell phone bill discounts, corporate buying plans, etc.). One surprising saving you may not have thought of: health insurance companies sometimes offer special discounts on gym memberships.

Trim your subscriptions. 

Danielski advises to reevaluate your subscriptions: “Most of them are cheap, so it might not seem like a big deal to add another $10 monthly expense to the budget.” But $10 here and there can add up over time, especially if they are set on autopay and you aren’t even aware of what you’re spending. A 2018 study found that on average, Americans spend $237 per month on subscription services, and 84 percent of people underestimate how much they actually spend. Review your monthly subscriptions, whether that’s streaming video or music services, beauty boxes, food services, apps, digital magazines, and more. “Most of these services are easy to pause or cancel, so you won’t lose a deposit or any kind of collateral,” says Danielski. Do this for a month or two and see what you miss—and what you barely notice.”

Next up, read on about whether it's better to pay off debt or save for retirement, according to finance experts.