How to Save for a House with the Asset Dedication Approach

 In Personal Finance

how to save for a house

For most people, buying a house is by far the biggest investment they’ll ever make. It’s also the most meaningful.

Therefore, it makes sense that they put a lot of time and effort into picking the best possible option for their needs.

Yet, if you’re about to embark on this process, you may have no idea how to save for a house. Don’t worry; you’re not alone and we’re about to show you what it takes.
saving for retirement

Begin with a Budget

This is a no-brainer, but we’re not talking about the typical budget everyone should have. If you want to learn how to save for a house, then you need to begin by understanding what a budget must consist of for this type of massive investment.

David Weliver has great advice when it comes to budgeting for a home:

“Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average six percent interest rate on a 30-year fixed rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed. (Just trust me on that — the math is complicated.)

For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.

($1,866 / $650) x $100,000 = $290,000 (their maximum mortgage amount)”

The next thing Weliver goes on to recommend is including your down payment into this budget, so let’s go ahead and cover that next.

Make Sure You Have 20% for a Down Payment

Most people don’t know how to save for a house because they have no idea what target to hit. That’s not to say they can’t look up how much the house costs; it’s that they either think that’s the amount they must have, or they set their sights far too low for that down payment.

Before you can buy a home, you’re going to need to find a lender who will lend you the money you need to secure it. Before that can happen, you’ll need to show them that you are a good investment on their part.

While there are numerous ways to do this, one of the most important is to show them you have 20% of the money it will take to buy the home. This not only means they have to loan you a lot less; it shows you are serious about affording a home.

Furthermore, if you can’t pay 20% upfront, you may still get a loan, but you’ll need to pay private mortgage insurance (PMI) before you can get that much-needed money. This will have a substantial impact on how much homes you can afford and add other expenses to your budget for a home.

Reduce Your Debt

Saving up 20% of a home’s total cost is no small task. That’s why you should do yourself a huge favor and begin paying down your debt ASAP.

If you have student loans to pay off, credit card debt, etc. start working on it right now.

Aside from the fact that doing this will make it much easier for you to save the money, it costs to buy a home, the less debt you have, the better you’ll look to lenders too.

Having 20% of the home’s price is great, but if a lender sees that you’re drowning in debt, they will be far less impressed by your accomplishment.

Download Free E-Book “The 20% Rule: How You Can Avoid A Retirement Collapse”

Curtail Your Spending

Once you have your debt under control, the next step is to do the same with your spending.

By now, you should have a pretty good idea of how much money you’ll need to save up for that 20%. You’ll be able to get there a lot quicker if you stop spending money on going out, new clothes, cable and other luxuries you simply don’t need.

You can go back to enjoying those things later. Right now, if your goal is to afford a home, those purchases are liabilities.

If you have trouble with impulse shopping, simply leave all your plastic at home. Take out the cash you’ll need at the beginning of the week and then force yourself to stick to this budget.

Use Robo-Saving

Another way that you can take the hard work out of saving up for a home is by automating the process. You can open a bank account specifically for this purpose and then set up automatic deposits every month into that account right after you get paid.

This will also help curtail your spending because, even if you do decide to take your plastic with you everywhere you go, the money won’t be there to spend. After a month or two, you may even find that you can set aside a bit more than you originally thought.

How to Save for a House with the Asset Dedication Approach

When it comes to learning how to save for a house, many experts may mention some of the above tips, but most of them will completely miss out on recommending the asset dedication approach. This is really too bad too because this remains one of the most robust methods for doing so.

Asset dedication approach is based on the dedicated portfolio theory (DPT). This approach divides a portfolio into three categories of assets: cash, bonds, and stocks. It also focuses on a specific goal. In this case, that goal could be how to save for a house.

The way you would go about using asset dedication is:

  • Start with the minimal amount you need – in cash – to cover six months of expenses.
  • Decide on what your goal is in terms of the amount you’ll need to afford the home you want. Then, invest your assets into individual bonds. Each bond should have a maturity of your desired target date.
  • Take your other assets and invest in the stock market with a long-term perspective. Ideally, use the low-cost index exchange-traded fund (ETF).

The great thing about investing in bonds – in particular with the asset dedication approach – is that, regardless of what happens with price fluctuation while you hold them, they still pay back the face value upon maturity. As long you buy quality bonds (e.g. government or investment grade corporate bonds), they’re virtually risk-free.

Don’t let yourself become overwhelmed by the process of buying your house. Start now by following the above steps, and you’ll be in much better shape than others who are in the same shoes.
Bond Investing Fundamentals

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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