Saving for a down payment can be a challenge, imagine having to do so without a steady paycheck. This is a struggle many small business owners & freelancers face when embarking in their home buying journey. Learn more about the best practices to save for a home without a steady paycheck in this RealEstate.com article by Stefanie O’Connell.
Buying a home is a major money milestone and saving up a down payment can feel daunting. If you’re a freelancer, business owner or gig economy worker without a steady paycheck, saving up can be even more challenging.
Uneven cash flow and income fluctuations can make it hard to commit to regular savings transfers. And lean months may require you to withdraw money from savings to cover your bills, making it difficult to make meaningful progress toward your major savings goals.
Despite these challenges, saving up for a home is still possible for non-salaried workers. And it’s increasingly a reality for many individuals as the gig and freelance economy continues to grow.
So here are some best practices to keep in mind so you can commit to achieving your money milestone goals, like buying a home, regardless of the way you get paid.
1. Set Up Savings Goals
Calculate how much home you can afford based on your freelance earnings. You might not know how much you’re going to make from month to month, but you do need to know how much money you can afford to pay toward a mortgage from month to month.
So sit down and take a look at your finances to figure out what consistent expenses you can commit to, even with your inconsistent income.
Once you figure out the monthly mortgage you can afford, you can get a sense of your housing price range and work from there to calculate how much you’ll need for a down payment.
Keep in mind that as an independent contractor, a bigger down payment may improve your chances of getting approved for a home loan. So consider homes where you can put down a greater portion of the purchase price.
2. Open a Savings Account Dedicated to Your Down Payment
Once you’ve set a savings goal for your home down payment, open up a dedicated savings account for these funds. Having money for your various savings needs in one place can make it tempting to withdraw the funds needed for your home down payment for other reasons — like a vacation or a smartphone upgrade.
Putting your down payment savings in a separate account can keep you on track as you build towards your savings goal and help put some distance between you and your money, so you’re not tempted to spend it impulsively elsewhere.
Labeling your dedicated home savings account can also help remind you what you’re saving for so that you stay motivated throughout the savings process.
Take your commitment a step further by setting up a recurring automatic transfer from your checking account to your home down payment savings account each week, so that you continue to make progress on your savings goal regardless of your cash flow for the month.
3. Pay Yourself a Salary
Set yourself up with a weekly salary by depositing a regular amount from your business account to your personal account every week or two, regardless of how much your business or freelance work actually brings in.
This can bring some consistency to your personal finances, and help when it comes time to apply for a mortgage by showing lenders a more regular income.
It might take some time to adjust your budget to the changes and figure out exactly what your salary should be, but giving yourself a regular “paycheck” can go a long way in helping you better plan your finances and get in the habit of saving for your major money goals – like your down payment.
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