(first home – 5 minute read)
Hey Gen-Z! I’m Aimee, I’m 17 and I like to write on finance – especially for young people (here’s a link to my website www.libertasnz.com! Please check it out!). I’ll be filling in for The Comic Accountant today!
Today, let’s talk about how you can save up for a deposit for your first home. With the state of our housing market right now, you may be wondering, how will I ever buy my own home? It may sound impossible, but it is definitely achievable and I will show you how!
Build up that first home deposit!
Obviously, saving for a housing deposit is difficult and requires lots of hard work. You may have to make some sacrifices and manage your money quite tightly, but it will all be worth it in the end.
How much money will you need to save for the first home?
Let’s start off with how much a housing deposit you need to save.
Assuming that housing prices continue to rise minimally at 1% or so a year and you are aiming to buy your first home in about 10 years. If you are are around my age, you’ll be 27-ish when you buy your first home. By then, the average house price in NZ may be about $1 million.
Generally, a deposit for a first home is 10%, it can go as low as 5%, but usually, it’s around 10%. So, you are looking at saving around $100,000 in order to put down a 10% deposit on your first home. If you are looking at a home outside of a large city or a smaller apartment rather than a standalone home, the deposit may be lower, but for the sake of simplicity, let’s assume that you need $100,000 saved for the deposit.
Where should you put your money?
Now that you know how much money is needed, you will need to start making and investing money!
As a college or university student, your main source of income will be from a part-time job, but this alone is not enough. You will also need to invest your money and let the returns compound. The best way to do this is by investing in an ETF or an index fund. The Smartshares NZ Top 50 ETF has seen, on average, annual returns of 11.34% for the last 5 years. Other high-growth ETFs have comparable returns.
Read more about ETFs and Index funds here!
This means that annually, you should see a return of about 10%. By using a compound interest calculator (like this one https://sorted.org.nz/tools/savings-calculator!), we can see that in order to reach close to $100,000 over 10 years with 10% returns every year, you will need to invest about $600 a month, or $7,200 a year.
How much would you need to work in order to buy your first home?
If you are working a minimum wage part-time job ($21.20 an hour), you will need to work about 35 hours a month to have approximately $600 to invest. This is with tax of 10.5% and a 3% KiwiSaver contribution already deducted. That is, if you don’t have any other expenses.
You may also need to pay rent and have other living costs. In this case, working only 35 hours a month will not be enough. You will need to be working as much as you can whilst also making some sacrifices in your daily life.
Make your own instant coffee at home for a fraction of the price instead of buying a $6 cuppa. Flat with roommates to lower your rent instead of living by yourself. Making sacrifices such as these whilst managing your money tightly will help you reach the target of investing $500 a month towards a first home deposit. Just gotta hustle!!
Living with your parents is financially smart.
For those that are able to live with their parents, it is a lot easier to reach the $600 investment goal every month.
Of course it goes without saying that if you wish to have more flexibility with your social life, you may want to work more for some extra money. Even though you may not have to worry about paying rent, you should still manage your money strictly to meet the goal! As a young adult you should still be contributing to your fair share of the household bills (this will still be a lot cheaper than renting though).
That being said, not everyone has a great relationship with their parents. Also, not all parents may be financially capable of letting you stay with them. For those of you who can stay with your parents – consider yourselves extremely privileged.
Making the first step to your first home
Working a minimum of 35 hours a month (8.75 hours a week) and investing at least $600 a month will require good planning and some sacrifice when it comes to your social life or personal time.
As a young adult, you will also need to juggle school, uni and any extracurricular activities you may have. If you are able to do so well, you will have set yourself up for financial independence, something that not many people are able to do at a young age. By reaching that goal of investing $500 a month, this also builds a good habit of regularly saving, one that you can continue into well into your future! This is the first step you can take to building your personal financial confidence!