How to Create a Savings Budget for Buying a Second Home

Make Sure You’re Financially Prepared to Buy a Second Home

Purchasing a second home requires some financial planning first, starting with creating a savings budget. Your first home buying experience might have taught you that you need cash for a down payment and closing costs, along with money set aside for maintenance and repairs, but the numbers can look very different for buying a second home.

Assessing Your Savings Needs When Buying a Second Home

A second home can be more expensive than the first home if it is used as an investment property or a vacation home. Not only might the purchase price itself be higher if you’re looking for a second home in a desirable market, but you’re also likely to pay more for things like property taxes and homeowner’s insurance.

As with any home purchase, you should first determine the home you can afford based on your current income and existing financial obligations.

Creating a Budget to Save for a Second Home

Now that you know what you need to save for a second home, the next step is to create a plan to save that amount.

First, define your savings timeline. If you plan to purchase a second home when you retire and still have 10 years left, you’ll need to budget to save $11,328 to $12,828 annually, based on the earlier example. Dividing that monthly, you’ll need to save about $1,000 to reach your goal, which is a pace that’s not unrealistic for saving. On the other hand, if you have five years until retirement, you’ll need to double that amount, which can test your saving ability.

Reviewing your regular monthly household budget will help you once you determine your monthly savings goal.

Consider two things: how much you spend each month and how much disposable income you currently have to allocate to savings after covering your expenses.

Depending on your timeline for saving for a second home, you may already have some extra cash flow in your budget that allows you to save the amount you need. If not, you’ll need to review your spending to see if there’s anything you can cut back on or forgo.

The other option, if you can’t reduce your spending, is to increase your income. This can be achieved by working more hours, taking on a part-time job in addition to your full-time job, or starting a side business to generate extra money.

Remember to Save for Expenses After Buying a Second Home

The initial costs of buying a second home aren’t the only things you need to save for. You’ll also need cash reserves to cover the additional costs of owning the home after the contract is signed. These costs may include:

• Homeowners association fees if they aren’t included in the mortgage
• Property taxes and homeowners insurance if they aren’t included in the mortgage
• Garden maintenance
• General repairs and maintenance
• Utility bills for the second home

Those costs can add up. You will also need a comfortable emergency fund to deal with larger expenses, such as replacing a roof or heating and cooling system, or to cover your share of homeowners insurance if you need to file a claim for damages.

Depending on how much you’re already saving for buying a second home, you may want to include these costs in your savings budget now or wait until you can add them after closing the deal. If you wait until after the purchase to save for these additional costs, make it a priority so you don’t find yourself financially unprepared for a home-related emergency.

Source: https://www.thebalancemoney.com/how-to-create-a-savings-budget-for-buying-a-second-home-4172780