Saving for a home: it’s all in the mindset
The bad habits we learn
It’s hard for individuals to manage money well if the country as a whole doesn’t manage money well. I liken it to being a child with constantly overspending parents who are always in debt; you can easily pick the same habits up. The country isn’t leading a good example, we’re massively overspending and massively in debt.
At an individual level, the main problem is instant gratification. If you look at previous generations, people like our parents, they save for the thing they want and then they buy it. That’s a common trend for people who are perhaps 65 and older, the generation just ahead of the baby boomers. That’s because during the war, when times were hard financially, they learned to manage money.
As baby boomers grew up, money was relatively awash, and they bought things when they wanted to. But like everything else in life, spending is a habit, and it became engrained in our collective mentality. Nowadays, if we don’t have enough to buy the item, we think: ‘We’re going to get paid next month, let’s just borrow it’.
Companies have been only too keen to facilitate this with credit deals on most big-ticket items these days – some have changed their whole business model because they make more profits from their credit deals than they do from selling their products.
The problem is, when you spend more than you earn you can only do it for so long before you go bust, as we’ve seen all too clearly in the events of a decade ago.
Keeping up with the Joneses is the main issue: buying things you don’t need to impress people you don’t know. Changing that mindset is the key to your financial future, particularly if you’re looking to buy a home.
Psychologically it’s all about how and where you visualise yourself. When you consider your future, if you only think about the next 18 months then it’s very easy to just keep buying things. Over a timespan of 18 months we don’t see the implications of debt in the long-term when we borrow to buy stuff.
If instead our vision looks much further ahead, say 10 or 20 years, we make decisions today to build our future, not just to have instant gratification. This is amply demonstrated in the success of some of the companies that manufacture the products we covet; firms like Samsung and Toyota have become dominant in the US market ahead of domestic rivals because they thought long-term, where their US counterparts were focused on 12- or 18-month goals.
So try changing your view from ‘I need to buy a house now/in the next 12 months but have no chance’ to ‘I need to own a home in the future’, then put a plan in place to save for a deposit. The new lifetime ISAs (LISAs) are fantastic for this goal; you can put away up to £4,000 per year and receive a 25% bonus from the government on top of your savings. They’re only available for people aged 18-39 but they’re a big boost to saving for a home.
Entitlement mentality is your enemy – think gratitude instead. You’re not entitled to a house, you have to earn it. And while it might be more difficult to save a deposit these days, it’s a lot easier to earn money now than it was when our parents were younger, thanks to technology. They had to plough fields, graft and pound metal, get hot and sweaty, to earn money; we can sit on a computer and tap some keys, or answer calls! Yes, the house is more expensive now – but you had to work a lot harder to get it then.
The perfect way to start the day
Imagine if by mid-morning you’d already achieved your financial goals for the day? That’s exactly how to start thinking differently about your savings and cash flow.
As a rule, I advise that you should aim to save 12.5% of your salary as part of your long-term vision of buying a property. Assuming you work an eight-hour day, that means your first hour’s wages are all about your future – from 9am to 10am goes into your savings, and from 10am onwards is for the essentials, living and having fun. You’ve already taken a step towards your dream before your second cup of coffee!
One final tip: if/when you become part of a couple, rather than living off two wages, see if you can live off one wage between you. If you intend to have a family, that will likely eventually happen anyway for at least a period of time. Even if you can’t save one whole wage, if you can save a big chunk then that’s a massive amount of money towards your future… and your new home.