How To Build a Housing Fund

I am going to be very honest with you, buying a house is a capital intensive process. Apart from the cost of the home itself, some other costs that might come up include;

• Transaction costs including legal, agency, closing costs etc

• Transportation costs for viewings etc

• Insurance costs and charges

• Survey costs

Among other things including contingencies and unforeseen expenses.

This is one bridge you don’t want to cross “when you get there”. One of the best ways to get ahead of this is by building a housing fund.

Your housing fund is a pool of cash dedicated to covering all your housing related expenses.

It is therefore important to start building this fund as soon as you start earning money, as well as to do it in the right way to ensure your goals are met.

This newsletter will be very tactical, and we will go into the weeds on the best way to save towards your housing fund. The hope is that by the end of this, you will start the process of building your housing fund.

1.Determine Your Savings Target

The most important step is to determine what the target is. i.e how much you need to save and how long it might take you to get there.

A simple rule of thumb is to try to ave 30% of the cost of the home you want to buy.

So for example, if you estimate that the home you want to buy will cost ₦20,000,000, you should set a housing fund target of (₦20,000,000 x 30%) = ₦6,000,000.

Heres why; you would be expected to pay at least 20% of the total home cost as a down payment for the mortgage.

The remaining 10% should cover anything else you might need to pay for.

2. Choose where you will be building this fund

In the past, you had just 2 options for where to build your Housing Fund;

• You could buy a wooden piggybank (kolo) or

• Open a new bank account and label it “Housing Fund”

With the first option you ran the risk of the money getting destroyed by the elements, stolen or even misplaced.

With the second option your main issue was you constantly had access to the money and could always withdraw it on a whim.

With both options though your money was definitely going to be negatively affcted by inflation for example; Annual inflation in Nigeria averages 15% over the last 10 years. So assuming you saved half of your goal in 12 months ₦10,000,000, by the end of the first year, the money would be worth 15% less i.e (₦10,000,000- (₦10,000,000 x 15%)) = ₦8,500,000.

Average annual interest rates for savings accounts in Nigeria is around 9% so you are still losing a signficant amount of value.

Luckily, this is 2023, and you have better options. The best way to build your housing fund in 2023 is through a locked high yield savings account (LHYSA).

This is a bank account that is locked by default so you can get higher interest rates on your savings. This means you cant just withdraw the money on a whim, which has proven to be very effective at maintaining a savings culture.

There are many different options for LHYSA’s but I will recommend H28’s Savings app. Its a dedicated savings app that provides you with the means to build your housing fund in a regulated bank account that is NDIC insured while also providing you with high interest rates and gives you the ability to lock your savings over 3,6 or 12 months.

You can also acccess multiple housing finance options with the app and get credit based on the amount of savings you have within the app.

3. Evaluate your current financial situation and Determine how much you can save and what frequency

To make this as simple as possible, use a spreadsheet to track your financial position. Here’s a couple of things you will need to track.

How much do you earn currently, how many sources of income do you have, what are your monthly expenses including debts, bills, any other person you support or send money to.

What you need to determine is how much money is coming in monthly and how much is leaving.

So assuming you earn ₦150,000 a month from your job and ₦50,000 from your small business, this gives you a monthly income of ₦200,000.

Lets say you have to pay bills of about ₦120,000 a month, this gives you a balance of ₦80,000. A good rule of thumb is to start saving at least 10% of your monthly disposable income in your housing fund and then increase it gradually till you hit your elastic limit. Remember that this is a special period in your life and buying this home might be the biggest investment you will ever make.

Additional sources of income

You should consider adding to your sources of income in order to shorten the time to hit your savings target.

There are many low effort options you have which are out of scope of this article but adding to your sources of income will reduce the time till you hit your savings target and improve your chances of getting qualified for a higher amount.

4. Cut Down On Your Top 3 Expenses

If you did step 3 properly, your top expenses should become very clear. Usually, your main 3 expenses on a monthly basis will be rent, food and transportation. You should be able to make some deep cuts to all or some of these expenses during the housing fund savings period. Remember that these cuts are temporary but will have huge impact on your housing fund.

For example, consider reducing Uber rides, buying food in bulk at the beginning of the month.

For best results, you might combine it with little cuts too like reducing eating out, nightlife expenses etc.

Remember that the key is discipline and being intentional about achieving your goals.

5. Setup automatic debits (If you can)

Automatic debits do a couple of things for you;

• Reduces the chances that you will miss a payment

• Helps you to build discipline

Luckily, the H28 app offers you the option to setup automatic debits either through your debit card or through connecting your bank account to the app.

You can set the frequency of debits either monthly, weekly or daily depending on what works for your own unique circumstances.

In Conclusion

Building your housing fund will be a long arduous process. And you can knock that time down by starting as soon as possible and following the instructions above.

If you automate your savings from your everyday budget and augment this by stashing money from any windfalls and side hustles you have, you’ll be in your own home much sooner than you think.

That's all for this week

I hope you enjoy the Superbowl’s first half and find some inspiration in the commercials. Everyone’s been talking about how brands are going to be huge on TikTok this year, versus just on Twitter. Make sure you get hydrated before going to bed to avoid brain fog tomorrow!

I hope you have a great week. And I’ll see you next week! As always, feel free to DM me or reply to this email to get in touch!