How to save for down payment on a home?

Like all seemingly insurmountable long term goals, saving for a down payment on a home is much easier if you break it down into small, actionable chunks. Whether you're trying to save up $10,000 or $200,000, deciding how to save for a down payment on a home is the first, and often most difficult step, to actually achieving that goal. To help motivate you and ease you into a months or years long habit of savings, here's the entire process broken down into five easy steps.

1. Set Your Budget

How much house do you want? Where do you want to live? How many bedrooms, bathrooms do you want? How much square footage? Decide upon your dream home, and then pare down that dream based on your budget. You can find out how much the types of homes you are looking for cost by browsing through current listings on Realtor.com or other real estate search websites. Even if you're not going to be buying in the near term, it helps to see how much the homes you have in mind cost. You may be surprised - for better or worse.

Nail down your price range, and then set your down payment goal to 20% of that amount. Why 20%? Because with a 20% down payment, you won't have to pay private mortgage insurance.

Next, add about $5,000 or so to that figure. That will cover closing costs.

For this example, let's say you want a 3 bedroom 2 bath house in Green Tree, Pennsylvania. That puts you at about $125,000 to $150,000 price range. So, you'll need $25,000 to $30,000 for your down payment. Next, add $5,000 for closing costs, and your target is about $30,000 to $35,000.

2. Set a Timeline

When do you want to see yourself in your new home? Consider this in regard to any big life events you have on the horizon - new baby, marriage, new job, graduation. Now, factor in one to two months for house hunting and add another month or two for negotiation and other logistical stuff that needs to get done after an offer is accepted.

So, let's say you are want to get married and move in to your brand new home 12 months from now. That means that you should have your down payment in hand in the next 8 to 10 months.

From here, it's simple. Take your down payment, subtract how much you have saved up already and then divide it by the number of months you have.

So, if you already have $10,000 socked away in a Traditional IRA (tip: first time homebuyers can draw down up to $10,000 from their Traditional IRA for housing expenses without incurring early withdrawal penalties) and $5,000 in a regular savings account, that's a $15,000 head start. That leaves about $15,000 to $20,000 to go over the next 10 months. So, you have to save $1,500 to $2,000 every single month until then.

3. Set a Monthly or Weekly Budget

This is the toughest part of all. Set aside an evening to go through all of your receipts, bills and credit card statements and categorize all of your spending. Or better yet, use a service like Quicken Online or Mint.com to do this for you. Find out what can be trimmed from your weekly spending. Cancel cable subscriptions, cell phone data plans, and other big monthly expenses. Use some of your savings to pay down high interest credit card debt, since the amount you accumulate in interest won't be nearly as much as you pay in finance fees. Lastly, identify areas where you can earn extra income, either by selling assets, working overtime, taking on a second job or freelancing.

4. Automate Your Savings

Set up a separate high yield savings account and set up your direct deposit to automatically place a certain amount in that account. That way, you won't have to think about the act of saving. Instead, you'll just have to begin making do with less discretionary income - which is actually easier than it sounds.

5. Stick To It

At this point, your savings plan will be on autopilot. The benefit of this method is that you'll know if this isn't going to be infeasible from the beginning. That way, you can adjust the parameters - i.e. how much you can afford to pay on a home, when you can buy a home, how many hours you can work - so you won't get to your target home purchase date and come up short. And remember: don't get discouraged - especially if an unforeseen expense comes up and sets you back a few months. Just reevaluate using the above steps and keep pressing on. You'll have that down payment in no time.

Alternately, if you only come up with part of your target down payment, you can explore other mortgage options and home financing instruments that allow you to put less down. Speak with a mortgage broker about your goals to find out what's possible.