Smart Moves by Ellen James Martin

HOW TO SAVE FOR A HOME

A housing recovery is underway. Given that home prices are reasonable and mortgage rates favorable, real estate experts say it's a positive time to make a purchase. Yet many young singles and couples who seek homeownership still face major obstacles.

"Compared with the frothy days of the boom market before the recession hit, it's a heck of a lot harder to buy your first home," says Eric Tyson, a personal finance expert and author of "Mind Over Money: Your Path to Wealth and Happiness."

Tyson says many debt-heavy young buyers need a debt reduction and savings program that could take up to a year or two to complete before they're in a position to meet the expense of purchasing a home.

Are you willing to reduce your spending and cut debt to buy a first home? And are the sacrifices worth it?

Tyson contends that those who have steady employment and are certain to stay in the same area for at least five years are usually better off buying than renting.

"If you get a fixed-rate mortgage and buy in a neighborhood with rising prices, you should do better as an owner than a renter. That's because you'll have better control over your living costs and won't face the uncertainty of rising rents," Tyson says.

Here are a few pointers for young people who aspire to homeownership:

-- Carefully review your current financial picture.

One obvious obstacle to saving for a house is out-of-control spending, says Leo Berard, charter president of the National Association of Exclusive Buyer Agents (www.naeba.org).

Before you can realign your budget, it's wise to analyze where your money has gone, category by category, for the period spanning the last three to six months. This can be done with paper and pencil, with such personal finance software as Quicken or through such free websites as mint.com, a favorite of many young savers.

"Until you get a picture of your spending, it's very tough to see where cuts can be made," Berard says.

Granted, it's time-consuming. You'll need to sift through all your checking account and credit card statements. But, the information that such a breakdown yields will be worth it.

-- Develop a spending plan that prunes low-priority outlays.

Once you know where your money is going, it's time to create a spending plan that meets all your basic and top- priority needs while still letting you save for a home.

Tyson encourages you to scrutinize every category of your spending in search of possible reductions.

"Some areas -- like car expenses and restaurant bills -- probably contain a lot more fat than others. But there should be no sacred cows. Everything is on the table," he says.

For example, Tyson urges renters to reject the notion that their current housing situation is a given. Much money could be saved by modestly downsizing, Tyson says.

Likewise, are you willing to change your transportation spending? Perhaps you could dispense with a car and take public transportation to work. Meanwhile, you could find savings by cutting your energy use -- especially air conditioning -- and by letting go of a gym membership you don't use.

Financial planners are quick to cite food costs as an area where substantial savings are possible. Many people are surprised to realize how much they're spending to eat out at lunch with co-workers.

"Unless your office culture demands you go to restaurants with your colleagues, you might want to pack lunches for work, a very strong money-saving habit," Tyson says.

-- Strive to reduce your credit card debt.

In addition to student loans, many people in their 20s and 30s continue to accumulate substantial credit card debt. They use their cards for clothing, entertainment and vacations. And the unfortunate reality is that many young adults have cards with double-digit interest rates.

"If you're serious about homeownership but are living on plastic, you're going to need to make very big behavioral changes," Tyson says.

Cutting credit card balances requires strong self-discipline. But it's an essential prerequisite to homeownership for many. The odds are you won't need a financial planner to help. But Tyson says a good book on the subject could be invaluable. He recommends the newly updated version of "Deal With Your Debt: Free Yourself from What You Owe," by Liz Weston.

-- Don't let your friends weaken your resolve.

Sunnier forecasts for housing have many convinced that now is a good time to buy. But skeptics always abound --including many young people who've seen relatives or friends lose homes to foreclosure. Doubters also point to continuing economic uncertainty as reasons to postpone home-buying plans.

But if you're among those young adults who believe that saving to buy a home in the near future is in your economic interest, Tyson cautions you against letting anyone dissuade you from your goal.

"Their pressure could be implicit rather than explicit. For example, your friends might tell you that by cutting your entertainment spending and vacations, you're sacrificing too much of your lifestyle," he says.

Tyson believes those who let friends talk them out of saving for a home purchase in the next several years could come to regret it.

"If you have the courage to buy soon and choose a place in a solid neighborhood, within three to five years you should see tangible benefits -- including a modest level of appreciation," he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)