Big purchases need significant savings. Let us be fair. Budgeting and savings don’t come easy to us all. For some, those two terms are easier said than achieved.
Then again, few life skills come naturally to some people. Everyone can learn how to budget and save money better. Everyone has a big financial dream they plan to achieve someday. What makes the difference is the efforts we put in.
If you need to purchase your first house, purchase a car in cash, save for a big vacation, or start your own small business. You can achieve your saving goals sooner rather than later, and I will show you how.
There’s a little question of what a “Big Purchase” is. I like to see a big purchase as that item that is beyond your current paycheck. Something that requires you to save for some time before you can buy it. It could be a TV, Playstation, a home or even a car.
Only you, the size of your income, and your savings can decide what is big to you per time, but whatever it is, the principle of saving towards that big purchase is the same.
My Early Savings Strategy for Big Purchases
When I started earning, I could not initially figure out how to save for big purchases and expenses like appliances, furniture, electronic equipment, home upkeep, cars, and car maintenance. I just assumed I would keep all my earnings to myself and head to any shop and buy whatever my money could buy.
Later, I understood that people needed to save (in some cases for years) to get a down payment until they were prepared to buy a house. I did not connect the dots immediately to find out all these other things will need to be in line items on your budget, which you save for, too.
Perhaps that is because for each one of the sample funds I looked at, not one of them had the categories of auto maintenance finance, vehicle purchase budget, vacuum replacement fund, home maintenance budget, and others.
Finally, I heard information about saving 1% of your home’s annual cost towards home repairs. I love to separate items to avoid confusion. I established a home maintenance fund, set up a car purchase fund, and finally, a furniture and appliance purchase budget.
Setting up these different savings accounts is a real budget saver. It allows you to save for the numerous things you would like to without needing a lot of paperwork to get it done. It will enable you to see exactly how close you are to reaching your savings targets whenever you check the account’s balances. It prevents you from accidentally spending money on a single budget category that you intended to hold for one more.
As time went on, I developed other strategies to save for big purchases, and I’m sharing some of them with you here.
What Are Your Options for This Big Purchase?
You might not need as much money as you assumed. You also might not need to save for as long as you first thought.
Have you ever considered buying used instead of new? There are loads of reasons to get a used car over a brand new vehicle or bypass the new building house in favor of a fixer-upper or renovated historical residence.
Suppose you are trying to purchase electronic equipment, including a laptop. In that case, you can buy a late version under a year old via peer-to-peer services such as Craigslist or even Nextdoor for a portion of the expense of a brand new version from the shop.
Question your assumptions and sentiments because some things that you ought to buy used instead of new.
Buying used is not the only means to spend less on a significant purchase. When you get a house, locations matter a lot more than if the house has been a new building. A median house price in San Francisco costs $1.4M in late 2020. While in many areas of the United States, say Baltimore, houses cost a tenth of that price. Also, you can live luxuriously on $2,500 a month in some states.
Before you can produce a savings program, first you need a savings target. Spare a couple of months or years of unnecessary distress by exploring the most inexpensive route to your desired purchases. How much does that path cost?
That is your savings target. But be careful that if it takes you some time to save, you might need more cash than the initial target.
Set a Savings Timeline
When you decide on a target, it requires a time limitation. If it lacks a sense of urgency, it dies a slow death. Besides, with no deadline, how can you know how much you have to save every month?
A timeline helps you know how long or close you need to save for that big purchase.
Aim to get a realistic but challenging deadline, which pushes you a bit. It ought to stretch you to reach it, but it should not be entirely as unattainable as to put you up for failure. Sometimes, your target may reflect a moving target. For instance, home values always change, and the more you wait, the more you will probably need as a down payment.
A quick note of warning. A timeline or deadline shouldn’t pressure you into doing unlawful things to achieve your big purchase. It should inspire and drive you to stay focused and timely to attain your goal.
Understanding How it Works
Let’s assume I want to replace my washing machine because the existing one is old and fast wearing out. To make this achievable, I need to have a budget for this item and start saving money periodically. I can start by saving $100 per month. Before I started saving, I already checked for the best price of the new Washer to be $1,399.
This means that in a little over a year, by putting aside $100 monthly, I will be able to make my big purchase.
$100 x 12 months = $1,200
Price of the Washer $1,399
Savings after 12 months = $1,200
Even at this stage, you can still get a great bargain with your cash and make your big purchase at a lesser price.
By saving $100 monthly, my timeline was for one year plus. If I wanted to get the machine earlier, I would need to save more. The more I save, the faster I get to my big purchase goal.
What if I’m Buying a Car?
Saving up for a car usually sounds daunting but let’s try to break it down and see if it’s achievable.
If you can save $350 per month, for example, from no more having a car payment, and you’re driving a car worth $2,500 today, you can buy a $6,700 Minivan in a little after 12 months.
Saving $350 for a year: $350 x 12 Months = $4,200
Current value $2,500 of the car you drive
Total after a year $4,200 + $2,500 = $6,700
That is not an expensive car. I understand, but it is one that will get you about and be secure and comfortable.
So, if you don’t have a car at all, from this scenario, you would have saved $4,200 after 12 months. You know you have to decide if you want to get a car with that or save some more to get something even better.
Push yourself for another 12 months, and you would have saved $8,400 or more if you are a little aggressive. That should get you something better than what you would have bought with $4,200.
Guess what? By doing the same thing, you can purchase a $10,900 car annually then. (That is $6,700 + $4,200 = roughly $10,900.) Do the same for yet another year, and you are going to be in a car worth almost $15,000, or continue for 2 years. You will be in an automobile worth near $19,500 after only 4 years of saving up and paying to get the vehicles with money.
If you would like a car that is even nicer than this, keep saving in precisely the same manner, and also add more to your monthly auto savings finance as time passes.
Within five years, you will maintain a $23,000-plus paid-for car, and you’ll be able to keep saving this manner forever.
Note that the value of every asset is subject to depreciation. If you maintain your car well, you will still get an excellent value for it when you’re ready to sell.
Commit to Paying Cash
The earlier you commit to paying for everything with cash, the more quickly you will be in a position actually to start to take charge of your money. You can begin building long-term fiscal stability and prosperity when you dedicate yourself to stay away from loans and credit cards.
That way, you do not have money wasted on interest payments to somebody else. You may use it instead to accomplish your saving for a big purchase.
Credit cards make it easy to spend beyond your budget and rack up credit card debt that may throw a monkey wrench on your savings advancement.
Payment info from Shift Processing shows customers pay around 83% more when they swipe their credit cards than counting out cash bills.
Look at placing a “hold” on your credit cards until you get to your savings goal. It’s possible to remove it at any time. If you do not feel comfortable with a hold, take your credit card from your pocket and sip it in a secure place.
Set Up Separate Accounts
People are inclined to spend the money sitting in their checking accounts. The more access you have to the money, the easier it is to spend. Money can burn a hole in your pocket, even in a virtual pocket.
First, start high-yield savings account with a virtual bank such as CIT Bank. This ought to be mainly for your big purchase objective. Most banks permit you to tag your account, so name the budget according to your target. If you save for a mortgage payment, call the accounts something such as “Down Payment for a Home.” Every time you log in to your bank, the account name will inform you why you are saving money instead of spending it on dinners, garments, or gadgets.
And do not feel compelled to start the savings account at your existing bank. Open your savings account in another bank in case you sometimes succumb to temptation. It will make it much more difficult to raid.
Make Some Spending Cut
If you are saving for a big purchase relatively soon, search for ways to cut costs in other places so you can save more money toward the big buy and purchase the item sooner.
For instance, you may lower your food budget and reduce your family eating out per month. Reduce your cable, figure out ways to decrease your utility bills, lower your transport spending, or perform a no-spend challenge.
Save Everything Extra
At any time you get some money you were not anticipating, move it straight to your savings accounts. That could indicate a bonus at work, your tax refund, or even an inheritance. Precisely the identical logic applies when you receive a raise. As opposed to thoughtlessly spending more such as most individuals do.
Suspend your existing spending, and adapt your automatic savings to move up by your increased amount. It is less fun than going out to dinner more frequently, but you will thank yourself later once you attain your big purchase months or perhaps years earlier than anticipated.
Prepare for Emergencies
The most common budgeting pitfalls you will find around are planning for everything but not for emergencies or unforeseen expenses.
Emergencies occur all of the time. They take various forms. Some times, it may be a $1,000 vehicle repairs, next year a $3,000 medical bill, another a $5,000 roof replacement. Quit seeing crises as outliers and budget for emergency funds, particularly for sudden, unexpected costs.
Likewise, make savings account for irregular expenditures such as presents for special occasions. Based on historical statistics in the National Retail Federation, the typical American household had inched nearer to spending $1,000 on vacations every calendar year. The 2019 spending almost doubled the average in 2002, when the NRF started monitoring it. If you do not budget for vacation costs through the year, anticipate your financial plan to go up in flames come December.
Gift prices do not end with the holidays. Your budget has been struck with innumerable unique event gifts, for example, birthdays, weddings, and baby shower gifts each year. Have a budget for irregular expenses monthly. That way, you aren’t amazed by these all-too-predictable expenses.
Otherwise, your massive purchase savings will soon be ripe for raiding, derailing your progress.
Automate Your Savings
People are fallible and subject to failure. Even disciplines meant to save one’s life do fail. So, do not rely on them?
Preferably, set up automatic recurring payments from your checking account to your branded savings accounts. Schedule these for every paycheck within 24hrs of being paid. That way, you can’t ever have the opportunity to spend the money meant for savings.
Most companies even permit you to divide the direct deposit for your paycheck, making it even more straightforward. Each paycheck may then go into your savings account without you seeing it.
It’s possible to use third-party savings automation programs to transfer funds based on particular causes. For instance, programs like Acorns round up each purchase and move the change to your savings accounts.
If you would like to reach your savings target and make your big purchase quicker, think outside the proverbial box to save money.
For example, how much faster would you save money if you did not have a home payment? Find a means to house hack to ditch your lease or mortgage payment and supercharge your savings speed.
If house hacking does not work for you, try out some easy hacks to save a particular figure every week, month, and year.
Earn More Cash
You might even expand the difference between your expenses and earnings by creating additional income.
That could imply negotiating a boost with your company, whether on your current job or a new place. Or you may look for a new higher-paying job.
Alternately, pick up a side hustle to make more income out of a daily job. Beyond earning some excess money, it may also help you build new skills and expand your network. You would be amazed just how many side hustles develop into a full-time job or business generating more income than your previous day job.
The more you get, the easier it is to save, and the faster you can save up for that big purchase.
Be Accountable to Someone
When you discuss your goals with family and friends, you dedicate yourself to these goals. Unexpectedly, you end up accountable for fulfilling them.
A 2019 study from Ohio State University found that people who discuss their goals with other people, especially those they view as having higher standing, considerably improved their probability of meeting their objectives.
Commit your goals to as many people you respect, and check-in with them each month to update them on your progress. Give the right to ask and challenge you to keep track of your progress. The extra societal stress will help keep you on track for reaching your savings target.
Using the 50/30/20 Rule
Managing your funds through budgeting is the trick to financial success.
Senator Elizabeth Warren and LearnVest have popularized the 50/20/30 principle, which urges that you spend as follows
- 50% of your take-home cover on necessities such as food and rent or mortgage payments,
- 20% goes to Savings and debt reduction obligations,
- 30% on lifestyle options
If your take-home cover is $2,700 a month and you don’t have any debt, your breakdown will look like this.
- $1,350 on necessities, which includes rent and mortgages
- $540 Savings and Debt Servicing
- $830 On Lifestyle and others
Imagine a scenario where you do not have any credit card debts or any form of debt. You could be saving up to $540 per month. You could choose to be more aggressive by reducing the amount budgeted for Lifestyle. This will help you save even big and draw you closer to achieving your big purchase.
Little drops make an ocean. If 20% of your take-home pay appears to be a big deal, start small, even if it’s $40 or $100 a month. Saving just a little is far better than saving nothing. You are a lot more inclined to keep saving if you put small, attainable objectives.
Invest To Grow Your Savings
If you have to save for a couple of weeks for your big purchase, then a high-income savings account suffices. On the other hand, if you are saving money for something you do not expect to buy for at least 2 or 3 years. Like a home or a car, you may consider investing in a mutual fund.
It usually has a higher rate of return than standard savings or money market accounts. You could also think of transferring your money into a high-yield savings account to make extra interest. Remember, the rate of interest can go down at any moment without warning.
I advise you to look to low-risk, stable short-term investments for holding your savings. The last area you need to end up is having lost cash instead of earned.
It is crucial to reevaluate marketplace conditions and employ smart approaches to keep your finances healthy, even during downturns.
And keep in mind, it is never too early to begin saving for retirement. Volatile markets may provide a number of their most excellent chances to make wealth for long-term investors. Therefore investment in retirement accounts early in your lifetime may set you up for potential achievement.
At precisely the same time, you also don’t wish to eliminate cash to inflation. Contemplate extremely safe investments such as Treasury inflation-protected securities to make a return on your money and prevent inflation.
Negotiate a Lower Price
Everything in life is negotiable. The more expensive the buy, the more space there is for discussion.
Home sellers accept low offers all of the time. The same holds for automobile vendors, both owners and dealerships. With successful negotiation approaches, you might not need as much cash as you thought.
When the finish line is in sight, begin probing vendors with lower offers to determine whether they will come to you. You may come across an early ending to your own savings marathon.
Holidays are also an excellent time to check with vendors for the best discounts. Between Thanksgiving in November, Christmas in December, and the end of the year, loads of discounts and offers fly all over the place.
Saving money for big purchases feels intimidating, particularly when you first begin saving. However, the earlier you start, the earlier you can afford the major purchase you have been eyeing and alter your life for the better.
When you finally reach your goal and make your big purchase, keep saving aggressively. You have created great financial habits; that’s the tricky part. Continuing those customs is simple. Look into the future, think bigger, explore financial goals such as financial freedom and early retirement, or put aside sufficient cash to pay your kids’ school tuition.
Not many people regret saving money and building wealth quicker. Maintain saving, and before you know it, you will reach more remarkable landmarks than your initial aim ever.
What big purchase are you saving up for, do you have a strategy, what’s preventing you from starting now? We can talk about it. I’m here for you.