How to Save for Large Purchases
When I first started budgeting, one of the things I couldn’t figure out in the beginning was how we were supposed to budget for larger purchases and expenses such as furniture, appliances, electronics, home maintenance, cars and car maintenance and repairs, and so on. I knew that people had to save (sometimes for years) for a good down payment before they were ready to purchase a home, but I didn’t connect the dots right away to figure out that all of these other items need to be line items in your monthly budget that you save up for, as well.
Maybe that’s partly because for all of the sample budgets I looked at, none of them had the categories of “car maintenance fund,” “car purchase fund,” “appliance replacement fund,” “house maintenance fund,” and so on. But eventually I heard advice such as save 1 percent of the cost of your home each year to go toward home repairs. And me being me, because I like to compartmentalize, I set up a house maintenance fund. And then I set up a car maintenance fund. And eventually a car purchase fund. And an appliance and furniture purchase fund. And so on.
Setting up these separate savings accounts (we use Capital One 360) is a real budget saver because it allows you to save for the various things that you want to without having to have a ton of paperwork to do it, it lets you see how close you are to reaching your savings goals any time you check the account balances, and it prevents you from inadvertently spending money on one budget category that you meant to hold for another.
Here are 9 important steps to follow when you are planning to make large purchases. By following these steps, your wallet and your bank account will thank you.
1. Commit to paying cash.
The sooner you commit to paying for things (all things) with cash, the sooner you’ll be able to really begin to take control of your money so that you can start really building long-term financial stability and wealth. When you commit to leave loans and credit card balances behind, you don’t have all that money wasted on interest payments to someone else, and you can use it instead to reach your own amazing financial goals.
2. Decide if the large purchase is really worth the money you would spend on it.
Review your budget to determine if you can really afford the large item (or items) that you want to save for. As mentioned in the point just above, make sure you can buy the item with cash in the needed timeframe, without going into consumer debt or relying on a credit card.
And then consider if purchasing that item is worth possibly overshadowing other financial goals. Most of us don’t have enough money to buy everything we want, so we have to choose our financial priorities. For example, you may have a dream of owning a speedboat or a ’65 Mustang convertible (OK, maybe that’s my dream :)). But do you really want that large-ticket item more than you want to help pay for your children’s college or max out your Roth IRA or retire in dignity?
For an interesting read on this topic, I recommend the book Your Money or Your Life by Vicki Robin (newly updated for 2018). It (the original edition) helped to shape some of my early ideas about personal finance and the value of work and money.
One of the ideas the author promotes in her book is to look at everything you buy in terms of the hours it takes you to pay for the item (as she puts in, in terms of the life energy spent). So, for example, if you make $30 per hour and you buy the latest smartphone for $900, was it worth the 30 hours of your life that you had to work to pay for it? If you buy a new $20,000 car, is it really worth working 667 hours?
3. Make room in your budget to save a certain amount each month for each large-item category.
Once you know that a purchase is in line with your values and your financial priorities, set a certain amount aside each month in a savings account for the item or category, even if you won’t use any of the money that month and might not need it for years. (If you know you won’t need the money for at least five years, you can consider investing the money in mutual funds.) And then don’t spend the money on anything else! Instead, let it sit in the savings account it’s been allocated to.
So, let’s say you want to save up to buy a new washer and dryer because you can tell the old ones are wearing out. So you set up a furnishings and appliances fund (this is one of the savings funds we have and that I recommend everyone have—learn what other savings accounts I recommend that every family have here).
And let’s say that you want to save $100 per month toward your appliance purchase, and you’ve shopped around to find the best deal you can, and you know the new washer and dryer together will cost about $1,450. So you know that you’ll be able to buy the washer and dryer in a little over a year (or maybe a little under a year, if you negotiate the price down because of the power of paying with cash).
And what if you want to save up to buy a nicer car? If you can save $300 a month, for instance, from no longer having a car payment, and you are driving a vehicle worth $2,000 now, you could buy a $5,500 minivan a year later. (That’s by saving $300 for a year; $300 x 12 months = $3,600 plus the $2,000 value of the current car = about $5,500. That’s still not an expensive car, I know, but it’s definitely one that can get you around and be safe and comfortable and all of those things.)
And then by doing the same thing, you can buy a $9,000 car a year after that. (That’s $5,500 + $3,600 = about $9,000.) Do the same thing for one more year, and you’ll be in a car worth nearly $13,000, or hold on for two more years, and you’ll be in a car worth close to $17,000 after just four years of saving up and paying for your vehicles with cash.
If you want to have a vehicle that’s even nicer than that, then keep saving in this same way, and even add more to your monthly car savings fund over time. In just five years you would be in a $20,000-plus paid-for vehicle, and you can keeping saving this way indefinitely.
4. Set up separate savings accounts for each of the categories you want to save for, and regularly transfer money into them automatically.
The best way to make sure that you don’t spend money you were saving for one thing on something else is to set up multiple savings accounts. The ability to be able to set up multiple savings accounts is one of the things that I love about my Capital One 360 savings account. We’ve been saving with them since 2004 (back before ING Direct was bought by Capital One), and they’ve been a great bank, with no checking fees, free bill pay, and automatic transfers to or from other banks or between savings accounts and your checking account.
You can transfer money into these savings accounts once a month, or you can transfer money every other week, or choose one of several other options that they offer.
Read this article for more information about automating your finances to reach your shorter- and longer-term financial goals.
5. Make some cuts in spending in other areas (at least temporarily) if needed to pay for larger purchases or to purchase the items more quickly.
If you need to make a large purchase fairly soon, then look for ways you can cut spending in other areas so that you can put more money toward the large purchase and buy the item sooner with cash. For example, you might reduce your food budget, limit your family’s eating out to one time a month, cut your cable, find ways to lower your utility bills, reduce your transportation spending, go on a clothes-buying fast, or do a no-spend challenge (you can save $1,000 in a month!). If you are regularly spending more each month than you bring in, you need to check out this article on how you can stop overspending.
6. Consider earning extra income to go toward larger purchases.
If you want to purchase the item or items more quickly than your current budget will allow even after reducing your spending, you can also earn additional income. There are even lots of side hustles and side jobs (like blogging! :)) that you can do right from home. Read this article to find ideas for earning extra income.
7. Consider buying the item used.
As you prepare to make large purchases, don’t forget to look at the possibility of buying the item used. Many used items still have a lot of life left in them, and the savings can be substantial! So don’t overlook this option when considering the best purchase for you and your family. You can look in the local classified ads, Craigslist, Amazon, eBay, garage sales, thrift stores, and more.
8. Shop around, and negotiate the purchase price.
Prices for items vary widely depending on where you purchase them, so take a little time to do your homework. Before you buy, shop around online to look for the best deals. Depending on the price of the item, this could save you hundreds or even thousands of dollars—the savings is worth the effort. And once you find the best deal for what you’re looking for, don’t be afraid to negotiate. You don’t lose anything by simply asking! Try out this phrase: “Can you do any better than that?” The more you experience you get negotiating for lower prices, the easier it will become.
9. Celebrate milestones along the way.
As you save for your large purchase or purchases, if you need the extra encouragement to save up and buy the item for cash rather than going in to debt for the item, reward yourself along the way. For example, if you’re saving to buy a $12,000 car with cash and you plan to save for two years to do that, you might go out to dinner every six months to help keep yourself motivated and on track. Or you could treat yourself to your favorite ice cream shop, or buy a new pair of jeans, or whatever will help you stay on track to meet your goal.
We live in a society where we have access to information nearly instantaneously. And with the availability of easy credit, many people can buy many of the things they want right when they first think of them, without having to save up for them and pay with cash. But making purchases with cash and avoiding debt is the only way to go for long-term financial success.
By saving up the money to make big purchases, you’ll be accomplishing great things, and you’ll be setting a wonderful example for your children and helping to set them up for a financially successful life as well. Because debt is a trap; don’t get stuck in it! And if you already have consumer debt, follow these steps to get out of debt as quickly as you can to find financial freedom!
Invitation to Share
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