The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
How to Save for Big Purchases
Whether you want a small city condo or a sprawling suburban mansion, a house is the largest purchase you'll probably make in your life. Not surprisingly, cars rank second. Under that are items of great importance to a family – for example, a grand piano for a house of musicians or regular vacations for a solo traveler. If you're saving for a large purchase, here are four steps that you can take to ensure your big ticket item is in reach:
Step One: Consult a Pro (Or the Net!)
In order to save up for a big purchase, you’ll first need to find out how much your desired house, car, boat etc. will cost. With cars, you may need to shop around and test drive a few models before you settle on the perfect ride. Call around to local dealerships for the best pricing and check local advertisements for sales. If you are planning to buy a home, research costs for your desired home size and location, and then inquire how much a mortgage broker would require as a down payment to secure such a property. Make a "sanity check" of your personal finances. What amount of money can you handle being taken out of your monthly budget? Calculate how much of a monthly payment you can comfortably afford and how much of a down payment your lender or broker will require up-front to reach your desired monthly payment amount.
Step Two: Determine Your Savings Goal
While there’s no actual “magic number” that lenders seek, 20% is usually a sizable enough down payment to secure financing on a home or vehicle assuming your income and credit score meet lending criteria. Used car purchases can likely be financed with 10% down, according to Autotrader.com, and some dealerships offer low-down-payment financing options. Certain home loans require as little as 3.5% down depending on the applicant’s credit. However, you may first want to calculate how much you’ll be paying over the entire life of the loan to see if it’s worth it to wait and save a bigger down payment before making a major purchase. If you're saving for retirement, you'll likely be saving for much longer, so keep your pace slow and steady as you complete your short term financial goals. You may also want to consult a financial advisor if your long term goals involve making investments.
Step Three: Make a Plan
Now that you have a dollar figure in mind for your down payment (or whole purchase amount), it’s time to determine how you’re going to get from point A to point B. Make a budget. Look at your current living expenses and determine if anything can be trimmed – for example, your morning lattes or monthly Netflix subscription, clothing purchases etc. Eat out less. Shop for better deals on goods and services you use regularly, and avoid using credit cards if you can't pay the entire balance in one month. This way, you won't get stuck with high credit card debt when you're trying to purchase your dream boat or concentrate on your retirement plans.
Once you’ve trimmed the fat from your budget, you can look at how long it will take you to reach your savings goal. For example, if you have $1,500 in savings now and find extra money by trimming excesses and cancelling unnecessary services, you’ll reach a savings goal of $10,000 in a little more than two years (about 28 months). Get creative for faster savings:
- Host yard sales or sell items online.
- Do contract or night work.
- Carpool to work or downsize your current vehicle.
- Temporarily scale back on 401k and Traditional or Roth IRA contributions.
- See if you can negotiate lower student loan payments.
- Contact your local credit union to see if you can save money by refinancing your car or changing insurance carriers.
One thing you DON'T want to do when you're saving up for a larger goal such as a buying a car or home is deplete your emergency fund. Most experts recommend having at least $1,000 in an emergency fund to cover things that may come up suddenly. This doesn't have to interfere with your goal setting plans, though. Either tuck your emergency cash away in a separate account, or if you don't have one, leave the first $1,000 that you save in your account for unexpected expenses.
Step Four: Find Your Stash Spot… and Keep Going
You'll also need a place to keep the cash you're saving toward your financial goal. While a checking account is handy for everyday banking, consider a savings account or money market account. Check the interest rate and requirements on both options to see what works best for you. If you already have multiple accounts, you may wish to open a separate savings account just for a single goal such as buying a home. When you reach your goal, you can either opt to close the account or continue saving for your next big item.
It’s easy to crunch the numbers and set a financial plan. It’s harder to stick to it. Keep track of your savings in online banking; as you watch your bank account grow, you'll have more incentive to keep going. There may be setbacks along your way to the end goal of your new car or home, but remember — the journey is just as important as the destination!
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