The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Dollars and Sense: How to Save for Major Purchases
Whether it’s a small city condo or a sprawling mansion in the countryside, a house is the largest purchase most Americans will make in their lifetime. Not surprisingly, automobiles rank second, while underneath are items of great importance to a particular family or individual – for example, a grand piano for a household of musicians or regular vacations for a solo traveler.
Step One: Consult a professional (or the Internet!)
In order to save up for major purchases such as a car or house, 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. Potential homebuyers can start by researching costs for their desired home size and location, and then inquiring how much a mortgage broker would require as a down payment to secure such a property. 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, conventional wisdom holds that 20% is a sizeable enough down payment to secure attractive 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, such as FHA 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 worthwhile to wait and save a bigger down payment before making a major purchase.
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 figure out how you’re going to get from point A to point B. Make a budget. Look at your current 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.
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 $1500 in savings now and find an extra $300 per month 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.
- Do contract or night work.
- Carpool to work or downsize your current vehicle.
- Temporarily scale back on 401K contributions.
- Contact your local credit union to see if you can save money by refinancing your car or changing insurance carriers.
Step Four: Keep going
It’s easy to crunch the numbers and set a budget. It’s harder to stick it. There may be setbacks along your way to the end goal of your new car or home, but remember… the journey is as important as the destination.