How to Save For Major Purchases
Posted: July 6, 2021 in Savings
When most people want to save for something outside of their weekly budget, they make a plan to save for the entire thing. This works when you're looking to spend a couple of hundred dollars on a game system or a vacation, but it's not how things work when you're making a major asset purchase. Even buying used, homes and cars are frequently too expensive for a reasonable cash purchase on any near-term savings plan. Other examples are recreational vehicles like dirt bikes, ATVs, and campers, frequently expensive enough to require financing.
So, how do you save and budget for something that you're going to need a loan to purchase? If you've never done it before, it's not that much different from saving up for a cash purchase. The biggest difference is that you'll need to make sure you have the monthly budget to absorb the payments for the duration of your loan. Here are five achievable steps to walk yourself through learning how to save for a car, a home, or any other financed asset.
How To Budget Your Purchase
The first step to planning any major purchase is finding the room in your budget for both your savings plan and your eventual loan payment. Usually, it's not a question of whether you can afford a new vehicle or home; it's a question of how much vehicle or home you can afford to own. The key to keeping your budget healthy is understanding what you can comfortably pay without short-changing other needs. The standard model recommended to beginners is to try to follow the 50/30/20 rule. What does that mean?
- 50% of your earnings should go to necessities
- 30% should be earmarked for lifestyle expenses
- 20% for your savings
This is obviously not achievable for everyone because, in some areas, the cost of living is hard to keep below or at 50% of the average person's earnings, but it is a pretty good indicator of whether you can absorb a cost into your budget. If you can't set up a budget that puts a full 20% into savings because of necessity costs, you still need to find some savings, and you may want to adjust your anticipated purchase budget.
Calculating Necessities
It's fairly easy to count the basic items in this category because you obviously need housing, utilities for that home, and transportation to get to work, as well as a basic food budget. Beyond that, some people will have necessities that others count as lifestyle expenses. For example, an entertainment industry worker must maintain a cellular phone and data plan for work. That phone is a necessity for them. Even if it's a lifestyle expense for most people, that person could not sustain a career without it. That includes home internet for those who work from the house, at least part-time. Some of these expenses will fluctuate, like groceries, so an average value is needed. Others, like rent, are steady.
Adding Up Lifestyle Expenses
Any discretionary purchases are probably lifestyle expenses. It's easier to cut these expenses when necessary, provided they aren't linked to a loan or contract. Television service and streaming media apps are common recurring bills in this category, as are loan payments on recreationally purchased assets like vacation homes or vehicles like jet skis and ATVs. Additional upgrades to necessities like going to a salon instead of a less expensive barber-shop, leisure time clothes, and cosmetics should also be considered lifestyle expenses most of the time. If you're taking out a loan on your major purchase, chances are it will be either a lifestyle purchase or a necessity.
How Much To Save for a Down Payment
Once you figure out how much of your income you can spare for savings, the last step to saving for your down payment is deciding how long you have to save. Figuring out the largest loan amount you can comfortably add to either the lifestyle expense or necessity expense category helps you understand whether the new purchase eliminates other line items and, if so, what your maximum comfortable payment size will be. That helps you ballpark the down payment needed. For vehicles, 20-30% is a good idea. For homes, 15-20% is recommended, but there are paths to ownership with smaller down payment options.
Once you know what you can save and how much you can afford, you can work out how many months it should take to get there. If you don't like the number you get, consider revising your lifestyle expenses to free up more money or shopping below your maximum budget. After all, that allows you to save for the next big purchase more easily because less of your income will be committed to the loan expense. Finally, once you know what you're saving for and how much you can save each month, automate the process with regular deposits from your checking into your savings after every paycheck. You can even automatically distribute your direct deposit to different shares or even different accounts if your employer or financial institution supports direct deposit. ProFed accounts support ACH distributions, and it's as simple as filling out a form.
Saving for a major purchase doesn't happen overnight. Whether you're saving for a camper or an SUV for the family, it all comes down to making the necessary adjustments to your budget. Differentiate those lifestyle expenses from those necessities and find the room in your budget where you can start saving for a down payment and monthly loan payment. Save what you can, when you can. Remember, maintaining a healthy budget is understanding what you can comfortably afford. If you have additional questions about saving for a major purchase, feel free to contact our team.
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