How to Save For Major Purchases
When most people want to save money for a large purchase, they typically make a savings goal for the entire amount. This strategy works when you're looking to spend a couple hundred dollars on a game system or a vacation, but a significant purchase can be more complex. Even buying used, homes and cars are frequently too expensive for a reasonable cash purchase on any short-term savings plan. Other big-ticket items include recreational vehicles like dirt bikes, ATVs, and campers, often expensive enough to require financing.
So, how do you create financial goals for purchases for which you will need a loan? If you've never done it, 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.
The first step to planning any major purchase is finding room in your budget for 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 your monthly expenses and 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% to your savings account
This is 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 good indicator of whether you can absorb a cost into your cash flow. If you can't set up a budget that puts a full 20% into savings accounts because of necessity costs, you still need to find additional savings, and you may want to adjust your anticipated purchase budget.
It's easy to count the basic monthly expenses in this category because you need housing, utilities, transportation to get to work, and 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 home, at least part-time. Some of these expenses will fluctuate, like groceries, so an average value is needed. Others, like rent, are steady.
Any discretionary purchases are probably lifestyle expenses. Cutting these expenses when necessary is more manageable, 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.
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 the lifestyle 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. It enables you to 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 determine 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, set up automatic transfers from your checking account to your savings account after every paycheck. You can even automatically distribute your direct deposit to separate accounts or a Christmas or Name-Your-Own club account 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 personal finances. Differentiate lifestyle expenses from necessities and find 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, please contact our team.