If you look forward to achieving a big money goal this year, you need to develop a feasible plan to ensure that your goal is attainable. In other words, you must know how to save for a big purchase. It’s interesting to see how folks wake up one morning and splurge tens of thousands of dollars on a new car or spend figures on a new house.
The truth is that many people, especially those who are financially intelligent, always save for big purchases long before the items are actually bought. They don’t just randomly spend a huge chunk of cash without setting up a proper plan. Otherwise, they would end up running into debt and become financially unstable.
Whether you want to buy a car, renovate your house, or earn another college degree, you must remember how important it is to plan for these huge expenses. Thankfully, this post will explain the ideal process one must adhere to when planning a big purchase.
Why Should You Save For Big Purchases?
One good reason why you must know how to save for a big purchase is to prevent yourself from overspending. For example, if you suddenly withdraw $7,000 out of a $10,000 balance in your checking account to purchase something, you have certainly spent too much, and that would affect your finances.
However, if you save for it, you would be able to make the purchase conveniently without tampering with your emergency fund or retirement account.
Should You Save Money For Every Big Purchase?
You should always save for every big purchase because it helps you to live below your means. People who know how to save for a big purchase are able to manage their finances effectively and live within their financial capacity.
What Happens If You Don’t Save For Big Purchases?
If you don’t save before making a big purchase, chances are that you are living beyond your means, which would certainly result in financial issues such as debt, inability to pay a mortgage (if you have any), or failure to plan for retirement successfully.
How To Plan For A Big Purchase
Anyone can know how to save for a big purchase as long as they are willing to observe the ground rules. Before you think about spending a huge amount of money on something, you must first ask if you are financially capable of making the purchase.
For example, you can’t make an outright payment of $450,000 when your monthly income is below $5,000. Your goal is almost impossible. If you have to save $500 every month from your $5,000 salary, it would take you 900 months (75 years) before you can complete the payment. This is why you need to assess the feasibility of your financial goal. You must be sure if it’s within your reach.
Another important thing you must also consider when saving money for big purchases is the priority. You must prioritize your goals in order of how essential they are to you. For example, you shouldn’t be saving money for a new car when you haven’t paid your rent. That would turn out to be a big money mistake.
10 Ways To Save For A Big Purchase
If you understood the piece of information above, you should have a basic idea of how to save for big purchases. Nevertheless, it’s important to know the specific steps and actions you must take to actualize your goal. Here are 10 helpful tips to save for big purchases:
1. Define Your Purchase
This is exactly what you need to begin with. It’s important to determine what you want to save for. You need to also remind yourself that you can’t save for everything. You can’t achieve all your money goals at once. If you are saving $10,000 as a downpayment for a house, you shouldn’t consider saving money for a car or a trip to the Bahamas.
More importantly, the amount of money you can save, as well as how long it takes you to save that amount, depends on your financial resources. If you are earning a significant amount of money every month, you should be able to reach some money goals without wracking your brain and getting worried about money.
But the moment you can determine what you are saving for, that’s a good place to start. You can literally write your goal on a board or piece of paper and paste it on your fridge, wardrobe, or mirror. This is an effective method to constantly remind yourself of the goal ahead.
2. Use The Pay-Yourself-First Strategy
To make your big purchase eventually, you need to save money consistently. You have to first prioritize savings as soon as you receive your paycheck each month. This means you have to remove a certain amount of money from your salary before spending the rest of it. That’s how the pay-yourself-first strategy works. It doesn’t have to be a huge amount of money. It could be 10% or 15% of your monthly take-home pay.
By doing this, you can achieve your savings goal faster. The moment you remove your savings first, you can budget the rest of your salary as you wish. If you want to employ the pay-yourself-first strategy effectively, it’s advisable to set up automated transfers. You should have a specific amount of cash moved from your checking account and deposited in a separate savings account.
3. Set SMART Goals
If you want to learn how to save for large purchases, you must be willing to set SMART goals. In this context, “smart” is an acronym for Specific, Measurable, Attainable, Relevant, and Timely. These keywords must be fully understood and observed when pursuing a financial goal.
Firstly, once you identify a specific goal, you should break down the goal into measurable bits. For example, if you want to buy a $20,000 car within two years, you need to save around $833 a month. The next step is to see how attainable your goal is.
If your salary isn’t good enough to provide $833 every month as savings to purchase the car, then your goal would be almost impossible or too difficult to achieve.
Moreover, you need to ensure that your goal is relevant. If buying a car isn’t a necessity to you, then the goal isn’t relevant. Your money goals should be playing significant roles in your life; otherwise, they aren’t worth chasing.
Lastly, you should observe timeliness when pursuing a goal. Set a deadline for when you intend to accomplish your goal. That’s how you learn how to save for a big purchase.
4. Budget Your Money Using The 50/20/30 Rule
You may need to employ the 50/30/20 budgeting method when learning how to save money for big purchases. This is different from the traditional budget strategy where you set the specific amount of money you want to spend on each of your expenses such as utilities, gas, water, transportation, feeding, savings, etc.
But when it comes to the 50/30/20 rule, your income is budgeted for 3 major categories. 50% of your salary is allocated to your “needs” which include things like food, rent, healthcare, and utilities. Then 30% goes to your “wants”. This category includes entertainment, eating out, shopping, partying, and whatnot. The rest of the income which is 20% can be channeled toward your “saving goals”.
So if you are earning $5,000 a month, $1,000 should be sent to your savings account. You can split the $1,000 in half, keeping $500 for general savings goals such as retirement and emergency fund. The other $500 should go for your big purchase.
By the way, if you want to learn more about budgeting on a general level, here are 5 easy steps to budget your money.
5. Open A High-Interest Savings Account
This is undoubtedly one of the ways to save money for big purchases. You shouldn’t just save your money in an ordinary savings account. You should maximize your savings by opening a high-yield savings account that helps your money to grow even while you’re sleeping.
Find a high-interest savings account that minimizes risks and offers juicy rewards for saving your money. This is advisable when pursuing long-term financial goals, and a big purchase is definitely something that should take a while before it can be accomplished.
6. Use Investing Apps
You probably haven’t thought about using micro-savings and investing apps to facilitate your financial goals. They are one of the ways to save for a big purchase. This is because these apps allow you to make small investments by saving small amounts of money for a long period of time. Surprisingly, these micro-investment apps can increase your savings more than some high-yield savings accounts.
More importantly, using these apps gives you the opportunity to easily save money every day or weekly. You can simply use your mobile phone to transfer these small amounts of money and watch your savings grow over a period of time, and you can even save as low as $1 per day.
7. Reduce Your Overall Spending
One of the best financial decisions you can ever make when learning how to save for a big purchase is to cut down on your expenses. You should know that the more money you spend, the more difficult it is to save for your financial goals.
As soon as you can curb your expenses, you will free up cash to increase the contributions to your savings account, thereby helping you to achieve your goals faster.
Usually, reducing your overall spending would mean that you have to adopt some frugal habits. You have to find every possible way to reduce costs and live way below your means. If you want to learn more about frugality, here is a list of 25 frugal living tips to help you save a ton of money.
8. Increase Your Cash Flow
Learning how to save money for a big purchase would be pretty difficult if your cash flow is too low. Your monthly salary might not be a very big amount of money, but it should be able to cover your basic expenses and also help you save toward your financial goal.
In a situation where you can’t save because your salary is too small, then you must do something to rectify that issue immediately.
You should look for a better job or simply work multiple jobs. Of course, it won’t be easy, but remember you need to accomplish your goal. The good thing about increasing your income is that there are several feasible ways to make extra money.
From freelancing to online tutoring, and even affiliate marketing, there are diverse ways to make an extra amount of money without quitting your main job.
9. Avoid Debt
It would be a wasted effort learning how to save for a big purchase when you have a debt to pay off. Debt always has a way of restricting your finances terribly.
When you are in debt, you will certainly find it challenging to save money monthly to achieve any financial goal. This is because you have to constantly make monthly contributions toward the payment of your debt. Until your debt is fully paid, you won’t be able to gain total control of your finances, let alone save for big purchases. Hence, it’s important to avoid debt as much as you can.
Besides, if you are currently in debt, and you are looking for actionable strategies to help you pay up on time, here are 10 helpful ways to pay debt faster.
10. Set Your Priorities Right
It’s important you identify essential goals rather than chase after goals that add little or no value to your life. It’s okay to save for vacations or trips to Disney World. However, ensure that your essential goal is being sought after first. Prioritize the right things, and you won’t have to make financial mistakes unnecessarily.
On the other hand, setting your priorities right also means you have to chase after a specific money goal without being distracted by irrelevant objectives. If you are saving to make payments for a mortgage, you aren’t supposed to be making impulse purchases. That would only slow your progress or even prevent you from accomplishing your goal.
How To Save For A Big Purchase: Recap
There’s no special magic trick for how to save for a big purchase. The key to this is understanding your financial situation and setting financial goals that are within your means.
Also, you must be willing to follow due process. That is, taking your time to hit and complete each milestone that would eventually lead to the ultimate goal. You can’t make a big purchase overnight. You need to approach the financial goal with a step-by-step mindset.
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