Saving for Your Future Purchases
Five years ago, a college graduate earning squat was easily approved to buy a $160,000 townhome with a low five percent down payment. Unfortunately, those days are over. Loans will no longer be available to anyone with a heartbeat, and if you’re planning on making a big purchase, you’ll be expected to put down more of your hard-earned cash. The need for more cash savings won’t just apply to a home purchase, which means there are several other large purchases you should be preparing for today. This article will help you figure out what you need to save for and how much to save.
1. Determine what you’ll need or want to buy in the future
There are at least three purchases that most people should be saving for – a computer, a car and a home.
A computer can be an expensive necessity, especially if your computer crashes and you haven’t saved enough money to buy a new one. Don’t rely on Best Buy offering interest free financing, instead you should plan for the worst and hope for the best.
How many miles does your car have on it? If it has more than 100,000 miles, you could be coming up on some expensive repairs. Have you set aside money for those repairs or maybe even a down payment on a new car?
The largest purchase most people make is their home. If you think you don’t have to start saving now because you don’t plan to buy for another five years, think again! Homes are expensive, not only to buy, but also to maintain and furnish.
Finally, think about any other purchases you’ll have in the next five years that will cost more than $500 and make a note of your anticipated cost for each one.
2. Figure out the number of months before you plan on making each purchase
Calculate how much you need to save each month to be on track to make each of the large purchases mentioned above. If you’re using your computer daily, chances are it will last for four years before it’ll be painfully slow and obsolete. Therefore, a computer that costs $1,500 every four years (or 48 months) would require monthly savings of about $30.
A down payment on a car usually runs between five and 20 percent depending on if it’s new or used and what the dealer financing specials are. For example, if you want to buy a $25,000 Honda Accord, you should expect to have at least $5,000 in cash to put down. If you plan on making this purchase in two years, you need to be saving $210 a month.
Lastly, you’ve settled down with your significant other, and you both start to think about living the suburban lifestyle. You find out that the average home price in suburbia is $315,000. You feel you have five years before you’re ready to make the big purchase, which means you’ll have to set aside $525 per month to have a ten percent down payment. WARNING: Qualifying for a loan with a ten percent down payment is not easy, so plan to have 15 to 20 percent for your down payment. This would require you to double your monthly savings to $1,050. Estimate high so you don’t get disappointed.
3. Set up an automatic savings plan and forget you ever had the money
Nearly all banks have the ability to set up automatic transfers between multiple accounts. Open a money market account and set up an automatic monthly transfer equal to the total amount you need to save monthly. Based on the examples above, you’d want to transfer $1,290 from your checking account to your money market account each month. Create a spreadsheet and keep track of how much you’ve saved for each of your future purchases. Before you know it, there’ll be thousands of dollars ready for you when you need it.
Don’t be tempted to use this money for other things. If you really can’t keep your hands off it, add a trusted person to the account as a joint signer so you’ll have to get that person’s signature before you can withdraw money. Then you’ll have to hear the guilt trip every time you feel the need to cheat.
So, what’s the cost of not saving ahead of time?
Simply put, you won’t get what you want when you want it. Historically, credit made it easy to get the things you wanted with near instant gratification, and stores even offered you very low interest rates to entice impulse buying. Although credit cards will always be available, it’s preferable to pay cash for your purchases rather than paying lots of interest.
The toughest part of the save-first method is that it forces you to live frugally today so you can live the life you want to live tomorrow.
By: Michael Algrim
3-14-2010
Michael Algrim is the creator of TheMindsetGame.com, a website that encourages readers to take simple actions to maintain a successful mindset. By day, Michael works in the banking industry serving hundreds of small business owners throughout Northern Illinois by providing financial coaching.
