Going into debt for an expense other than investment usually isn’t a wise decision, which is why you should consider saving cash for large purchases. It’s not as hard as you think when you break it down correctly. Keep these five steps in mind to help you decide how to pay for large purchases without putting yourself into debt to get them.
Take Care of Your Emergency Fund First
No matter what large purchase you want to make, make sure you have enough in your emergency fund to cover anything that could go wrong. Never tell yourself that you’ll take funds out of your emergency savings to cover the cost of a large purchase because you never know when disaster could strike. How big should your emergency fund be? You should have enough to cover at least six months of expenses for you and your family.
Break Down Your Goal by Month
It can be head-rattling to see a price tag in the thousands of dollars and trying to correlate how much that would cost you per month. If your big purchase is for something like a new car or repairs for your house, break down how much the purchase will cost you over the period you want to save. Understanding that you need to save $200 per week to reach your goal seems a lot more manageable than saying you need to save $800 per month, even though the two sums are the same in the long run.
Save in Lump Sums
This method of saving is typically easier for salaried workers who know what their income will be on a monthly basis, but it’s not out of reach for hourly workers who stick to their budget. Saving money in a lump sum can be one of the best ways to save for a new car down payment, or even smaller such as your auto insurance bill, or even possible for Christmas shopping. If you have a large payment coming due, the earlier you can start saving to break it up each month, the easier it will be to save.
Create Individual Savings Accounts for Your Goals
Most banks don’t mind if you open multiple savings account with specific goals in mind. In fact, some online banks like Ally encourage it. This separation can help you keep your money separate and identified for your long-term goal purchases, which helps you keep your fingers out of the pie when you’re tempted to spend the money.
Automate Your Savings Goals
Once you have your goals set out before you, set up an automatic withdrawal into your savings account to make sure the funds are taken out each month. This technique puts your savings goal on auto-pilot, and as long as you are saving as part of a healthy budget, you should be able to hit your goal target in no time. Most banks allow you to set up automatic transfers between one account to another or even to an outside source. Look for savings accounts with competitive rates to maximize your interest gains over your savings period.