Saving for a major purchase isn't always easy, especially if your income hasn't kept up with the pace of inflation. If you plan to make a large purchase, such as a new car, a down payment on a house, remodeling your home or apartment, a major appliance, a big wedding, an expensive vacation, or anything else, you'll need to do financial planning and possibly make some changes to help you meet your goals. The following five tips can help you get started on saving for the purchase you intend to make.
1. Figure Out the Exact Cost
Start by determining the exact cost of what you intend to purchase. Figure on paying a bit more if it's going to take you a significant amount of time to save the money, as the price may go up in the meantime. You'll also need to account for taxes and other fees. Research what this will be. Speak with a sales representative to get the exact figure, and ask if they believe the cost will remain the same over time. Get estimates from other providers.
2. Reduce Your Expenses
Reduce any expenses you can so that you can save for your big purchase. Are there debts that you can quickly pay off in order to eliminate those monthly payments and interest from the equation? Are there services or memberships that you can cancel? Are you overspending on groceries and dining or on entertainment? Review your bank statement, and analyze how you've been spending your money. There are probably changes you can make to free up funds toward the purchase.
3. Generate a New Income Stream
Consider finding a new stream of income. That might come in the form of a second job, a side hustle, or a passive income source, such as investments or monetizing content.
"Passive income is the opposite of active income," says Coursera.* "With active income, you are paid for the work you continuously do. Most careers or side hustles qualify as active income. With passive income, you do the work first, then collect payment over time—no further effort required. Earning passive income can be an enticing idea, but it’s important to note that it can take some time to grow your investments. If you are looking for quick cash, you may want to consider starting a side hustle or pursuing a high-paying career path."
4. Start a New Savings Account
Start a new personal savings account specifically for saving for the major purchase. It's okay if you already have a main savings account. This one will be a separate, goal-oriented account that will help you focus on saving the amount you need. An account like this is sometimes referred to as a sinking fund. Sinking funds are typically used to pay off debt, but they can work for this reason, as well.
5. Automate Your Savings
If you're unsure how much to save and when, try automating your savings. A sinking fund is great for this.
"Once you’ve established your sinking fund, set up automatic deposits," suggests Beth Braverman at CNN.** "Ideally, you’d tie the withdrawals to your paycheck deposits in your checking account. That way you don’t have to remember to regularly move cash into the account. You may have to make changes to the amount you save based on what else is going on in your life. If you lose your job, for example, you might need to hit pause, while you might boost your savings after receiving a windfall or a raise."
Thinking about how you're going to afford your big purchase can be overwhelming, but with a plan, it can feel more attainable. Start by determining the exact cost, then reduce some of your expenses, figure out a new income stream, if necessary, start a new savings account, and automate your savings, and you might reach your goal more quickly than you think.
* https://www.coursera.org/articles/passive-income
** https://www.cnn.com/2022/05/10/success/save-for-a-big-purchase/index.html