But any major expense requires significant planning. Taking a methodical approach to saving for these types of events can help you reach your goals faster and with less stress.
1. Estimate how much you’ll need and how long you’ll need to save
Once you have a rough idea of these two numbers, break your savings goal down into smaller, more manageable pieces. For example, if you need to save $25,000 over two years, you will need to save just over $1,000 per month.
Then you can make changes to your budget to set aside the necessary money. If your goal seems impossible, you may need to lower your savings goal or extend the time horizon.
“It’s important to be realistic,” said Jeanette Pavini, personal finance expert and author of The Joy of Saving. “If you’re living paycheck to paycheck and your goal is to buy an $80,000 Mercedes, that may not be possible.”
2. Create a separate account
By keeping the money for that purchase outside of your day-to-day checking account or emergency savings account, you can reduce the temptation to dip into those funds for something else.
Sometimes called a “sinking fund,” this purpose-designated account should be kept in a high-yield savings account or certificate of deposit, depending on your time frame.
“You definitely don’t want to invest that money,” said Kerry Keihn, chief operating officer and financial adviser at Earth Equity Advisors, a sustainable investment firm. “Keep it in a low risk option.”
3. Automate your savings
Once you’ve established your sinking fund, set up automatic deposits. Ideally, you would link withdrawals to your paycheck deposits in your checking account. This way, you don’t have to remember to regularly transfer money to the account.
You may need to make changes to the amount you save depending on what’s going on in your life. If you lose your job, for example, you may need to take a break, while you could increase your savings after receiving a windfall or a raise.
“Be flexible,” said Vincent Birardi, Certified Financial Planner and Wealth Advisor at Halbert Hargrove. “Life is going to throw curve balls, so give yourself an option in your planning and consider multiple scenarios.”
4. Don’t ignore your other financial goals
While you may be eager to reach your goal, it’s important to build a solid financial foundation before saving up for big purchases that are discretionary items.
“Start with your emergency fund,” said David Chang, a personal finance expert at The Ascent. “And make sure you’re participating in your retirement fund, because you want the tax benefits and the long-term compound growth. After that, pay down the debt, and then whatever money is left over can go into your sinking fund. “
5. Avoid the temptation to dip into expensive sources
In most cases, it doesn’t make financial sense to withdraw money from your 401(k) or use a high-interest credit card or personal loan to finance a purchase. important. This is because there are costs associated with accessing money this way. For example, if you make an early withdrawal from your 401(k), you could face penalties and taxes on the money, and potentially find yourself less prepared for retirement.
“You don’t want to dip into your 401(k) or IRA to fund a big purchase, if you’re still of working and saving age,” said Robert Gilliland, managing director and senior wealth advisor at Concenture Wealth. Management. .
With credit cards, the cost comes in the form of high interest rates, which can significantly increase your costs over time, especially as interest rates continue to rise.