How do you plan for a major purchase?

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KJ: Planning for a major purchase can be difficult, so here are some tips to think through how you can plan for the expense, budget for the expense, and account for the expense when it ultimately happens. Any major purchase like buying a home, buying a car, saving for your children’s education, or anticipating a home renovation can sometimes seem like a task you can’t possibly do. How are you supposed to come up with the money, and how do you account for it in the month you incur the expense(s)? Particularly when you have home repairs you are making, it can seem like a constant outflow of cash, so tracking it and making sure it is in line with your plan is critical. Otherwise, an extra dollar here and a dollar there really starts to add up. The answer is you aren’t doomed. YOU can do it. You just have to break it up into manageable chunks and track it.

Instead of renovating your home and putting it all on credit, plan for it six months out. You can’t set aside enough in six months? Then push to eight months out. You’ll be amazed at how just a little bit of extra time can make it all the more feasible. If you needed $5,000 for the cost, and can’t do that in six months – $833/mo – then maybe at eight months – $625/mo – it may be a little more affordable for you. And, research and studies have shown that with large expenses whether it’s a home improvement project or a nice vacation, the anticipation can be just as exciting as the actual project or vacation itself. Remember the last time you took a vacation. How much fun was it to just think about the vacation, what you wanted to do, where you wanted to go, picturing yourself on the beach sipping Mai Tais?… Plus, giving yourself a couple extra months might allow you to bargain-shop-like-a-maniac and maybe that can bump your total cost down to $4,000. You’ll be surprised what you can do with your budget and expenses if you relax your timeline a little bit. When you have time to really think through it, you’re no longer subject to the whims of pricing one week or month and can be strategic about the most opportune time to make the purchase. Who knows, maybe seven months into your goal, you realize you can get a very big discount?

How can you plan for a large expense?
It can be helpful to setup a separate savings account for different purposes. Maybe you have one for your emergency fund, one for home renovations, one for a future car purchase, and one for vacation travel. At some point though, too many accounts can be cumbersome to track (plus you want to be sure to not be paying any monthly service fees for your accounts!), but as long as you keep up with the accounts and can tag them certain names, then this can be a great way to keep track and mentally compartmentalize your goals.

Usually, for large expenses that are anticipated, we treat our month-by-month as just transfers/savings to the account. Then, when it comes to actually paying for the expense, we try and absorb as much of the expense in the month incurred as possible without having to dip into savings. Obviously this doesn’t work for those large renovation or trip expenses, but a $100 here and a $100 there really does add up. Then, if our normal budget shows that we should have spent $X and we ended up spending $X+1,000, then we would process our normal savings as we would each month excluding this $1,000 overage, but then transfer $1,000 back into our checking account from our targeted account that was used for this purpose. That way, you aren’t sacrificing your longer-term savings when you have a dedicated short-term savings bucket to help. So let’s look at this a little closer:

Let’s just say our normal budget was $5,000/mo, and we were planning on saving $1,000 this month. Well, let’s then say we spent $750 on a short vacation, and maybe we were able to have $250 of the expenses covered by our normal budget categories for food and “everything else”. At the end of the month, if we spent in normal expenses $5,000 (again, $250 was used for our vacation), then the extra $500 for the vacation was out of the norm. We could then go a few routes. We could put $1,000 like normal to our long-term savings with then pulling $500 from our vacation fund. Or, we could put $500 toward long-term savings and choose to not pull any from our vacation fund. Sometimes, not pulling funds from a vacation or other fund is a conscious choice to keep funds for that specific purpose.

Planning for expenses with your home
It’s not uncommon for normal maintenance in a home to be about 1% of the value of your home. Obviously this figure could be either significantly inflated if you have a brand-spanking-new home with most everything under some kind of warranty, or it could be significantly understated if you live in a 1950’s home with potentially more significant items that come up (foundation, pipes, roof, etc.).

For us, our first home fell into the former category and was a new town-home with no required maintenance or move-in expenses. It definitely worked for us at the time, and it’s a bit of a contrast to our current residence. We chose to move to a little older home with more space and a great deal of renovations we wanted.

So, how have we accounted for our renovation expenses? In some cases, we were able to absorb some of the costs over a month or two. In other cases (like some of our kitchen projects), it had to be withdrawn from our short-term savings. We were sure not to dip into the “emergency fund” portion of our savings, though! We don’t want to let anything sit on a credit card, line of credit, or other debt obligation, so all of our projects have probably taken a little longer than some would be comfortable, but hey, we have no debt (other than our home), and we’re ready to work on our next projects! Most of the larger ones involved saving to our longer-term savings still while reducing or withdrawing funds from our short-term savings account. Then, we had to build back up the short-term savings a little bit, so we would regularly shift how much would go to the long-term bucket versus what would go to the short-term bucket. I.e. maybe we were saving $1,000/mo, and our normal split was $800/long-term and $200/short-term, maybe we had to shift to $500/long-term and $500/short-term to build back up the short-term bucket until we got it to a level we were comfortable with.

Sometimes it seems a little like “out of one pocket and into the other,” but keeping it separate like this helps make sure you are maximizing your long-term goals still and not just focusing everything on the short-term.

Saving for education
You haven’t yet SPENT the money, so money put into an account for children’s education I would usually just consider a transfer OF savings and NOT a current expense. Think of it as part of your overall bucket of what you are saving. Then, when you go to withdraw the money, you would tag it as an expense at that point with potentially a corresponding withdrawal from your dedicated account to offset your cash flow.

    Do you have any tips on planning for large expenses?
    How do you keep track of your various “buckets”?
    Do you use separate accounts or are many goals combined into one savings bucket?

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2 thoughts on “How do you plan for a major purchase?

  1. This week Mrs. MBG and I discussed saving up for our long awaited honeymoon to Australia. We want to save the smart way.

    Like you discussed at the top, planning makes a big expense possible. To reach our $10K goal we are saving $600 each month for seventeen months.

    • That’s awesome! Thank you so much for sharing. It can sometimes seem like an insurmountable task, but when you break it down like that, it really is doable!

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