Planning for a major life event or large purchase can be overwhelming, and it can be difficult to know where to start. Fortunately, with the right financial planning strategies, you may be able to save faster than you thought. The following tips can help.
#1 – Articulate your specific goals.
The first step in planning for a major purchase is taking time to articulate exactly what it is you hope to accomplish. For example, perhaps you wish to purchase a second home in a tropical location. How many bedrooms will you need? What type of community do you hope to live in? Are you wanting a single-family home, a condo or a townhome? Taking time to consider and articulate your specific goals can help you remain focused on your savings strategies over the long term.
#2 – Understand the full cost.
It is also important to research and understand the full cost of your future purchase. For example, if you are hoping to save for the cost of your child’s college education, it is important to note that, on average, the cost of tuition increases at a rate of approximately 8% per year.1 To adequately save for college tuition, you will need to plan for the future cost of college, not today’s cost.
Similarly, if you are planning to purchase a new house, you will need to cover the cost of property taxes, insurance and repairs on top of the mortgage. It is important to understand what these expenses may add to the full cost of the home and make sure you save accordingly.
#3 – Establish a dedicated account.
Consider setting up an investment or savings account specifically dedicated to your large purchase. The type of account will likely depend on your savings goal and time horizon. For example, if you are in your 30s and hoping to purchase a second home in your 60s, it may make sense to establish a long-term investment account that contains a diversified mix of growth-focused assets. In contrast, if you plan to make a major purchase in the next year or two, it may make sense to save in a dedicated, liquid savings account at your bank. Another important consideration is if there are any tax benefits available. For example, if you are hoping to save for a child’s college education, it may make sense to open a 529 college savings account.
#4 – Update your budget.
One of the best ways to achieve success with your savings goal is to incorporate it into your overall budget. You may need to reprioritize some of your monthly expenses to make room for additional savings.
Start by reviewing all your expenses over the last several months to gain an understanding of what you currently spend on both discretionary and non-discretionary expenses. Do not forget to include one-time annual expenses, such as car registration or insurance payments. Compare your expenditures to how much income you bring in each month. Are you spending less than you earn? Is there room in your budget that allows you to set aside additional savings for your large purchase? If not, you may need to cut back on some of your discretionary spending. For example, you may decide to cancel some monthly subscriptions, reduce the number of times you eat out each week or vacation closer to home.
#5 – Automate.
One of the best ways to prepare for a major life event or large purchase is by automating your savings. Doing so allows you to focus on other things while remaining on track toward your goals. Consider establishing direct transfers from your paycheck to your savings, investment or 529 college savings account, and watch your savings grow over time.
Could you use help planning for a major life event or large purchase? We would love to have a conversation. To learn more, please contact us.
