Saving for Major Purchases

You might be thinking, “Save for things I’ll need in the future? Isn’t that what my emergency fund is for?” Actually, no, it isn’t. Saving for expected, major purchases is sometimes called a “sinking fund,” a term borrowed from the business world.

It’s a pool of money you regularly contribute to so you’ll eventually have the cash you need for an upcoming big-ticket expense, like a vacation, a new car or home repairs.

You’re actually “paying yourself” to delay that purchase because your savings will accrue interest. Compare that to putting the purchase on a credit card with a sky high interest rate, where you’re paying to use someone else’s money for a time. By grasping this concept of delayed gratification, you’ll save yourself a lot of money over your lifetime.

You also won’t be tempted to tap into a retirement account for a major purchase. That is extremely expensive money. You’ll have to pay taxes on anything you withdraw and possibly a penalty. That money is intended for another major purchase, your retirement!

So what’s the best way to save for your big ticket item? First, you need a goal. For example, if you know the house will need a new roof in the not-too-distant future, and it will cost $7,500 or more (which is typical these days), that becomes your goal.

It’s okay to start small. If you can’t put away $500 a month, start with $100. But begin looking for ways you can increase that amount by cutting your expenses. Be flexible. It’s okay to adjust your savings as needed, just keep in mind that you want to reach your goal as soon as possible.

You might think it’s silly, but you can also start a change jar if you still use cash on a fairly regular basis. Empty your pockets or wallet into a one gallon jar or jug and forget about it. When it’s full of mixed change, you’ll have roughly another $400 toward your goal.

For the rest of the cash you’re saving, you’ll want to open a special savings account at an online bank to get the best interest rate. If this special purchase is several years away, you can put some of the money in CDs to earn more interest. You should ladder CDs, so that one is coming due every 6 months or so. As you near the target date for your big purchase, cash out the CDs and put the money back into savings.