Just about every day we swipe debit cards, use credit cards and count out cash for small purchases. Most of the time we don’t even think twice about it.
But there are times in life when a major expense is on the horizon. It could be a down payment on a home, a two-week vacation or even saving for retirement. Unlike the small, everyday items, those purchases require a lot more forethought.
Unfortunately, saving is harder to do today than in years past. Wages have been stagnant for decades, growing at a rate of just 0.2% a year. All the while cost of living and inflation has been increasing at a faster pace.
Saving may be a challenge and can take time, but reaching financial milestones is worth it.
Step 1. Set a Goal
The first step to budgeting for a large expense is to set a goal. In other words, figure out how much money you need and how quickly you can reach that amount. This is the most important step in the process because everything else is based on the monetary goal.
Needless to say, you need to make an accurate estimate of the cost or your goal could fall short. Make sure to accurately estimate the cost by:
Getting an Expert Opinion – When you’re planning for a big purchase it helps to get an expert opinion in terms of the cost. For instance, if you plan to do a bathroom remodel it’s a good idea to get estimates from several contractors. That will give you a good idea of how much you have to save.
Doing Your Research – Even if you’re able to get the help of an expert, you’ll still need to research on your own. Use the expert estimate as a jumping off point for customization and figuring out variables that could affect the cost.
Adding a Contingency – For a large purchase, it’s always a good idea to add a contingency to the budget. A contingency is extra funds that cover excess cost and unforeseen expenses. Shoot for a contingency of at least 5-10% of the estimated total.
Step 2. Analyze Your Current Budget
Now that you have a goal it’s time to assess your current budget. Make sure all of the expenses and income items are up-to-date. And if you don’t have a monthly budget or expense tracking system, now is the time to put one in place.
An app that helps you set financial goals and tracks progress is a great budgeting tool. YNAB, Level Money, and Unsplurge are all good options.
Step 3. Trim the Financial Fat
Typically, it’s easier to cut out discretionary spending and reduce expenses than it is to increase wages. Go back through at least three months of bank transactions and note every unnecessary expense. Look for spending trends that indicate a habit that can be changed so you’re able to save more money.
For example, if you spend $10 a week on bottled water it’s a chance to save. Spending $10 on a reusable, filtered water bottle and $20 a faucet filter that lasts three months will ultimately save $90.
Utilities are another easy way to trim the financial fat so you have more money to save. Electricity and water are necessities but there are numerous habits that can be changed to reduce the amount of power and water that are used.
Step 4. Set Up Automatic Savings
You can leverage technology yet again to make saving a little easier. By setting up automatic withdrawals into a savings account you’ll never be tempted to spend your extra cash.
There are a few ways you can set up automatic savings:
Request an Automatic Withdrawal From Your Paycheck – If your employer does direct deposit ask them to send a portion of your paycheck to your savings account.
Sign Up for a Change Saving Program Through Your Debit Card – If you use your debit card regularly ask your bank if they offer a change saving program. Once enrolled, the bank will round all of your purchases up to the nearest dollar and send the extra change to a savings account.
Use the Acorns App – Another way to automatically roll your change into a savings account is by using the Acorns app. It rounds all of your purchase up to the closest dollar and puts the excess change in your savings.
Step 5. Check Your Budget Regularly
Budgeting is an ongoing process, especially when you’re saving for major life expenses. One of the biggest mistakes is going through the work to put together a savings plan and then letting it slide. Check your budget and financial apps at least once every two weeks to look for more ways to save and make sure you’re on track to hit your goal.