Everyday budgeting is tricky enough, but what happens when you’re saving up for a really big payment? Whether it’s a summer vacation, a year of college or a down payment on a house, preparing for a large cost takes a special kind of budgeting. Read on for a few tips to help you save for big payments.
Take Advantage of Tax Breaks
Often times, you can find a tax-advantaged account to help you save for big expenses. A 529 plan, for example, is available to families saving for education-related expenses, including K-12 as well as college tuition. With a 529 plan, you can usually contribute pre-tax dollars and withdraw money tax-free, depending on your state of residence. Other tax-advantaged savings accounts include a Health Savings Account for qualified medical expenses and, of course, an IRA or Roth IRA if you’re saving for retirement.
Opt for a Single-Purpose Account
Check in with your credit union or bank about the possibility of opening a single-purpose savings account. A single-purpose savings account is designed to help you save for specific expenses, such as holiday shopping, a wedding, or a vacation. With a single-purpose account, you can make regular contributions throughout the year via automatic payroll deduction. It’s a great way to save up for a big payment, or anytime you’re saving toward a specific goal.
Earn More Interest on Your Savings
If the big payment you’re saving for is a year or two away, there’s no reason to keep your money locked up in a traditional savings account. Instead, consider putting it into a savings vehicle where you can earn interest on your money. A Certificate of Deposit, for example, offers a rate of return which is usually higher than what you’d receive with a savings account, and the interest rate is fixed. A high-interest savings account or a money market account are also good choices for earning more while saving.
Consider Making a Purchase on Credit
In some instances, it could be wiser to make a big payment with a credit card, as opposed to saving. The benefit of paying for a large expense on credit is that you can often earn good rewards and perks, including cash back, air miles, shopping privileges and so on. At the same time, it’s important to make a pay-back plan, because interest adds up quickly on large credit card purchases. Finding a credit card with 0% APR on purchases for an introductory time period could be a good solution to help limit interest while you’re paying the bills on a large purchase.
Get Specific About Your Goals
Don’t simply plan to ‘save’ for a big purchase. Instead, do specific budget calculations and time planning. Determine exactly how much money you need for your upcoming purchase, and decide how much you can afford to save every month. Having concrete goals, as well as a time-specific plan of action will make it much easier to stick to your goals and to measure your progress along the way.
Make This a “No-Spend” Month
Want to save a lot of money, fast? Designate a “no-spend” month for yourself, in which you eliminate all non-essential purchases. This means paying for bills, groceries, and little else. You’ll need to give up subscription entertainment services, impromptu shopping trips, meals outside the home, and perhaps most importantly—no impulse buys. A “no-spend” month is tough, but it might be worth it to take you a few steps closer to your ultimate savings goal.