How to Save For Large Purchases
One evening, in the fall of 2016, my husband (at the time boyfriend) came home to our quaint apartment, bursting with excitement. He was holding a fistful of brochures for houses in a suburb outside of our big city, and yammering something like “Let’s buy a house!”
What the what?!?
Apparently he was visiting his parents in said suburb and drove by a neighborhood being built. Spontaneously, he decided to swing by and talk to someone at the model house. Now, I’m usually the person who is making impulsive decisions, so I was stunned. Buy a house? Us?
How To Make it Happen?
Eventually, I came around. Some of my hesitance had to do with my financial self-esteem, and some of it was just uncertainty about pledging to something so major. However, my husband talked me through the financial sense of buying versus renting in our area, and I eventually saw reason. We didn’t end up buying the initial house he showed me, but the wheels started to turn!
At the time we weren’t avid savers, so we weren’t sure how to execute. Not knowing the first thing about home ownership or home buying, we looked into the different types of loans for first time buyers. We settled on putting down roughly 15-20% which would be a hefty chunk of change. How on earth were we going to save that much?
Start With The End in Mind
To begin with, we discussed how much we were willing to spend on a house. It was important to us to purchase a home that we could afford on a single income. Life is magnificent, and also unpredictable (which makes it fascinating)! We wanted to choose something that would not end in catastrophe if one of us became unemployed.
We also didn’t want to be house-poor. Being “house-poor” is when a person spends a significant percentage of their income on housing expenses (mortgage, property taxes, utilities, etc). I’ve seen varying amounts for the recommended percentage of income that should go toward housing, but generally it’s between 25-30%.
Of course, if you live in a high cost of living (HCOL) area, this can inflate how much you spend on housing. We DO live in a HCOL area, with no plans to move, so we landed on 35% of one person’s take home pay. We chose to not use our gross pay when calculating this number. Mostly because we don’t get to use the money that is taken off the top (for taxes, retirement, etc.) on housing. However, if you find yourself in this same position, you do you! Just like with anything I write, there is no one-size-fits-all.
Basically, we wanted a mortgage payment that would allow us to breathe in our jobs and in our budget.
We used a mortgage calculator to play with numbers and came to an agreement on how much we were willing to spend per month on the mortgage. That number was used to help us determine the total price of the house we were willing to buy.
The bank may have approved us for way more (almost double the number we came up with), but the bank doesn’t have to budget month-by-month for us, or feel the sting when things get tight. We made the decision ourselves before we ever went to the bank, to be sure we didn’t get sucked into spending more than we intended.
How to Save a Target Dollar-Amount
Because we had the goal in mind to put down 20%-ish, we calculated the exact amount we needed to save. By doing the leg work of figuring what kind of mortgage/total price of the house we could comfortably afford, we protected ourselves from future financial stress, and simply took 20% of that total price. We also picked a rough date on when we wanted to have this money saved. This happened to coincide with when our lease would be up, i.e. when we wanted to move. Now we had a Target Dollar Amount, and an end date to help us stay motivated and on track.
After that, it was simply counting how many months there were between then, and the time we wanted to move. We divided our targeted amount by the number of months. Because there are two of us, we divided the amount into 2. Now, we each had a set amount that we would “pay” into our high-yield savings account each month, just like a bill.
By doing the research and the math, we were able to plan our savings strategy. Without this, we would’ve just been magically hoping over time the money would appear in our account (unlikely). Using this approach, we “set it and forget it” and when the time came, viola! The money was there and ready to use.
Side note, my husband and I are high income earners, and we chose to have a shorter timeline. I acknowledge the savings amount set in my example (in the image above) is high. Do not be discouraged! The timeline is your own, the amount that a person can realistically save per month is income-dependent. However, the method holds true even with these variable numbers. I ask, please do not lose sight of the forest for the trees.
This Skill-Set is Transferable
I used the example of saving for a down payment, however, this can be used for any large purchase. We used this strategy when we replaced the floors in our house, and it can also be used for a vacation, a car, etc.
It should be pointed out again, that one size does not fit all when it comes to personal finance. Personal finance is…personal. Also, our approach to buying a house specifically, does not need to be your approach when you are home-buying.
What I do want to emphasize, is through planning, saving for a high priced goal isn’t out of reach. If you know how much you want to save, and set a rough end date as a goal, it just takes a little math to work backward and figure out how much per month you should be saving. Then, add the line item into your budget like a bill and you’re on your way! It may take time, discipline, and persistence (which can be annoying), but it is achievable.