How Do I Plan for Big Purchases?

There are two big kinds of people when it comes to cars. Some of us get a new vehicle as a matter of course every few years, and are never without a car payment. And others of us drive the same vehicle for as long as possible. It's okay to find a middle ground between these two approaches, and aim to keep a vehicle past when you've made the last payment, but not so long that it's falling apart.

You can find yourself in a negative equity trap with a car loan – this is when you owe more on the car than it's worth. New cars lose a lot of value as soon as they're purchased and driven off the dealer's lot, and if you don't put a lot down when you buy a new car, it's easy to end up with negative equity. It's a problem when you either want to sell the car (will you be able to get enough to pay off the loan?) or if you get in an accident and your auto insurer totals the car (you'll owe money on a car you no longer own and your insurer won't give you more than it's worth).

Car prices have skyrocketed in the wake of the COVID-19 pandemic, and these days, you're likely looking at a price of more than $40,000 for the average new car. Let's say you intend to keep a $40,000 car for 10 years. It will take a lot of discipline, but you can put money aside (say, in a sinking fund) every month to fund the purchase of a new car without a car loan. You can automate a transfer or even set up part of your paychecks to be direct-deposited to a new car account, removing some of the temptation to spend that money.

Pro-tip: if your car runs fine, but you think you need a new one, have yours detailed. You can pay a few hundred dollars to have it thoroughly cleaned, inside and out. It will make a huge difference.

Buying a house will take a lot more money than buying a new car, but you can still make it a goal to save for that down payment over time. We recommend waiting on jumping into a home purchase until you have a three to six month emergency fund, are out of debt, and can make a 20% down payment. Putting 20% down on a house means you'll be able to avoid paying for mortgage insurance, which makes your mortgage payments higher and protects your lender in case you default on the mortgage loan. Putting at least 20% down will also lessen the chances that you'll end up underwater on your home loan (owing more than the home is worth, which can be a real problem if you're having trouble making payments or want to sell it).

In addition to the down payment, you've also got to budget for your closing costs, which will likely be an additional 1%-2% of the home's purchase price. Plus moving costs, which are harder to estimate and will depend on whether you're moving yourself or hiring movers.

If you're intending to spend $300,000 on a house, that's a $60,000 down payment, along with $3,000-$6,000 for closing costs. This is a lot of money to save up, and it's best to approach it as a goal, so put money aside from your earnings right off the bat, rather than waiting until your bills and other expenses are paid, and just saving whatever is left. You might also have some choices to make as far as your fun spending is concerned. Ask yourself if you'd rather buy a house or maintain your usual online shopping habits. Buying a house might also be worth adding a side hustle so you can save that down payment and closing costs more quickly than if you were just saving from your regular paychecks.

A lot of people have big vacations on their bucket list, but the nice thing about travel expenses is that they're highly variable and there's always ways to save money. Both camping in the U.S. and staying at five-star hotels in Europe count as vacations, but there's a major cost difference there. Just like saving for a car or a house, you can change your money behaviors and boost your income to be able to afford travel. If you're currently spending $500 a month on dining out, could you cut back and instead save that money for a dream vacation? 

Ultimately, planning for big purchases comes down to how much you're willing to change about your spending and savings habits to achieve your goals. You could cut back your leisure spending, or you could find a way to make extra income, or you could do both.