Here are some strategies and ideas to try out, if you’re hoping to pay for a new car, a home purchase, or the vacation you’ve always dreamed of.
Buying a Car
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.
Buy a Home
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.
Traveling
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.