How to Budget for Big Purchases

Does planning for big purchases keep you up at night? Planning for big purchases in life can be daunting. Whether it is a home improvement project, gift or new electronic device, understanding financial planning can give you the tools to reach your goal without losing sleep. Don’t hit snooze on saving for your dreams by learning more about budgeting. 

Should You Use a Credit Card for a Big Purchase?

Using your credit cards for big purchases can be risky if you don’t have the cash to pay it off. Carrying a balance on your card can lead to higher interest rates on any remaining balances that compound daily and large balances can increase credit utilization. According to Experian, a credit utilization rate that exceeds 30% will tend to lower scores. Many people may choose to use “buy now pay later” services as an alternative to using credit cards. These services may charge late fees or inflated interest rates which can naturally make budgeting difficult. Consider paying for big purchases with cash or in-full to mitigate credit card debt. 

How to Plan for a Large Expense

When it comes to planning for a large expense, there are a few different approaches you can take. Whether that’s setting savings goals or monthly budgeting, setting money aside over time may help you plan for a large expense in the way that works best for you financially.  

List Your Upcoming Large Purchases

Listing out purchases at hand can help you foster an understanding of your financial situation. Separate expenses into categories such as wants, needs and savings. Notice expenses that are large – and consider the average cost of each category. Understand which categories and expenses you can afford to splurge on and those you may need to rule out. You may notice during this exercise you could be overspending in certain categories and that may help you save. 

Set a S.M.A.R.T. Goal and Action Plan

If you are wondering how to set financial goals, defining a S.M.A.R.T goal can help you achieve a better understanding of your personal finances and help you create an achievable savings plan.  

• Specific – Think about how much you would like to spend and what you would like to spend it on. 
• Measurable – How will you track your savings? Consider a fixed amount you will put towards your goal. 
• Attainable – What will you do to reach your goal? How will you reach it? 
• Relevant- Why is this important to you? Understanding the importance of a goal can keep you accountable. 
• Timely – It’s important to reflect about the duration of time you would like to save for. How many months, days or years may it require to save for your goal? 

Example of a S.M.A.R.T Goal:  I would like to save $6,000 for a down payment on a new car. I will save $500 per month by setting an automatic transfer from my checking account to my savings account. I will reduce the amount of money spent on dining out and purchasing clothes. This is important to me because my current vehicle needs repairs and I require a car for daily transportation. In the end, I will save $6,000 over 12 months or by December. 

Budgeting Tips to Save Money Over Time for a Large Purchase

It might be hard to initially learn how to budget but it’s easy to start saving where you can. Budgeting doesn’t have to be difficult. Here are some tricks and tips to keep budgeting balanced.  

Pay Yourself First

Start by putting necessary expenses down first every pay period. Rent, gas, food and other necessities should be the first to budget for. Contributions to retirement, 401k and emergency funds can secure your financial future and are still important to contribute to while saving money. This ensures you are putting down necessary expenses first and considering leftover savings for your goal. 

 50/20/30 Budgeting Rule

The rule recommends putting 50% of your money toward needs:

• Groceries 
• Gas 
• Rent/Housing 

30% toward wants:

• Shopping
• Dining Out 
• Hobbies 

20% toward savings:

• Emergency Expenses
• Investments 
• Retirement

Make Small Contributions

You can also make small contributions to help reach your goal faster. Consider skipping your $7 coffee and putting the contribution to your goal. It may seem like a small amount may not be effective but can be appreciated over time. 

Find Ways to Increase Your Income

 Passive income is made from nontraditional jobs, such as investment accounts, owning rental properties and much more. These ventures may take effort to get started, but passive income generally requires low effort once established.  

Consider Short Term Investment Options

Short term investment options can be a way to gain capital. Unlike long term investment options, short term investments are for shorter periods and may be repeated over time. No matter what you’re saving for, knowing how to invest for short term goals can be a good skill to have. 

You Don’t Have to Know All the Answers

Whether you’re saving for a new car, a house or your dream vacation, knowing how to budget for big purchases can help you avoid landing in debt. Consider talking to a Farm Bureau financial advisor to get an even more in-depth view of our financial planning process.