Today is the fourth in a series of posts focused on America Saves Week. Yesterday we talked about saving for retirement. Today’s focus is saving for a large purchase.
Why talk about retirement before talking about saving for a home, college, or a car? Because retirement is inevitable. Because you need to be thinking now about the kind of lifestyle you want to have when you retire. Because knowing how you want to retire will help you figure out the purchasing decisions that happen before you retire. Seeing the end goal gives you a target number and helps you make a plan to get to that goal.
How to Do It
Sit down with your spouse and decide whether or not you’ll be making a large purchase in the next 5 years. Be realistic and look at the pros and cons of each choice. For example, should you move to a larger house or can you maximize the space you have by renovating or adding on to the house? A neighbor of ours did the math and realized it was cheaper to add a 2-story addition to his house given the interest rates than to buy a new one.
It is always safe to save for a car especially if you live in the suburbs and need a car to get to work. Balance your car desires against your budget and your long-term goals. Research the reliability, gas mileage, repair records, and maintenance costs of different cars. While I initially was against my husband’s desire to spend more money on a used Honda Odyssey versus a Ford Windstar, over time, our Honda Odyssey has been reliable, not too expensive to repair, and not subject to many safety recalls.
Remember, if you have an older car that is totaled in an accident, you may need to replace it quickly. Having a down payment combined with whatever you receive from the insurance company will give you a bargaining tool when car shopping and a way to reduce your car loan if you need to get one.
Down payment for a home or pay for home in cash
It can be done. Fans of the site, Money Saving Mom, have followed her story for years as she and her husband saved cash for their first home. If you plan to buy a home, include money in your fund in case you need or want to make changes in the home. Retirement While I covered retirement yesterday, it bears repeating again – save for retirement before saving for other goals. Take advantage of the power of compound interest.
While it’s up to you whether you’ll help your children pay for college, many parents feel it’s part of their responsibility to do so in part or in full. Personally, my husband and I are saving a small amount for our 5 children, and we will encourage them to find ways to minimize their college expenses whether it’s through a part-time job, attending community college for a year or two, or taking a year off to work full-time and earn the money for the rest of college. We think our children will value their college education more if they contribute to paying for it.
Like many states, our state has a savings plans which we take advantage of with automatic monthly payments. We use the age-targeted funds which means the money goes into riskier investments when our children are younger, and safer ones as they get close to college age. Set up your own savings plans if you have the financial means. Don’t hesitate to ask family members to contribute to college savings in lieu of gifts or do smaller gifts and give the balance to college savings. Some family members will love this idea, and others will prefer to do their own thing. It never hurts to ask. Sometimes family members don’t realize they can help financially with your children’s college education. Find out if there are tax benefits for larger gifts.
Tomorrow: Pledge to Save
Barb is a mom of 5 kids who spends her day keeping track of socks, stuffed animals, library books, and a 4 year old when she isn’t writing about all the frugality, gardening, cooking, and reading she manages to fit in between the chaotic moments. She can be found at A Life in Balance, Frugal Local Kitchen, or on Twitter with daily doses of life in 140 characters or less.