Once-in-a-lifetime trips. Newborn babies. Replacement vehicles.
At one time or another, most of us have dreamed about making one or all of these things a bigger part of our lives. And we’ve also noticed something all these dreams have in common—a hefty price tag! The best things in life may be free, but plenty of great things end up costing a pretty penny.
How do you work these items into your lifestyle without turning to credit or blowing your financial plan? Instead of just wishing and hoping you’ll have enough money someday to upgrade your kitchen, we want you to make a plan that will allow you to pay for that or other big-ticket dreams with cash on a specific timetable. The best way to do it is by starting a sinking fund you add money to over time.
It’s all about making room for each dream in your monthly budget without interrupting your daily needs or your long-term financial goals. We’ll talk more about how major purchases fit with long-term goals later, but first let’s look at how the sinking fund fits with your regular bills.
Identify Your Upcoming Major Purchases and Expenses
First a basic note on budgeting—keep in mind that since these are really “wants” rather than needs, they belong lower down on your budget than the four walls of food, clothing, shelter and utilities, and transportation. At the same time, remember these big-ticket items don’t just pay for themselves, nor do the funds to cover them magically appear without a plan. You won’t be able to afford them until you give them the same amount of planning you already give to the non-negotiables.
To keep major purchases or events from blowing your budget, begin by identifying the purchase and the specific price tag. Know how much you’re willing to spend and start planning in advance. Here are a few of the things it might make sense to pay for through a sinking fund:
- Home repairs or upgrades like remodeling a bathroom or kitchen
- Vacations and travel
- Replacement vehicles
- Childbirth or adoption costs
- Kids’ activities or events
- Replacing furniture
Price each one to get some realistic savings goals on paper. This will help you decide which major purchases you can afford to go after first. For example, let’s say you’ve been spending way too much time and money lately on auto repairs, and you’re pretty sure you’ll need an $8,000 replacement car in about a year. To make that happen, you’re going to need to begin budgeting about $650 a month. If that sounds too steep for your current income and expenses, be ready to adjust your expectations on either the amount you can spend or how soon you can buy.
Or let’s say you’re dreaming about taking a $3,000 anniversary trip in six months. You’ll need to budget about $495 a month until then to go into your vacation sinking fund. If that’s too much, delay the trip and spread the cost out over more months.
Incorporate Each Major Purchase Into Your Monthly Budget
The key with making these major purchases really happen is to be sure to incorporate them into your monthly spending plan and include the details of both the target fund and the timeline for purchase.
If you’re already in a pretty good rhythm with your monthly budgeting, you’ve probably found that giving every dollar an assignment results in more financial flexibility over time. By consistently covering all of your expenses on paper, most people get to the bottoms of their budgets with at least some margin left over.
Once you know which items you’re going to focus on saving for, give each dream its own line in your budget. Treat these sinking funds just like any other monthly expense, listing them right along with your other bills.
To see how this can really work, let’s consider a situation where you want to plan for two major purchases at the same time, one in the near future and another in about a year. Say you want some repairs done to your bathroom sometime in the next six months that you estimate will run you $2,000. You also want to take your family on a long-awaited Disney World trip one year from now that you expect to cost around $3,500. In both cases, you’re going to use a sinking fund approach and combine it with the famous debt snowball technique.
They’re not really debts of course; they’re just plans to pay yourself over time to prepare for major purchases. Because the bathroom repair is both cheaper and happening sooner, plan to add “minimum payments” in the amount of $300 to the Disney fund. Plan to add at least $333 a month to the bathroom fund. And whenever you have extra money above those amounts, send those dollars to the bathroom fund to be sure you’re ready to buy in six months.
At those rates, the worst that could happen is you pay both by your target dates. On the other hand, your new intensity with savings might just turn up extra dollars that allow you to hit one or both targets early! If you find that you can afford the bathroom a month or two earlier than planned, by all means roll the money you had been using in that fund to speed up your vacation fund!
Remember to Wait on Major Purchases Until Your Emergency Fund Is Full
Just as the four walls have to take precedence over dreams, so does your emergency fund. First comes your required starter emergency fund of $1,000. Next you’ll need to pay off all consumer debt, because being debt-free is far more vital to your financial fitness than a vacation. It’s also essential that you finish building your emergency fund until it’s big enough to cover from three to six months’ worth of living expenses.
If those steps sound like tall barriers standing between you and your dreams, hear this: Most people who get serious about the Baby Steps find that each one can be accomplished more quickly than they imagined. Taking a year or two to stabilize your finances will improve your life in untold ways and allow you to enjoy those major purchases far more than you would while still in debt or lacking an emergency fund.
Budgeting Will Make Your Major Purchases a Reality
Some people love budgeting. If you’re one of them, the opportunity to get your money in order and written out on paper will give you a feeling of hope and power.
But whether budgeting gets you tired or inspired, there’s something you need to know—getting in the habit of making a written plan for your monthly income and expenses is the foundation of everything good that will happen to you financially, including the day you go to pay cash for your replacement vehicle or European cruise.
If you’re looking for a way to make planning for major purchases simple and convenient, download the EveryDollar app right away! You can save up your emergency fund and build a sinking fund for major purchases right into your budget.