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How to Budget for Your Next Big Purchase

Saving up for a big purchase is a much better strategy than credit cards and payment plans.

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Looking to make your next big purchase soon? Whether it’s a couch, a coffee machine, or a new laptop, squeezing in a large expense can be difficult, especially if you have necessities to cover. That’s why it’s important to budget accordingly for larger purchases. Here’s how you can do it.  

Step 1: Set your budgeting goal

The first step in budgeting for a big purchase is to figure out exactly how much you’ll need to save up. So, what do you want to buy? How much does it cost (yes, with tax)? And are there any additional expenses, such as shipping costs, warranties, and installation fees, that come with purchase? 

For example, if you’re saving up for a new MacBook Pro, the cheapest model currently costs $1,699. With AppleCare warranty priced at $279 and the added tax of $257.14, you’ll actually be paying a total of $2,235.14 for a new laptop.

By determining the actual price of your purchase, you’ll be able to budget accordingly to reach your goal. Account for anything that can increase the cost of your purchase and prepare yourself financially for your big buy. 

Step 2: Set your time frame

After figuring out how much your purchase will cost, figure out how much time you need. Think about how urgently you need the product or service. For instance, you may need a new laptop at the start of next school year. Or maybe you’re budgeting for a new blender as a gift for your mom’s birthday in 3 months. 

The more time you give yourself, the easier it will be to budget as you’ll be able to set aside a smaller amount of money each time. So it’s always a good idea to prepare ahead of time by thinking of any future large purchases you may need to make. By spreading out the big expense over many months, and practicing patience, it’ll be much easier to afford. 

Step 3: Calculate your budget

Divide the total cost of your purchase by the number of months in your time frame to calculate the amount of money you should set aside every month. You can also do this by week or by paycheck if you prefer to budget in smaller increments of time. 

For example, if you’re planning on purchasing the MacBook in a year, you’ll have 12 months to save up the $2,235.14. That means you’ll need to set aside about $186.26 every month (or about $42.98 weekly, $85.97 bi-weekly) to cover the cost when you’re ready to purchase. 

Step 4: Set aside your money

Making a goal is one thing, but actually putting it in action is another. It’s important to move this money into a separate, untouched account every period in order to actually start building up your savings. 

A good way to ensure you never forget to make a deposit is to set up an automatic transfer into your savings account on the days you get paid. Pay yourself first. By doing so, you won’t need to manually enter in your banking information each time, and you won’t risk having to over-budget or adjust your timeline because of a missed payment. 

Should I budget in a high interest savings account?

Budgeting in a high interest savings account (HISA) can assist you with a large purchase, but it may not help you out as much as you’d hope.  

Let’s say you’ve decided to purchase the MacBook Pro at $2,235.14 in a year, and you deposit your monthly savings into a savings account with an annual interest rate of 1.5%. That means you’ll need to contribute approximately $184.98 monthly for 12 months to reach your goal. On the other hand, without any interest at all, you’ll be paying $186.26 monthly – only $1.28 more. And on top of that, you may be taxed on your earnings from the account. 

So if you’d like to save every penny possible, a high-interest savings account can be a worthwhile tool. But keep in mind that it won’t make too big of a difference unless you’re saving for an extremely expensive purchase or your time frame is substantially large. 

The big benefit of having a different account is leaving the money untouched and not reaching into it because you want to go out to dinner with friends, but don’t have the money for it. 

Should I budget in an investment account?

Investing your budget so it can grow on its own can be a financially smart decision, but it can also be risky. Investments take time to grow, and if you’re planning on making a large purchase in the short term, you might risk losing some money before seeing any gains. However, if you’re preparing yourself for a large purchase with years of budgeting in advance (e.g. downpayment on a house), you can consider passively investing this money to reach your purchasing goals quicker. 

READ: Pay off debt or invest? 8 factors you should consider

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Should you make big purchases with a credit card??

Putting large purchases on credit can be tempting because you can slowly pay off your debt in smaller increments, but interest rates can substantially increase the price you’re paying. 

Let’s say you’ve decided to buy the MacBook Pro for $2,235.14 now on credit, and you give yourself a year to pay off the balance. If your credit card has an APR of 18%, and you don’t make any payments before the grace period ends, it would take 14 monthly payments of about $186.26 to finance your laptop (and an extra $247.86 due to interest). 

Below, option B is a minimum payment of $5 + $67.05 that’ll take almost 10 years to pay off (and you can’t buy anything else on the credit card). 

Just the minimum amount (option C) and it’ll take almost 15 years to pay off (and that shiny new laptop has likely bit the dust). 

How long will it take to pay off the credit card?

  • Option A: Minimum payment each month
  • Option B: Minimum payment plus an additional amount each month
  • Option C: Fixed amount each month
 

Option A

Option B

Option C

Time to pay off

14 years and 5 months

9 years and 9 months

1 year and 2 months

Original balance

$2,235.14

$2,235.14

$2,235.14

Interest paid

$2,034.04

$1,530.77

$247.86

Total paid

$4,269.18

$3,765.91

$2,483.00

Amount saved

-

$503.27

$1,786.18

Time saved

-

4 years and 8 months

13 years and 3 months

 

So although credit cards can be a helpful tool if you need something right away, it may be smarter financially to prepare your large purchase budgets ahead of time. You’ll save much more without the added interest, and you won’t have to worry about the debt spiralling out of control. 

Using a credit card to your advantage, though, is smart. Get a cashback credit card card with a 2% cash back rate on any purchases you make, and buying a $2,000 laptop can result in about $40 back. 

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Should you use buy now, pay later for big purchases?

Buy now, pay later services, such as AfterPay or PayBright, can be another option to finance large purchases when you don’t have the money on-hand. Most companies don’t charge interest fees, so you’ll be paying less than purchasing on credit. On the other hand, missing a payment incurs large penalty fees and negatively impacts your credit score 

With buy now, pay later services, be aware of your purchasing habits. The no-interest incentive can be a tempting factor, causing you to overspend on more purchases than you need. So consider saving up ahead of time instead – you won’t be in debt and you’ll be able to evaluate each purchase decision more carefully. 

Other tips on saving for big purchases

Budgeting for a large purchase isn’t limited to just figuring out how much you should save ahead of time. Here are some other tips that can help you check out quicker and debt-free: 

  • Plan for seasonal sales and discounts (e.g. Apple’s back to school discount)
  • Consider making extra income (e.g. garage sale, side hustle)
  • Cut down on unnecessary expenses and allocate it towards your budget (e.g. Netflix)
  • Buy used or refurbished items 
  • Save your emergency fund for emergencies only

READ: Tips for sticking to a budget

The bottom line

Budgeting for a large purchase doesn’t have to be difficult if you prepare yourself ahead in advance. Figuring out how much money you need, how much time you have, and how you can set this money aside will help you reach your purchasing goals without stressing over debt. On the other hand, credit cards and buy now, pay later services can be considered for purchases you need right away, but be aware of the interest rates and risk factors that come with it. 

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