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By Katie Pins
You’ve got a big expense coming your way. Your car may be making a weird noise or you may be recently engaged. Whatever the expense may be, you’re probably thinking about your bank account. How can you budget for big expenses when you have a relatively short timeframe? It isn’t always easy to up your savings game, but we’re here to help.
Ideally, you’ll want to prepare for any type of expense. Big expenses can fall into three categories: planned big expenses, annual costs, and emergencies.
Planned big expenses: We all have big expenses on the horizon. We could be saving for a wedding, a down payment on a home, or a new car. Although these are planned expenses, they could still break the bank without careful budgeting.
Annual costs: Holiday spending, taxes, summer activities for the kids, charitable donations and vacations would all fall under annual costs. In order to get a clear picture of these costs, you may have to take a look at an entire year of spending. You could even go back a few years to get a better picture of how much you spend on average.
Emergencies: We talk a lot about emergency funds on the Money Mentor. That’s because an emergency fund is so important to your financial health. Studies even show it’s good for your mental health! With that in mind, an emergency is a one-time unexpected expense you should definitely budget for. Experts recommend having at least six months of living expenses in an emergency fund, but anything is better than nothing. The most important thing is that you get started on your emergency fund.
A big savings goal can be intimidating. If you know you need $10,000, it helps to make that goal more manageable by breaking it down. If you have 18 months to save for that expense, that’s about $555.55 a month.
It might be even better to think of how much you need to save per paycheck. If you’re paid twice a month, divide $10,000 by 36. That’s $277 a paycheck. It’s still a lofty goal, especially if you are living paycheck to paycheck. However, it helps to know your budget on a granular level. This way you can now focus on how you’ll save for your big expense.
Open a separate savings account just for your goal. This way you can easily track your progress. Plus, you’ll be less tempted to dip into the account, knowing that money is tied to your savings goal.
When picking a savings account, remember that not every savings account is equal. Pick a high-rate savings account with no monthly service fee. Your money could make money in a high-rate account, helping you reach your goal quicker.
Once you’ve calculated what you need to save each month, set up automatic transfers from your checking account to your savings account. Even better, set up direct deposit with your employer so that a portion of your paycheck goes directly to a savings account. This set-it-and-forget-it strategy will help ensure that you reach your savings goal in the time you’ve allotted.
Everyone talks about cutting back on your daily latte or other small items that add up. Although it’s important to factor in those little things when thinking about what you want to cut, eliminating your small purchases may only help a little.
On average, we spend the most money on housing, food and transportation. With that in mind, look at those major expenses and see where you can reduce your costs. Reducing costs in these areas can have the biggest impact on your savings.
Housing: There are a few things you may be able to cut or reduce to help you save on your housing bills.
Food: Although this is a necessary expense, there are ways to cut back on your spending in this category.
Transportation: There are some big expenses you can reduce in the transportation category.
If you’re looking for more ways to cut expenses, follow our six-month plan to cut expenses. You may find you can significantly reduce your monthly spending and reach your savings goal faster!
Katie Pins is a marketer fascinated with finance. Whether the topic is about the psychology of money, investment strategies or simply how to spend better, Katie enjoys diving in and sharing all the details with family, friends and Money Mentor readers. Money management needs to be simplified and Katie hopes she accomplishes that for our readers. The saying goes, "Knowledge is Power", and she hopes you feel empowered after reading Money Mentor.