Saving money is a skill that is honed just like any other skill – through practice. When you are young, the most you ever needed to save was probably a few hundred dollars for camp or a video game console. Now that you’re an adult, you’ll need to up your saving game if you plan to successfully save money for bigger, grown-up purchases like a car or a house down payment.
Fortunately, just like learning to cook or drive a car, there are tips and tricks that make saving money easier. Below I’m going to walk you through a step by step guide to saving money for your first big purchase. If you follow these steps, you’ll be able to save for your first big purchase, and all savings goals after that will be a little easier.
Set a Goal
The first thing you need to do when saving for a big goal is to clearly and accurately define the dollar amount that you are planning to save. For example, if you want to purchase a new car, find out how much that car will cost. Don’t forget extra fees like sales tax, registration fees, and finance fees. These extra fees can add up to thousands of extra dollars, so it’s important to be accurate.
If your first grown-up purchase is a house down payment, make sure to factor in closing costs. Closing costs are the extra fees and taxes you’ll pay when you buy a house, and they typically cost between 3% and 5% of the value of the home. That’s several extra thousands of dollars that you’ll need to include in your budget.
Set a Timeline
Next, it’s important to set a definitive timeline for your savings goal. Setting a timeline will help you set your savings plan (which we’ll go through below). For example, if you plan to save $20,000 for a new car, by what date would you like to achieve this goal? If you are a new saver and your savings goal is over $10,000 you should give yourself more than a year. Let’s use the example of the new car and assume you want to be behind the wheel in two years. Now we can build a savings plan.
Build a Savings Plan
Once you know how much you would like to save, and when you would like to achieve that goal, you can use this information to build a savings plan. In the example above, if you want to save $20,000 in two years you’ll need to save $10,000 per year or $833 per month. This monthly number is the basis of your savings plan, and it will help you determine how much room you need to make in your budget for this new savings goal.
Make Room in Your Budget
You’ll never make real progress on your savings goals unless you make room for your savings in your budget. In the example above, you need to find $833 in your monthly budget to ensure you hit your savings goal on time. You can make room in your budget by decreasing your expenses and increasing your income. Here is a list of ways you could make room in your budget to reach your savings goal:
- Ask for a raise at work
- Work overtime
- Get a part-time job
- Move to a less expensive apartment
- Give up non-essential expenses
- Pay off your debt
That last one is a great way to make room in your budget for savings goals. By paying off your debt, not only are you avoiding expensive interest charges but you are also diverting that money to a place where it will earn interest instead of cost you interest.
Consider Windfall Money
While budgeted contributions are a great start to setting and reaching savings goals in a timely fashion, it’s also important to consider adding windfall money to your savings fund so you can reach your goal faster. Windfall money is any money that you receive that is unexpected and includes overtime pay, birthday money, and income tax returns.
Windfall money can be an excellent way to speed up your timeline for your savings goal. For example, if you plan to save $20,000 for a new car over two years, but you put two income tax returns totaling $2,000 towards your savings goal, you’ll reach your goal two and a half months ahead of schedule.
Stick to Your Plan
Once you have a savings plan in place and room in your budget to make it happen, the only thing left to do is execute the plan and diligently save that money. While this might seem like the easiest part of the plan, it is often the hardest. Sticking to savings plans requires discipline and the ability to see the big picture. Unfortunately, these are skills that many Canadians lack, so it will take patience and commitment to achieve.
The good news is that once you save for your first grown-up purchase, the next one will be easier, and the one after that will be even easier. My first big savings goal was to save $10,000 for emergencies. It was a daunting task because I’d never saved more than a few thousand dollars in my life. Fortunately, I was able to stick it out and get that money saved in four months. After that, I saved for a $4,000 trip to Paris, a $5,000 move to another province, and those smaller savings goals helped me prepare to save $32,000 for a house down payment. Saving is a skill, and the more you practice, the better you’ll get.