Large Expenses

The Key to Budgeting for Big Expenses

Sometimes large expenses pop up out of the blue. More often, however, they are things you can plan for. It could be as fun as a new car. But it could also be something like a large home maintenance project (new roof, new air conditioner) that seems like an emergency, but should be predicted in general terms. Nothing lasts forever, and you can estimate the lifespan of most of your stuff. So why not prepare?

Five Tips to Save up for That [Fill in the Blank]

A sinking fund is a separate account or amount of money set aside to replace a big expensive item when it fails or for when you decide to get a new one. The best sinking fund strategy is to start one immediately after you make a purchase that will eventually need to be replaced. Take the amount you think you'll need to cover the large expense, then divide it by the number of months (or years) you'll have before you'll need to replace it. Then, save that amount each month (or year) and you'll be prepared for replacement.

For example, if you just bought a $30,000 car that you expect to last 10 years, you would need to start setting aside $3,000 per year to replace the car when your current car reaches the end of its life.

Get a raise at work? Congratulations. Now, set aside a part, or all, of it to save for a large expense. You've already been living on the amount without the raise, so this way you can be savings without feeling any pinch.

The same advice goes for bonuses you might get. While tempting to spend them right away, the smart move may be saving it.

Gifts and unexpected money like a utility deposit refund can add to your sinking fund without cutting into your income.

Chances are, you have plenty of stuff around the house you don't need. The good news is, one man's trash is another man's treasure. So if your large expense is just about to happen and you don't have enough money to pay for it, turning your stuff into cash on Craigslist or eBay could be your answer.

Look for large expenses and you'll most often see them coming, rather than being surprised. With a little planning, you can be prepared for them without raiding your emergency fund.

Saving for a Home

When it comes to large expenses, your home is probably the biggest of them all. So saving for one can be daunting. Unlike saving for retirement, where the funds you stash away likely won't be accessed for many years, a down payment is a large sum of money that you'll need to access soon. That means slowly setting aside small amounts here and there won't cut it. So here are some tips that will help:

Before you start saving, know how much you need to save. Generally speaking, your housing expense should not exceed 28% of your stable monthly income. Sitting down with a mortgage lender will let you know how much of a mortgage you can qualify for (including mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues, if any), and how much of a down payment you should target.

When do you plan to buy a house? If you plan to buy a home in the next five years, divide your target down payment amount by five. That's what you need to put away in your house fund each year. Naturally, the shorter your timeframe is, the higher your annual savings goal will be.

This is a tough one. Risk-type of investment vehicles (stocks, real estate investment, trusts, etc.) are probably not good options since you are saving for a definite purpose that needs to be reached in a specific timeframe. You may be able to earn more in these types of vehicles rather than safer alternatives like savings accounts or certificates of deposit, but you also risk losing money in the process. When saving for a house, the worst-case scenario isn't missing out on returns, it's losing the money you need to buy your home.

We're talking about saving thousands of dollars a year, so making room in your budget for this savings is vital. You may have to earn additional income. You may have to cut back on expenses. You may need to do both. Budgeting for this savings won't only save you much-needed cash, it will help you practice managing a tighter budget, which you will definitely need once you are a homeowner.

Make it automatic and make it easy. That usually means some kind of payroll savings plan. Like your 401(k) plan, you should allocate a certain percentage or dollar amount of your regular pay to go directly into a savings account or money market account dedicated to your down payment. Since you never see this money, you won't be tempted to spend it.

Saving for your down payment is easier (and quicker) when you bank any unexpected windfalls. Income-tax refunds, gifts, bonus or commission checks…they can all help your house fund without taking away from your everyday budget. Regularly depositing a few thousand dollars per year in windfalls can chop a couple of years off of your savings timeframe.

While you're saving money, there will be demands on your finances. Car replacement or repair, uncovered medical expenses, even job loss. Make sure you have a well-stocked emergency fund to deal with these challenges…it will help you get back on the savings track as quickly as possible.

Buying a home is typically a long process, because the amount you need to save is relatively large. But the discipline you develop during this savings process will serve you well during homeownership. After all, you'll have plenty of expenses once you're a homeowner…so the more practiced you are at saving toward these, the better off you will be.

10 Ways to Save on Your Next Car

It's definitely not a home purchase, but cars don't come cheap, either. Here are 10 tips to help you get the best deal on this "large expense."

Test drive in person, but negotiate price and financing via computer. (You can even have the vehicle delivered to your home or office and sign the paperwork there.) Why do this? Well, most Internet department salespeople are salaried and get extra bonuses based on volume rather than commissions based on the sales price. That means they're incented to offer you the best price to move cars. The average savings when you deal over the Internet is $1,000 to $2,000. Internet dealing also means you get to avoid the financing and insurance office. This is where dealers throw add-ons and extra fees which threaten to negate the great deal you negotiated. Lastly, you can shop and and negotiate on your schedule, skipping the "let me talk to my manager" routine.

Once you've determined which make and model you want, contact several dealers via the Internet. Tell them what you want, when you want to buy, then ask for their best price. Oh, and let them know you are asking other dealers the same thing. The object is to start a bidding war for your business.

Get pre-approved for your auto loan before you start car shopping by applying to a handful of banks and several credit unions to see who can give you the best rate and terms. If you keep the applications within a 14-day period, all the loan applications will only count as one inquiry, minimizing the impact on your credit. Once you settle on a lender, that pre-approval should be good for about 60 days, giving you plenty of time to shop for a car. Once you find the right wheels and negotiate a price, ask the dealer if they can make you a better offer on the financing.

Don't talk about your trade-in, financing or incentives until you reach a deal on the car itself. In writing. Treat them as completely separate transactions. Otherwise, you'll make a gain on the price of the car but lose it on the trade-in, without even realizing it.

Just because something is preprinted (like add-on fees on auto sales contracts) doesn't mean it's non-negotiable. Smart buyers know those numbers can be crossed out, or an equal amount can be subtracted elsewhere on the same form.

Car dealers must hate the Internet. There is absolutely no reason at all for a buyer to walk into a dealership without knowing what a good deal is. Sites like Edmunds.com, ConsumerReports.org, KBB.com, NADAguides.com, CarBuyingTips.com and JDPower.com will arm you with details you can use to get a better deal - from what incentives are available on the car you want to what other buyers have recently paid for cars just like yours in your area.

Buying at the end of the model year is a great way to save (August through October is usually a really good time to buy if you want to get the current year at a discount). Dealers are getting the new models in and need to get rid of the existing inventory. Buying at the end of the month can be a good strategy as well, as many sales people are trying to make their quota.

The dealership selling you a new vehicle isn't necessarily the one that will offer you the highest price on your old one. Shop around to see who can offer the best price on a straight sale.

Hold out for a great deal on a great car. Because a great deal on a car that doesn't hold up or serve your needs well into the future isn't a great deal at all.

The same goes for the dealership. Find one who makes you comfortable and one who is convenient for maintenance. You will be returning, so do business with someone you trust.

If the dealer you prefer doesn't have the vehicle you want, try a switch. Many times, dealers can swap with other dealers. They want to make the deal work…and this way you get your vehicle and your dealer.