The Best and Easy way to Save for big purchases

In your budget, you would naturally have a ‘savings’ category for future emergencies or just general saving purposes. But what if you want to buy a fairly expensive item (at least hundreds of dollars and up to thousands) like a vacation, new furniture, or even a car?  Do you dip into your ‘savings’ and just take the money from there? No need to do that.  There is a better and more efficient solution.

Create a new category in your budget and dedicate it to the future item that you want to buy. For example, if you want to take a one week vacation to Mexico that will cost you about $800, create a new category in your budget and call it “Mexico Vacation” . Psychologically, it makes a big difference to make it as specific as possible by calling it “Mexico Vacation-August 201” and not just some general “Vacation.” This generally helps your brain become more focused on this, since you have a clear destination and timeline.

Where do you get extra money from?

Now to the other challenge: where do you get the money from? Just because you have to save for something new, doesn’t mean you have extra money to spare. Your income is still the same (unless you are due for a raise at work, or start a new PT job) First thing to do is to conduct a budget review, line by line, and see which categories can you afford to take some money from and transfer it to the new “Mexico Vacation – August 2011” category?
The easiest and most logical place to start from is your ‘Savings’ category. This is not to suggest that you will stop saving, and just put everything towards the Mexico vacation. Rather, you would take something small from it and reallocate it to the Mexico vacation. For example, if you put $125 from every paycheck towards your savings, you can take $25 from that and transfer it over to your “Mexico Vacation-August 2011” category. You are still saving, but just not the same. But no worries, you will go back to saving the same amount once you have saved enough money for the vacation.

Keep reviewing other items in your budget to determine which other ones can you afford to transfer money from to the “Mexico Vacation – August 2011” category. What about your personal spending? Maybe your weekly ‘Grocery and Food’ category?

Assuming we have about 12 more pay periods from now till August, and assuming you can dedicate some $60-75 per cycle to the ‘Mexico Vacation – August 2011’ category in your budget, you could achieve your $800 goal that is needed for the vacation, even before August.

Bit of Effort to Save a lot

As you can see, with some crative budget re-allocation, and very minor sacrifices (patiences and discipline) , you have saved for your Mexico vacation. In other words, with a bit of planning, you can afford to go to Mexico and still be able to carry on with most of your other life activities, including saving money.

Mind you, if we have a bigger item to worry about, like a car for example, then you should look at a longer timeline (one year is ideal) and making some more sacrifices, but nothing draconian.

Last, in emergency situations, you will have to dip into your savings, and maybe temporarily make big sacrifices. But if you have prepared for it, it won’t be as hard.