Whether you’re saving up for a house, a car, a new phone, your child’s college education, or any other big expense, you’ll need to plan. For many of these purchases, most people will pay for them through some combination of savings and borrowing. How do you determine how much you should save? How much is too much to borrow? After all, you don’t want to end up with more debt than you can handle. ACCC offers free debt advice so you’re prepared when it comes to planning for major purchases!
Planning for Major Purchases
Buying a House
Buying a home is likely the biggest purchase you will make in your lifetime. The first thing potential homebuyers need to think about is how much they can afford for a mortgage payment every month. There are four different types of mortgages: federal, state, private, and quasi-public. The typical mortgage terms are usually 15 or 30 years. Homebuyers should aim to save around 20% of the cost of the home for a down payment. If you aren’t able to come up with a 20% down payment, you will likely have to purchase private mortgage insurance, which tacks extra money onto your mortgage payment every month.
When planning for major purchases like a home, it’s important to look into how to lower the costs wherever you can. Consider buying an older home or a fixer-upper, buying in the off-season, or looking at houses that have been listed for a while. Also, don’t forget your SMART goals! SMART stands for specific, measurable, achievable, realistic, and timely. When you’re planning to buy a house, be specific about what kind of house you’re looking for and where. Know how much it’s going to cost, and how much you’ll need to save for the down payment. Consider the resources you have, and evaluate your earnings and spending habits. Place a reasonable target for when you can reach this goal.
Buying a Car
Buying a car is another major purchase that requires a lot of planning. While it is not as large of a purchase as a home, the average cost of a new car is still around $30,000. Of course, if you want to save money, buying a used car is the better option. The terms for an auto loan can be anywhere from two to five years. Keep in mind that though your monthly payment will be lower with a longer term, you’ll be paying a lot more interest in the long run. Additionally, you should ensure your credit score is at least a 670 before you apply for an auto loan, otherwise your interest rate could be sky high. Again, you also should try to make a decent down payment of around 20%, if not more.
Saving for College
A conversation about planning for major purchases wouldn’t be complete without mentioning saving for college. If you have young children, now is the time to start thinking about saving for their education. There are many options for college savings plans, including the popular 529 plan. Named after Section 529 of the Internal Revenue Code, 529 plans are run by state and educational institutions, allowing parents to save funds tax-free. It’s important to start putting money away in a 529 or other investment account while your child is still young so that you can take advantage of the compound interest. If you can start early enough, it’s possible your child may not have to take out student loans by the time they get to college. By saving now, you can ensure your child starts off their adult life debt-free!
Final Thoughts on Planning for Major Purchases
As important as it is to save and plan for major purchases, debt is an unfortunate part of millions’ of Americans’ financial lives. Having too much debt can put a damper on planning for major purchases, and you may find yourself paying more money towards your debt than you’re able to put in savings. If you’re struggling to pay off debt, you may want to consider calling a nonprofit credit counseling agency to enroll in a debt management program. This program can help you pay down your debt in five years or less while keeping your credit intact. When you finish the program, you’ll be in a better position to save money and achieve your financial goals.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.