Nothing derails well-laid-out financial plans like a giant expense. The kind of expense that consumes one or more full paychecks.
Big expenses happen to everybody. Some are unplanned, like an emergency room visit, or a trip to the vet after a pet gets bitten by a copperhead. It's for this reason that building up a decent emergency fund, even before paying down debt, is a good idea.
Many big expenses, however, give themselves plenty of warning. Twenty-year shingles on a roof last, well, about twenty years. Property taxes are due at select, well-publicized times throughout the year. Annual insurance policy renewals show up once a year.
As the facilities manager of our church put it, with regard to planned expenses: “You should have been saving for those.”
Turning on your financial radar for ways to save money
So why don't we save money more often for these long-range expenses? The reason is that they're off our financial radar. They're still there, but we're concentrating on the expenses that are closer to where we are: monthly credit card bills, groceries, gas, etc.
What's needed is tuning our financial radar to these larger expenses. First we need to be aware of these expenses. Old age is the biggest. Home maintenance and car replacement are up there too. Secondly, once we know what will need to be replaced, and likely when it will need to be replaced, we can estimate how much we need to save to be ready at the time it's likely to arrive.
I Pick Up Pennies has already done a bit of this. They're looking forward to car replacement (as are we in our personal finance plan), double-pane windows for their house, and dental implants. These are each five-figure expenses, and they're on their financial radar, which is excellent. That's a lot of the battle right there.
Some tactics for saving money on these big-ticket expenses
Here are a few ways to save money effectively for those big expenses that you know about:
- Just paid off a car? Keep making the payment. Instead of making the payment to the bank, make it to your earmarked savings account. A $300/month payment that is put into a savings account will be five figures in less than three years. This isn't a bad strategy because you've been making the payment anyway, so nothing really feels different if it continues to leave your checking account each month.
- Maintain the item. We have our air conditioning unit looked over each year. We go in to the dentist. We take cars in. We try not to have the things break down before or on schedule. Instead, we try to make them last longer. This eases the financial burden of replacing it by postponing it.
- Try to find replacement cost. What would a comparable unit/car/tooth cost you today?
- Ask an expert about how long an item has left. The dentist will be able to tell you about how long those fillings or crowns will last. An HVAC guy will be able to tell you the life expectancy of your unit because he's likely seen a lot of them. A good mechanic should be able to give you good advice on how long you have left on your car. The answers to these play into the “final answer.”
- Calculate a per-month amount based on life expectancy. Now that you know about how long you have, and about how much it will cost, take that replacement cost and divide it by twelve times the number of years of life left in it. This will be approximately what you'll need to save each month to replace the item when it's expected to need it.
Do you have any success with planning for big expenses? Feel free to share in the comments below.
Good points! I try to have reserves for certain big ticket items like appliance replacement or remodeling. I can always use savings for various replacements.
I use the envelope system for smaller monthly expenses as well as larger expenses. For example, I know my car insurance runs approximately $900 every six month’s, so I have an “envelope” (Actually a class in quicken) that gets $155 put into it every month. That way when the insurance bill comes due, the money is there.
@Krant: Ahh, savings. That’s something we’re building back up after a long-ish period of not paying enough attention.
@Jose: Perfect way to do it!
Great ideas — I just try to save half my income and then pay out things from savings as they come up.
I thinking maintaining a payment is a great idea once you’ve paid it off. It’s insurance you get an emergency fund up and running quick. It also may lead to paying off other bills sooner rather than later.
We always do #1 – we dont’ put that money back into our regular budget, but we funnel it into savings for the next big expense that will ultimately come our way.
One thing you can do, as well, is take any tax refund money you get (I’m not a believer that getting a tax refund is a bad idea, though I know many PF bloggers shudder at the thought) and apply some or all of it toward your big expense.
Number 1 is one of the best tactics for many of us. And the point of saving any tax refund is a good thing. Getting at least 6 months of net salary saved is something that we all should do and maybe even more in this uncertain economy. Living below your means is always an investment savvy thing to do, although it is not as fun as going out on the town a lot.
I think limiting the amount of your spending helps. Learning how to cook will make a big difference.
That was such a fantastic read. It’s such a must to save money as no one can foresee one’s future, and emergencies just don’t knock the door, but show up at the least expected times. My family and I contribute to our “savings†especially big expenses. This has created a great bonding between us. All of us share this sense of responsibility and ownership. We kinda review it once a month and forget about it. This has accumulated to quite a sum.