Budgeting for a big expense can be surprisingly difficult. In most cases, you’ll want to put together a budget by tracking things like your monthly expenses and income. By doing this, you’ll see how much money comes in and goes out of your accounts.
This is perhaps the easiest way to manage your finances, but it doesn’t make it any easier to budget for large expenses.
When it comes to a big purchase, you need to start planning ahead and taking more time to consider the impact that expense will have on your finances.
So in this post, we’re going to take a look at a couple of tips that will help you budget for a large expense such as a home deposit, a car, or even an expensive piece of entertainment hardware.
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Step 1: Plan ahead
The first thing you should do is plan ahead. Unless you have a lot of savings laying around, it’s important to plan ahead for any kind of big purchase. Making a sudden decision to drop thousands on a piece of equipment for your home will make it difficult for you to stabilize your personal finances, hence why you have to think ahead of time.
We suggest putting together a spreadsheet or even a small document detailing all of the expenses and the variables that could affect it. For example, if you’re planning ahead of time for a big holiday, you might want to consider putting together a couple of expenses that you know will take up the bulk of the cost.
This could include plane tickets, accommodation, and so on. Get a rough idea of the prices by searching online and then put together a budget, adding on an extra 20% to make up for price fluctuations.
This should give you a rough estimate of how much money you’ll be spending on that big expense. Once you’ve planned this out, it’s time to compare it to your budget.
Step 2: Calculating the impact
Now let’s talk about how we calculate the impact it has on your budget.
For starters, if you’ve saved a lot of money and you are open to using that for your big expense, it makes things a bit easier. If you have enough money in your savings to make the big purchase, then you can simply use that money and then continue saving money as you normally would.
However, if those savings are also part of your emergency fund, you’ll want to ensure it doesn’t drop below a certain threshold. Everyone has a different amount they save up for emergency expenses and it’ll depend on your personal circumstances and situation.
If you don’t have a lot of savings or don’t want to use your emergency funds on the expense, then you need to consider how much money you can realistically put towards it each month.
After calculating your income and your expenses (including yearly expenses such as insurance costs), you should have some disposable income left over. If you don’t, then you may want to consider cutting out certain expenses before you adopt a lifestyle that you can’t afford.
A quick way to calculate the impact is to divide the amount of disposable income you have by the cost of the expense you’ve calculated. That number will give you the total number of months before you can start really using your disposable income on other things.
If you frequently use your disposable income on going out with friends and family members or buying entertainment goods, then this could change your lifestyle drastically.
Step 3: Finalizing the expense
Up until now, you’ll likely have been working with rough numbers. That’s perfectly fine, but with anything that has a very high cost, a few percentages can make a massive difference.
For example, if you’re considering saving up for a deposit for a home, you’ll want to look at mortgage information to calculate how much you need to save.
You’ll also want to look at how much repayments will be and also how long the mortgage will last. This type of information should be readily available with a mortgage calculator and it’ll give you a much better understanding of your financial situation.
Once you’ve determined the exact costs of the expense, how much you need to save and how long it’ll take, you’ll need to start focusing on saving money, cutting unnecessary expenses, and living frugally in order to financially cope with a heavy expense.