The Single Best Way To Save Up For Your Big Purchases

Today, I just learned what I believe is the single best method to save up for big or expensive purchases.

I’ll show you what it is in just a moment.

Here, we’re looking at the only way you should be using your money to buy expensive items.

In other words, once you’ve taken care of your regular monthly expenses like:

  • Tithes
  • Rent
  • Electric & Internet
  • Gas and Car Insurance
  • Tithes
  • Food
  • Phone Plans
  • Investing…

… this is what I believe to be the best method to pay for other items outside of those, like:

  • Vacation
  • Wedding anniversary treats
  • Birthdays
  • House
  • Furniture
  • Boat
  • Books
  • And other similar purchases

Right now, we’re in the second section of Page 14 – 16 in Chapter 1 of Dave Ramsey’s Complete Guide to Money.

And here’s my lesson for the day:

If you’re making a big purchase, stay away from financing and making payments. Instead, save up so you can buy the item right off the bat.

We continue Chapter 1, titled Super Saving: Common Sense for Your Dollars and Cents, on Page 14 with how you can really get the best deal on any new purchase you want to make.

So far, we’ve talked about:

  • Baby Step No. 1 (putting away $1,000 in a beginner emergency fund)

And once you’ve paid off your debts;

  • Baby Step No. 3 (putting three to six months of key expenses into savings as a full emergency fund)

And now, we’ve moving on to the next aspect of personal finance.

In this section of the book, Dave goes into detail about probably the biggest mistake Americans make when making a big purchase: making monthly payments on a purchase instead of saving up and paying cash for it outright.

So far, our first reason to save money is to build up emergency funds for rainy days, but what if we need to buy an item, say a book, a phone, a piece of furniture, a boat, a work-from-home lamp, and so forth?

How do we get the money to pay for any of that?

Well, here comes our second reason to save money: to make big purchases.

So, how do we get the money to pay for those big purchases?

The answer, according to Dave, is to: Use the sinking fund approach.

The Sinking Fund Approach

To use the sinking fund approach, you’ll need to ‘sink’ in the total amount of money that the item costs before showing up to buy it from the seller.

There are 3 main steps you can use to apply the sinking fund approach:

  1. Figure out how much you need to save to buy an item
  2. Know how long you have to save the money for
  3. Then, know how much you’d need to put away every month towards that purchase

So, those are three simple but valuable steps to buying anything you want.

For example, if you just realized that you need a new car.

Your car has gotten so bad that you routinely have to call strangers or friends to help you move it out of the road, when it suddenly stops working. You have no guarantee that you can drive the car for 30 minutes, without the car quitting on you.

One of the biggest mistake you can make is to go to the dealership and simply pick out your choice car.

  • You find the car you want
  • You pay the sticker price
  • Agree to the deal and terms of the financing
  • Sign on the dotted lines
  • And drive away a happy new car owner

This is a huge, huge mistake, and a wrong approach to buying that car.

Why?

The extra money you’ll pay for that car in the form of interests, and charges if you default on paying.

For example, say you got an interest rate on a 2020 Toyota Camry Mid-size car priced at $24,425 at 15% for twenty-four months.

Using a car loan payment calculator, you’d have monthly payments of $1,184 and would end up paying $28,416 for your $24,425 Toyota Camry.

That’s about $4,000 extra that you paid on that car; which is $4,000 more debt that you’re stuck in for the next two years, because you didn’t use the sinking fund approach.

Dave explains the same concept in the book using the example of a dining-room furniture set.

Here’s the deal:

Whatever the purchase, it’s a big mistake to have gotten out of debt…

… and then go back into debt because you want that item right now… today – debts, interests, and charges be damned.

You wanted an instant answer to your car challenge, and got stuck in needless debt for the next 2 years, because:

  1. You didn’t plan your car purchase the right way
  2. You didn’t save on your own enough, so you could come up with that $25,000 before going to the dealership

And that would cost you way more money than you bargained for.

And for what, to be able to drive a new car, right now, today?

There’s a better way – use the sinking fund approach.

So how, exactly, does the sinking fund approach work?

Good question.

Let’s use the sinking fund approach for our car example.

Here are the 3 steps for the sinking fund approach:

  1. Figure out how much you need to save to buy the car: $24,425
  2. Know how long you have to save the money for: 21 months
  3. Then, know how much you’d need to put away every month towards buying that car: $1,184/month

In other words, by using the sinking fund approach…

I can save up the same amount of money ($1,184/month) towards my new car, instead of making monthly payments as part of a financing deal…

… and buy that 2020 Toyota Camry in 21 months, instead of the financing deal (that would put me in extra debt of $4,000 and take an extra 3 months to pay off).

So, I’ll get that car with no debt and save more than $4,000 on it. That’s a good deal, if you ask me.

Question: What if you really need to buy an item urgently, and can’t wait those long 18 or 24 months?

Answer: Then, I’ll say that’s why you have your emergency fund. BUT, make sure the purchase is truly an emergency.

For example, getting or a boat, a handbag, or a new car when you can bike to work, is hardly an emergency.

You can wait to save up for those items by using the sinking fund approach, and then get the best deal all around.

The sinking fund approach truly works, and can save you and your family a whole lot of headaches, money troubles, and financial desperation.

If you’ve built up your beginner and full emergency funds, and paid off all debts, you definitely can make a big purchase – just remember to do it the right way.

Just remember today’s lesson, as you look into making that big purchase:

If you’re making a big purchase, stay away from financing and making payments. Instead, save up so you can buy the item right off the bat.

That’s all for today, my friend. We’ll continue in the second section of Page 16 of the book tomorrow.

See you then.

-DD

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