I’ve got a question for you today – how do you save up for big expenses? A big lump sum expense is one of the reasons why people go into debt. Most people don’t save up for big expenses and they just get a loan to pay for it when necessary. This would work as long as you have steady income and can pay off the loan in a reasonable timeframe. However, many people keep buying more stuff and got stuck in a debt spiral. We really shouldn’t buy if we can’t afford it.
Debts are bad
I hate debt. It really bugs me to send off a payment every month. I’d rather pay upfront and avoid worrying about the monthly payments. We had car loans in the past and it was such a huge relief to our budget whenever they were paid off. I could put the $350/month into our stock investment instead of sending it off to the bank. Also, it feels great not having a car loan over our heads. That’s why we paid cash the last time we purchased a car.
Currently, the only debts we have are the mortgages on our home and rental properties. I don’t like the mortgages either, but the interest rate is low and I like investing in the stock market. At least we don’t have other consumer debt like car loan and credit card debt.
How to save for big expenses
Here is the classic way to save up for big expenses.
- Figure out how much it will cost.
- Figure out how long you have.
- Start saving.
So if a used car that you’re eyeing cost $15,000 and you have 4 years to save, then you’d need to save $417/month. That’s $15,000/36. This should work for most big budget items, but there are other alternatives too. Let’s look at some of our pending big ticket expenses and see how we’ll save for them.
Upcoming big expenses
Currently, we have 3 months of expense in the bank as our emergency fund. We spend about $4,500 per month so $13,000 is a pretty good cushion. This fund shouldn’t be use for pending big expenses, though. We might have an emergency at the same time so it is better to save explicitly for these things below.
Property Tax – $15,000
Our property tax bills are due in November and we pay it off once per year. This one is pretty easy because we’ve been dealing with it every year. We add about $1,250 to our main saving account every month. By the time the property tax is due, we should have enough cash to pay them all in one shot. Property owners save 3% by paying the tax bills in full. By November we need to have $28,000 (emergency fund + property tax) in the bank and we are on track for this one. We may have to dip into our emergency fund a bit, but I think that’s fine for property tax.
The $15,000 tax is for three properties.
A newer car – $15,000
Our low mileage (48,000 miles) 2010 Mazda 5 is still running well so this one is a low priority for us. We probably should start saving once the car is over 12 years old, though. I’ll budget $15,000 for a newer vehicle and save $417/month until we reach that goal.
The thing about this one is that we might not need a newer car for a long time. What if I just put $15,000 in GM stock (or another automobile company) and see how it goes. When we need a new car, we can pull the money out. If the investment didn’t do well, we’ll just have to buy a cheaper car. On the other hand, we could get a nicer car if the investment was good. What do you think about this plan?
By the way, the image at the top of the post is the upcoming Tesla Model 3. Wow, I like the styling. It looks very futuristic. Nice, but out of our price range because it starts at $35,000.
20th Anniversary party – $5,000 to 10,000
We got married at the courthouse in 1999 and didn’t have a wedding. This was mostly because planning a wedding was too daunting for us, but the saving was nice too. It’s ridiculous that a wedding cost over $30,000 nowadays. I figured we’ll have a big party to celebrate our 20th anniversary instead of spending a ton on the wedding. Being married for 20 years is a much bigger accomplishment than getting married…
This is a big budget celebration, but it is cheap compare to a wedding. The reason it is so expensive is because we want to have it near Santa Barbara, where we went to college. We’ll rent out a huge house for a week and invite close friends and family to come celebrate with us. It’d be great if we could throw a fun dinner party for them too. We could get catering or book a big party at a nice restaurant or hotel.
That’s the idea, but I’m not sure if it can be done. A big house with room for 18 people cost $8,000 per week. I don’t know how much a big catering dinner would cost, but it’d probably eat up the rest of our budget. I’ll start polling our friends and families to see what they think. It might be more convenient to just book a big place for the weekend. After the celebration, people can get their own hotel or Airbnb if they want to stay longer. That’s the low end of the budget.
Our around the world trip in 2021 – $50,000
Here is my plan. We’ll take a year off to travel around the world when RB40Jr finishes 4th grade. We will “road school” him during 5th grade and he can start 6th grade at the junior high school when he gets back. Isn’t that an awesome plan?
My budget for this trip is $50,000. That’s about how much we spend per year at home and I think it is a good budget for a year on the road. I checked a few travel blogs and the figure seems reasonable. We’ll also stay with families and spend a good amount of time in cheaper countries.
Saving this much cash would be tough, but I have an idea. We’ll sell our condo before we leave, save $50k for travel, and invest the rest. When we get back, we’ll move into our rental house. That’s a great idea, right?
Save Save Save
Wow, we have quite a few big expenses coming up. They are spread out a bit so we could concentrate on one at a time. I’ll focus on the 20th anniversary first, then the RTW trip, and lastly a new car. This makes them a bit more manageable. We don’t have to save for all these things at the same time.
What about you? Do you have some big expenses coming up? Do you save up for them or just finance them when the time comes?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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