Your home is probably the biggest purchase you will ever make. Like millions of other families, you have taken out a mortgage for 10 to 30 years and put down a very large deposit. However, spending money in large chunks doesn’t stop with buying your home. You’ll likely have other big expenses that come with having a family and having to repair and maintain your home.
Just what is a “big purchase”?
Think of a big purchase as a large outlay of cash that is not part of your monthly budget. Some of these expenditures will be related to your home and some not. Let’s look at a few categories, with typical costs:
- Home furnishings – After buying a home, you’ll want to ensure it is adequately furnished. Your budget for furnishings and décor can easily be in the tens of thousands of dollars.
- Home renovation – Remodeling Magazine creates an annual Cost vs Value report that that gives typical costs and ROIs for common home projects. Projects range from $1,500 for insulation upgrades or a new door, $18,000 for bathroom remodel, $60,000 for a major kitchen remodel and over $120,000 for a master suite addition.
- Wedding – You may have bought your house as a couple and now plan to get married or you’re planning to contribute to the wedding costs for one of your kids. The Knot reports the US average wedding cost to be $35,329.
- College – The College Board recently reported price tags for a moderate college of $24,610 for in-state public colleges and $49,320 for private colleges.
- Major vacation – Credit Donkey reports that the average vacation costs $1,145 per person, and estimates an average four day vacation for a family of four to be over $5,000 for Disney World and closer to $7,000 for Hawaii. ValuePenguin reports that the cost for a 12-day international trip for a family of four averages $13,000. Obviously, there are many variables to consider that can change these estimates greatly in either direction.
Plan ahead for big purchases
In many cases, these big purchases are predictable. You may get a medical emergency purchase that cannot be predicted, however. Setting specific savings goals now is a very powerful way to influence current financial behavior in anticipation of big purchases in the future.
If you haven’t yet bought your home, be sure to budget adequate money for furnishings on top of the down payment. Try to avoid taking out a separate personal loan, maxing out your credit cards or using all your cash before you get your home loan, as these actions can put you at risk for mortgage approval.
Plan ahead, as many new parents do, by creating a college fund or a wedding savings account from the moment your child is born. Set up a vacation account that you contribute to on a periodic basis.
Always be sure you’re adequately insured to bear the brunt of medical expenses. Most financial experts advise establishing an emergency savings of at least enough funds to cover three to six months of your essential expenses.
When you create a budget for regular expenses, such as housing, food, transportation, and entertainment, include a line item for your big purchase savings goal. “Pay yourself” in this category every week and keep that savings separate from other funds used for ongoing expenses.
What if your big purchase costs more than you have saved?
When it isn’t practical to wait for your savings to build to cover the full costs of your big purchase, you may have other options, like a personal loan or home equity loan.
If you’re a home owner with a mortgage, each month you make a mortgage payment of principle and interest. The principle portion of the payment goes toward building your equity. This equity, the difference between the current market value of your home and your outstanding mortgage balance, can be used to secure a loan to pay for any of these aforementioned big purchases.