How to save for big ticket items?

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imareal1
Posts: 12
Joined: Fri May 05, 2017 1:22 pm

How to save for big ticket items?

Post by imareal1 » Wed May 31, 2017 9:05 am

What's the general strategy for saving for big ticket items like houses/cars? I just started my career (24 y.o.) and realize that after retirement savings (401k + IRA = ~24%) and living expenses, I don't have much left over for, let's say, savings for a car. I know one solution is to earn more, cut down on expenses, and save what I can. I guess my question has more to do with where to park the money and what kind of discipline/strategy is involved in saving for such purposes.

Thanks.

wolf359
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Joined: Sun Mar 15, 2015 8:47 am

Re: How to save for big ticket items?

Post by wolf359 » Wed May 31, 2017 9:14 am

(This is my approach, not a general Boglehead method).

If you had to take out a car loan because you didn't have the money for a car, how much would you have to pay? Set up an automated payment for that amount and send it to a designated account. When it reaches the appropriate amount, you have enough for a car.

If you don't actually need a car at that point, redirect that stream somewhere else. For us, that stream also goes to a vacation fund.

The benefit of paying yourself the car loan amount is that all the compounded interest accrues to you, not the lender. This builds the balance faster. If you want additional risk, you could use a conservative balanced fund (50/50) instead of a high yield savings account. In that case, target a little higher in case the market drops when you need it.

That savings stream is the first one I shut off if an emergency comes up, prior to tapping my emergency fund.

Jags4186
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Joined: Wed Jun 18, 2014 7:12 pm

Re: How to save for big ticket items?

Post by Jags4186 » Wed May 31, 2017 10:43 am

imareal1 wrote:What's the general strategy for saving for big ticket items like houses/cars? I just started my career (24 y.o.) and realize that after retirement savings (401k + IRA = ~24%) and living expenses, I don't have much left over for, let's say, savings for a car. I know one solution is to earn more, cut down on expenses, and save what I can. I guess my question has more to do with where to park the money and what kind of discipline/strategy is involved in saving for such purposes.

Thanks.
It's all about budgeting and expectations. If you only make $40k a prudent person will own an inexpensive used car. Say you can save $250 a month extra and have a car worth $3000, well every 3 years you can buy a new to you $10k-$12k car.

What's important is that you don't get into a payment trap where you can't wait and end up financing things which really shouldn't be financed.

The key to being successful in finances, IMO, is the principal of loss aversion. We feel losses more than gains. If you saved $30k for the purpose of buying a brand new car, it's a lot harder to pull the trigger than it is taking out 84 months of $354 payments which is sourced from future money you haven't earned yet.

As to where to save? Online savings account is fine. Once you get a good foundation you won't need to save for everything specifically you'll just kind of plan around it.

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flamesabers
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Location: Rochester, MN

Re: How to save for big ticket items?

Post by flamesabers » Wed May 31, 2017 11:56 am

imareal1 wrote:What's the general strategy for saving for big ticket items like houses/cars? I just started my career (24 y.o.) and realize that after retirement savings (401k + IRA = ~24%) and living expenses, I don't have much left over for, let's say, savings for a car. I know one solution is to earn more, cut down on expenses, and save what I can. I guess my question has more to do with where to park the money and what kind of discipline/strategy is involved in saving for such purposes.

Thanks.
Depending on the time frame, putting the money in a savings account would likely be the simplest option for you. I prefer to save my money (that I'm not investing) in a Vanguard money market fund so that it's simpler for me to check the balance when I'm reviewing my other Vanguard investments.

As far as strategy goes, I suggest either setting a fixed amount you want to save every month or make the effort to save all excess money you earn after every pay period. In regards to discipline, I think it's a matter of being self-conscious on how you spend your money. When you have a viable and specific goal in mind, I think it's much easier to save money.

badger42
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Joined: Thu Apr 09, 2015 9:01 am

Re: How to save for big ticket items?

Post by badger42 » Wed May 31, 2017 12:01 pm

Car: We don't explicitly save for that, it's something that would be covered by our emergency / slush fund without any trouble.

House: We'll buy one when we leave our current VHCOL location and FIRE in maybe 5-7 years. That's what keeping a good portion of our fixed income investments in taxable is for (We have the short end of the ladder in treasuries in taxable, and the long end of the ladder in iShares iBonds in tax deferred)

White Coat Investor has an interesting argument (which I do at least partially buy) for bonds in taxable - see https://whitecoatinvestor.com/asset-loc ... n-taxable/. I use the short end of the bond ladder in taxable as our emergency / slush fund (does double duty) - I am not concerned about liquidity in the US Treasury market.

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