Saving for a big purchase

Resources · Home loans and saving · 5 min read Starting out

Key points

• Divide the cost by the months you have, and you’ve got a starting monthly target.
• Interest on savings lowers what you need to put in, but only a little over short periods.
• Saving first and borrowing the same amount can differ by well over a thousand dollars.
• A separate, clearly named account makes the goal easier to stick to.

Saving for a big purchase starts with a few numbers

First, the amount. That’s what the purchase really costs, extras included. For a car it might mean registration, insurance and taxes on top of the price. For a home deposit, add fees and moving costs.

Then the deadline, meaning when you want or need it. And finally what you already have saved that can go towards it.

Take what you still need, divide it by the months you have, and that’s your monthly target. Now you can see whether it fits your budget, or whether the amount or the timing has to give.

A worked example

Say you want $12,000 in 24 months for a car.

Assumptions: a goal of $12,000 over 24 months, with deposits made at the end of each month. Where interest applies, it’s 4% a year, paid monthly at one-twelfth of that rate.

The same maths works in any currency.

With interest, the balance reaches $12,000.01 after 24 deposits of $481.10. The interest saves you about $19 a month. Handy. But over a short timeframe, your deposits do almost all the work.

Saving first versus borrowing

Now compare that with buying the car today on a loan.

Assumptions: a $12,000 loan at 9% a year, charged monthly, over 24 months. The repayment is $548.22 a month (rounded up to the cent, with a final repayment of $548.14).

The gap is $1,610.80 in total, and $67.12 a month.

That doesn’t make borrowing a mistake every time. The trade-off is time. Borrowing gets you the item now. Saving means waiting. Some purchases can’t wait, like a car you need to get to work. Plenty can. It depends on the purchase and your circumstances.

Making the goal easier to reach

Give the money its own account with a name like “Car fund”. Money sitting in its own labelled spot is much less likely to get spent by accident. Then set up an automatic transfer on payday, so saving happens before spending does. That’s paying yourself first.

Match where you keep it to your timeline. For goals a few years away, easy-access or high-interest savings accounts are common. Some people use term deposits or similar fixed-term accounts if they’re sure of the date. Investments such as shares can fall in value, which is a real risk when you need the money by a set date.

Windfalls help too. Putting part of a tax refund, bonus or gift towards the goal shortens the wait. And check your progress every few months, so if you fall behind you can adjust early instead of finding out at the deadline.

When the numbers don’t fit

If the monthly target is more than your budget allows, you’ve got three levers to pull:

• More time. Stretching 24 months to 30 drops the no-interest target from $500 to $400 a month.
• A lower amount. A cheaper option, or a smaller first step.
• More income or less spending elsewhere. Even just for a while.

Carrying high-interest debt adds another trade-off. Money saved at 4% while a card charges much more costs you the difference. Some people clear the high-interest debt first and save afterwards. Others do both at once so they don’t have to borrow again for the purchase. It depends on the rates and how soon you need the item.

Big goals take longer

For very large goals, like a home deposit, the same steps apply over a longer stretch. Over several years interest pulls more of its weight. But prices may rise while you save, so build that into the target.

Common questions

How much should I save each month for a big purchase?

Take what you still need and divide it by the months you have. That’s your monthly target. For example, $12,000 over 24 months is $500 a month without interest.

Is it cheaper to save or borrow for a big purchase?

Saving usually costs less, because you earn interest instead of paying it. In the example above, the difference was $1,610.80. Borrowing gets you the item sooner, though, and for some purchases that matters.

Where do people keep money for a big purchase?

For goals a few years away, easy-access or high-interest savings accounts are common. Some people use fixed-term accounts if they’re sure of the date. Investments can fall in value, which is a risk with a set deadline.

Try it

The savings goal calculator works out how much to put aside each month for your own goal and deadline. If you’re paying off debt at the same time, you can find your Freedom Date.

General information only, not financial advice. Your situation is your own.