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3 Tips for Saving and Paying for Large Upcoming Expenses

Everyone has a little list they keep in their head of big or semi-big stuff they have to pay for that's coming up soon. The problem with these items is they can come up suddenly especially if you’re in denial and then you are stuck either borrowing (charging on your credit card), or raiding your savings. Neither is particularly good planning, and we love good planning.

Here are my 3 tips for Saving and Paying for Upcoming Expenses:

  1. Match savings with cash flow – if you get a bonus in December, save a large chunk then. If you are paid every 2 weeks, save a little at a time (e.g. each month). If you get a bonus, do not save every paycheck (cash flow mismatch). You may feel a sense of scarcity and frustration and then go on a spending spree with your bonus.
  2. If the purchase or payment is less than 4 years away, stay liquid – if you have less than 4 years until the payment is made, keep your savings in liquid securities like cash, money markets (not money market mutual funds), short term CDs (6-12 months). Yes, it earns less interest, but there is far less risk that you will have to pay a penalty, or liquidate in a down market.
  3. Use installment plans wisely – if your child’s camp or private school offer installment plans, make sure they match your cash flow (see item 1). If they do not, make your own installment plan and save monthly or bi-weekly into a savings account and write one check with the payment is due. If the installment charge for the installment plan offered is greater than 2-3% of the payment, save on your own and pay in one lump sum.

I know these tips may sound fine as long as you actually have some cash flow to match payments with, save or keep liquid. If you do not, it’s all about planning.

Do not assume you can pay for these items with regular monthly cash flow, because even when that raise finally comes, you will expand your lifestyle to meet it. And, any extra cash each month will be gone, poof, with your "spendier" (that's not a word - yet) lifestyle. It's human nature. Save deliberately. Now. For things that will happen in a few years.

Where do you start? If you are in the habit of savings, (auto transfers every month is my favorite option) you will still spend your raise, but at least some amount will get saved because you've been saving deliberately each month.

Figure out what you can put towards your goal or need each month from your regular cash flow and open a savings account. Auto transfer the money into the savings account and do not touch it. If you have to manually save it (meaning transfer it each month) it will never happen.

If you get a sizable bonus or commission, make a list of the large payments that need to be made and see how they stack up to your expected AFTER-TAX bonus. If you need more, save monthly along with earmarking your bonus.

Plan for big items. Do not practice avoidance, that’s how people end up with huge credit card debt. Your kid will have to do something in the summer or you will have to entertain him/her… start saving!

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