Finally, you have a couple of months where things are going well. The bills get paid on time and you actually have money left at the end of the month. Then POW! The water heater bursts, the car breaks down and the first half of the property tax bill is past due — and you’re broke.
How can you possibly plan or budget for life’s big-ticket items? Many people believe it just can’t be done, that they have no choice but to rely on their credit cards to cover the cost of emergencies — whether it’s something they should have predicted or not.
There is a way out: Anticipate these expenses. You know they’re coming, so cut the price tag on that big-ticket item into small pieces and make it as routine as paying the phone bill.
—Define the goal. The first, most important step is to figure out what your next big money decision will be. Let’s say, for example, your refrigerator is slowing down. At 12 years old, you anticipate it has about three years left. Knowing this gives you something valuable: Time. Time to start researching and saving. What style and size do you need? About how much will it cost? Are there options you should consider? Brands you should avoid? Look into it now.
—Identify the terms. If you start saving for the refrigerator right now, you’ll have about 36 months. Let’s say you determine that it’ll cost about $1,600. Divide that amount by the term of 36 months. The result is about $44. You’ll need to save $44 each month, starting now, so you’ll be able to replace your refrigerator in three years.
—Make it smaller. Cut your goal into pieces — smaller payments are psychologically easier to handle. Instead of 36 months, divide the cost of the refrigerator by 156 weeks. With this slight change in terms, you need to save only $10.26 each week to reach your goal.
—Make it predictable. View this as a new, regular bill you must make each month or week. It will soon become as ordinary and predictable as your mortgage or car payment.
—Set up an account. Don’t keep this stash in a drawer or even in your regular savings account. That puts the money within easy reach and makes it too available for you to borrow for some other purpose. Create a savings account specifically for the item you want to buy instead. Check out SmartyPig.com, a fabulous online savings bank that makes saving easy and fun. Your account is free — there are no fees, no minimum requirements.
—Make it automatic. Set up an automatic savings plan to regularly transfer money to your savings account from your regular household account.
—Visualize the goal. Stay focused by finding a picture of the item. Draw a grid over the picture with a pen and ruler so you have the same number of squares as payments you’ll make. After each payment, fill in a space on the grid with a highlighter.
Mary Hunt is founder of www.DebtProofLiving.com, a personal finance member website.
You can email her at mary@everyday
cheapskate.com, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.