My daughter’s 3rd birthday is in March and I want to have one of those financially-irresponsible birthday parties that suburban housewife moms throw for their kids. And since I don’t have one of those executive six-figure-salary husbands to sponsor the party, I’m saving up for it. I started saving up for Christmas back in August. I save up for taxes and every other big expense that can’t comfortably be paid out of one month’s pay.
Planning is the hardest part about saving up for these big expenses, but it’s a necessary component to make sure you can do things you otherwise wouldn’t be able to afford. Since the same holidays and events happen every year, there’s no reason that you can’t plan ahead. As a matter of fact, I might start my 2011 Christmas savings in March (after the birthday party).
How Much To Save Up?
Method 1: When you know how much you need
A: How much money do you need for the Event?
B: How many months (or paydays) until the Event?
Divide A by B and you have the monthly amount you need to set aside to save up. This is how I’m saving up for my girl’s birthday party.
Method 2: When you know how much you can afford each month
The Event is #A months away and I can save up $B each month for it. I’ll be able save up $X by the time the Event comes. This is how I saved up for Christmas.
You might end up using some combination of the two, especially if you see that you don’t have enough time to save up the amount of money you need.
Next, work it into your budget. I mention budget’s all the time because, for me, that’s what I use to control my spending. It’s how I know how much I can spend or save and how much I can’t spend or save. Whatever I’m saving up for goes on my budget. I had a line for Christmas savings. I have a line for Birthday Part Savings. I have a line for Taxes and a line for House Down Payment.
Where Does the Money Go?
No matter what I’m saving up for, I stick the money into my savings account. So that means the money in my savings account is designated for all sorts of things and I have to manually keep up with how much I’ve saved up for each event. I keep up with it in my budget spreadsheet.
Some time ago, I read that ING Direct accounts let you do this electronically. For example, if you have $100 in your savings account, you can say that $25 is for Christmas, $50 is for taxes, and $25 is for Miscellaneous. Not sure if this is still true, so if you have an ING account please chime in the comments.
When it comes to paying for these events, I use a credit card with a $0 balance so I can easily keep up with how much I’m spending. Once I’m done with that event, I pay off the credit card balance with the money in my savings account. Except for taxes, which I pay to the IRS via check. In that case, I transfer money into my checking account to cover the tax payment.
How do you typically handle larger purchases that can't be covered with a single paycheck?