Saving for a big purchase

Question

I am currently a full-time, post-secondary student. What can I do now to prepare for a large purchase in a couple of years?

Answer

A marathon is 42.2 kilometers long. I remember thinking two things when I first considered running one: That it would be really exciting to finish and that it would be virtually impossible to finish. I felt both excitement and disbelief, in equal measure. I mean, 42.2 km. That is insane.

It turns out that the feelings of excitement and disbelief associated with running marathons are similar to those associated with saving for large purchases. And the steps to being successful with both are pretty much the same. Here they are:

Identify the specifics

It is much easier to develop a plan for something when you are really clear on what you are planning for. The specifics make the plan real and that can be terrifying and motivating. Think about the large purchase that you want to make and then ask yourself the questions below. The more specifics you can include the better.

What do you want?
–   A red car. Four-door, gently used, ideally standard transmission.
How much will it cost?
–   $12,000 including taxes.
When do you want to have it?
–   Two years from today.

Break the goal down

My running coach argued that a marathon wasn’t really 42.2 km. He said it was actually a 5 km race repeated nine times, and that I didn’t even have to finish the last one. I knew I could run 5 km, and I had already run 4 x 5 km when I completed a half-marathon. Breaking the goal down into smaller chunks helped me wrap my mind around the challenge and begin to plan for it.

Using the example above, you could say that you’d need to save $500 per month for 24 months in order to have the money you need for the car. So how could you break your large purchase down into smaller more manageable chunks?

Develop the plan

At this point you are clear on ‘what’ you want. This next step is where you figure out ‘how’ you’re going to get it by developing the plan. As a student who isn’t working, the focus of your plan is likely going to be on increasing your earnings while keeping spending in check. There also might be some things you can do to get yourself organized. Ask yourself the following:

Where does ____ figure in your plan?

–    Earning
–    Spending
–    Organizing
–    Saving

Now with those answers in mind, write down a simple plan.

Goal: Buy a car two years from today.

Plan:

–   Cut spending on eating out by $100 per month.
–   Organize savings by opening up a tax-free savings account for this goal.
–   Make saving easier by setting up a pre-authorized contribution at the bank that transfers $500 per month from your chequing account to your TFSA.

Take action on the plan

Putting your plan down on a piece of paper is a great start, but it does nothing for you if you don’t take action on it. Think about what would happen if you tried to run a marathon without executing your training plan first. Suffice it to say, it is not very effective.

That said, taking action is easier said than done. Everyone is different, but I can tell you from experience that it generally takes a combination of the following elements: Discipline, creativity, patience and courage.

When you are stuck—and you will likely get stuck taking action on your plan for a large purchase—look at these four elements and ask yourself which one would make a difference in getting you unstuck: Discipline, creativity, patience or courage? Then go to the corner store and buy a bag of discipline and you’re set.

Okay. That was a joke. You can’t actually buy any of these. But you can practice them and improve, which makes all the difference.

Beware of “shiny objects”

Even with a full cupboard of discipline, creativity, patience and courage, taking action on your plan isn’t easy. Watch out for “shiny objects” that distract you from your goal. They could appear in the form of something else you want to spend your money on, or trying to use your savings to generate a return.

When you’re saving for something that you want to buy in the short term—say in less than five years—the focus should be on saving your money and putting it somewhere safe. Interest rates are low no matter where you go and investing in something volatile like the stock market exposes you to too much risk for a short-term goal.

You are young. My recommendation is that you become a master in following these steps to get what you want.  You’ll be amazed at the spectacular results that come your way. See you at the finish line.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.