As a financial blogger I get asked all the time how to save for large purchases such as a vacation, renovation, or an expensive Christmas season. My answer is pretty simple: make a spending plan at the start of the year.
I’ve been tracking my spending for many years and one thing that has allowed me to do is put together a fairly detailed “guess” as to how I’ll spend my money every year. The fixed expenses are easy – you know exactly how much things like your mortgage, property taxes, and insurance will cost. Even variable categories such as groceries, gas, and dining out can stay fairly consistent from month-to-month.
Christmas gifts and other holiday expenses obviously come just once a year, but that doesn’t mean you can’t set aside money every month to prepare for increased spending in December.
Much more difficult to estimate are large purchases, both unexpected emergencies and expected – but not necessarily planned for – spending such as a vacation or a new television.
Trouble Saving For Large Purchases
A recent survey conducted by American Express revealed that almost half (47 percent) of Canadians say they have trouble saving for large purchases. Over the next year, many Canadians are planning to travel (47 percent), move or conduct renovations (29 percent), or buy expensive electronics (21 percent), and 42 percent of these people say they prefer to pay for large purchases over time.
I can sympathize with this. Even a so-called money expert like me had three occasions this year when a large purchase caught me off guard and just about derailed my budget.
Like when my hot-water tank stopped working the day before we were to leave on summer vacation, not only was a $350 service call money I’d like to have back, but I would’ve preferred to pay for it over a few months rather than upfront, since it impacted our vacation budget.
And, this fall, because we live in one of the windiest cities on earth, a section of siding blew off our house. It cost $400 to replace, too small an amount to get our house insurance involved, but enough that it threw-off my budget for the month. I wanted to save that money!
Finally, this was more of an impulse buy: We bought a treadmill in November. My wife took up running a few years ago, and this summer I started running a few days a week. Running outside in the aforementioned wind sucks (blows?) and so we decided it was time to get a treadmill so we could run inside in the winter and on those blustery days. We found a good sale and, $1,049.99 later, we were proud owners of a new treadmill. Not planned for, certainly not budgeted for, and a big purchase right before the holiday season. Yikes!
How A Credit Card Can Help
While a credit card can be a good payment tool for earning rewards and giving you a clear view of your spending, most people wouldn’t consider it to be a forward planning and budgeting tool. For one, because we’re rightly taught to pay off our balance in full every month or else pay dearly with interest rates of 19.99 percent or higher. Second, it takes discipline to spend within your means and not get carried away with credit.
But a new feature from American Express caught my eye. It’s called American Express Installments, and it’s the first ever installments plan to be built into an existing credit card. Here’s how it works:
Eligible Cardmembers can enroll to have the ability to pay for large purchases in equal monthly installments, while still earning rewards points. Instead of being charged interest common on credit card balances, they are charged a small fee based on the length of the installments they choose (2% for three months, 3% for six months, and 5% for 12 months).
When you enroll, you choose a minimum purchase amount and your preferred payment term of three, six or 12 months. From then, anything over the minimum amount is automatically set up as an installment payment to be paid back over your designated term.
For example, let’s say you bought something for $600 and wanted to pay it off over time instead of up-front – the below diagram shows what you would pay per month and as a total.
This is very competitive to carrying a balance on a credit card that typically charges 19.99% monthly interest on unpaid balances. With the Amex Installments program your fee would be between 2%-5%. On that same thought- this program is also competitive with a traditional short-term loan that charges an APR.
I still say the best way to save for large purchases is to plan for them well in advance and then pay for them in full. But, as they say, sh!t happens. Sometimes unexpectedly, like with my hot water-tank, and other times on a whim, like with our treadmill.
It’d be great if everyone had a cash reserve to prepare for and manage purchases associated with life’s big moments. We all know that’s easier said than done. That’s why it’s nice to see other solutions, such as American Express Installments, introduced to help Canadians manage their large upcoming purchases in a savvier way.
Instead of carrying a balance from month-to-month and paying credit card interest, pay a small fee, and get the flexibility to pay off your balance over three, six, or 12 months.
This post was sponsored by American Express. All views are my own.