Big goals can carry price big tags. Whether you plan to buy a home, a new car or treat yourself to a much-needed vacation, you’ll need the money. And before you can really start planning for these big expenses, you’ll want to ask yourself, “Can I (or should I) afford it?”
If the answer is yes, then begs the question, “What’s an appropriate amount to spend?”
Here’s some advice on how to tackle a few big-ticket buys. And, if saving money isn’t exactly your strong suit, keep reading. I’ve included some of my favorite resources to get a jump-start at the end.
Buying a House? Cap Monthly Payments at 30%
When it comes to budgeting for housing costs, my rule of thumb is to spend no more than 30% of your take-home pay. That includes the mortgage, property tax and maintenance payments. The truth is that becoming a homeowner comes with hefty responsibilities and often, unforeseen costs.
Should your new home require a repair, you’ll want to be able to comfortably afford it without stretching yourself too thin. A rookie homeowner mistake is assuming you can spend the same monthly cost on a mortgage as rent. But renters aren’t necessarily required you to pay for plumbing damage or repair broken major appliances on their own dime.
Once you’ve calculated how much you can spend per month, figure out what size mortgage that equates to and that should help you narrow down homes by price. Home search website Zillow.com has a calculator that produces your target home price based on your annual income, monthly debt payments and the size of your down payment.
Speaking of, you’ll want to prepare to put down 20%, especially in competitive markets. For more on the specifics of home buying, check out my previous blog post.
Save more: To minimize monthly mortgage payments, be sure your credit is in great standing. Borrowers with high credit scores (often a 760 or greater) are best suited to qualify for the lowest interest rates on a home loan in today’s market.
Eyeing a Car? Ideally, Budget 15%
When it comes to purchasing a new car, aim to spend no more than 15 to 20% of your take-home pay. This includes maintenance and gas. if you pay with cash, take your annual salary and multiply it by .15 to calculate a max spend.
If you plan to finance or lease the vehicle, take your monthly take-home pay, multiply that number by .15 and that is a healthy budget for car payments (assuming you don’t have other major outstanding debt).
Save More: Go pre-owned. If you’re okay with a few scratches and some wear and tear but with the assurance that the car comes with a manufacturer’s warranty, then opting for a pre-owned vehicle could be a great way to save anywhere from probably 10 to 25%. This option can be more costly than going with a regular used car. But CPO’s come with benefits like a longer warranty and proper inspections.
If you’re set on purchasing a new car, wait until the end of the year when dealers are desperate to unload the current year’s models to make room for new inventory.
And for what it’s worth, waving cash at the dealer won’t necessarily earn you…