WSJ Your Money Briefing - Money Moves for the New Year: Saving Up for a Big Purchase

Episode Date: December 26, 2024

How can you put away enough money for a major expenditure, like a car, house or improvements on your current home? It starts with making sure you're financially healthy enough to take it on. We hear from 34-year-old South Dakota resident and small-business owner Sallie Doty. She and her husband have been saving to make long-desired renovations on their house. Plus, host J.R. Whalen is joined by certified financial planner Mark Reyes, who discusses when to start budgeting and how to stay on track to reach your goal. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Amazon Q Business is the generative AI assistant from AWS because business can be slow like waiting through mud But Amazon Q helps streamline work so tasks like summarizing monthly results can be done in no time Learn what Amazon Q Business can do for you at AWS.com slash learn more Here's your money briefing for Thursday, December 26th. I'm JR Whalen for the Wall Street Journal December 26th. I'm JR Whalen for the Wall Street Journal. Welcome to the third episode of our series, Money Moves for the New Year. As we move closer to 2025, we're answering your questions about not only setting money goals for the next 12 months, but keeping them. Today, we're talking about saving for a big purchase. It could be a house, a family vacation,

maybe a new car. For me, it was the metallic blue, two-door Porsche Boxster convertible I bought in 2013. I had my previous car for way too long, decided to save and make some adjustments in my spending to meet my resolution of buying the car. Your money briefing listener and small business owner Sally D Doty, is ready to splurge on a project that she and her husband have wanted to take on for years. Some home renovations.

This is your traditional Midwestern split level home where you walk in, you've got two directions to go and there's not much of an entryway. Not a huge home by any means, but definitely lots of outdoor space to enjoy around the home. So that's where the external projects are coming into play. She's 34 years old and lives in Pierre, South Dakota with her husband and three dogs. They love hosting family and friends. So a new outdoor deck and siding is on their list. We're in our mid-30s now. I think both of us are in the position that we've saved. We've kind of like to make a list every year of some things

we would like to get done and then you just cross those off and kind of keep moving along as we go. But we've got a big year in 2025 for projects. As far as the biggest question, sometimes you always ask are the repairs worth it? We're living in our home for us. We want to enjoy this for us. We're not living in it for the next person, but we do have those conversations as to what would happen in this case scenario. And both being small business owners, you just hope you have good months ahead of you. Getting the money together for a home renovation project is a huge undertaking. So when should you start budgeting? And how can you stay on track to have enough money put away?

I asked Mark Reyes, a certified financial planner. Mark, what are the first steps Sally can take to manage this project? Well, with any major expense or project, you'll want to make sure, first of all, that you're financially healthy to take it on. For example, if you have a lot of high interest credit card debt charging 30% APR, you'll want to tackle that debt before taking on new renovations. And same goes on with an emergency fund, which I recommend having at least three to six months worth of expenses saved up separate than the house project.

Without a solid emergency fund, you put yourself at risk into falling into debt. And once you understand the price of the renovation and maybe find some financing for it, you want to make sure that you have enough free cash flow in your budget to make those monthly payments on top of your normal expenses. What you wouldn't want to do is use a lot of your monthly budget to finance the renovation and then have to put your essentials like groceries, insurance, and all living expenses on credit cards, which you may accumulate credit card debt. When someone is saving for a purchase that's, say, over $10,000, how do you suggest that

they create a budget for that? Typically with budgets, I recommend the 50-20-30 budget, where 50% of your income is dedicated towards essential spending like groceries, insurance, housing payments. 30% would be dedicated towards everything else but 20% would go towards saving and investing. So if you can regularly afford to save 20% of your net income per month, that's a good sign that you're financially healthy enough to save towards a larger project, maybe chip away $750 or $1,000 per month with a one-year timeline to save towards this larger

project. So about one year out, you recommend people start saving? At least, at least. And that depends on the type of project you're taking on and how much runway you can actually have for this project. So the longer you have to save for this project, the better. It depends on your priorities as well if this home Renovation needs to happen in the next six months

You might have to look at financing options But if you can delay it that just gives you more runway to save and and build up those funds for the project So someone is looking to do something like this in 2025 what are some ways they can build up the savings? First of all, I would recommend saving in a high-yield savings account if they're looking to pull the trigger in 2025. The rates right now are around four to five percent depending on which high-yield savings accounts you go towards. That way you're earning a little bit of interest on your savings and you're still having a secure funding source to park your savings. Another rule of thumb that's

been helpful for home renovations and homeownership in general is reserving three to five percent of your home's fair market value at all times in a high yield savings account. This prevents you from relying on financing for other projects and you have this home base of a solid fund, typically in a high-yield savings account that's just dedicated towards repairs or home rentals. What are some big ticket items that you hear from your clients that they typically save up for? Weddings, car purchases, business investments. But it boils down to, are you financially healthy enough to take on this investment

or this expense? Once you've reviewed your finances, how can you stay on track to afford the home remodel, wedding, or any big purchase on the horizon? It all starts with a good estimate. Mark will be back with us to discuss how you can plan out your payments, avoid missteps, and sustain your finances to see your project to completion. That's after the break. This episode is brought to you by HelloFresh. Be honest.

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To talk about how to do it, we're back with certified financial planner Mark Reyes. Mark, what if someone's planning to take on a big project, but they're not sure how much it's going to cost? Most contractors will give you a free estimate estimate and it costs maybe an hour of your time, but it gives you some clarity and direction. And I recommend checking out at least three contractors to compare prices, make sure you have an understanding of the scope and depth of the project and any necessary permits that come along with this large project. For example, when I replaced my roof on my home two months ago, I got three quotes from

three different vendors. The first vendor gave me an estimate for $16,000. The second vendor gave me an estimate for $17,000, so it was right in the same ballpark. But the third vendor quoted me at $30,000. And all vendors offered very similar materials, workmanship, and timing. So it's important to shop around just to understand who's offering the best price, quality, and value, and making sure you're not getting overcharged. How about projects that wouldn't involve a contractor, like a car repair or a wedding?

How can you get a good estimate for that type of project? If you're looking for a car repair, I would say get similar quotes, go to at least three independent mechanics. You can also check out the dealership, but typically dealerships charge significantly more than independent mechanics. That way you can get an understanding of the timing of the repair, what's actually needed for the repair,

and you can save up monthly for those larger expenses. Same thing goes for a wedding. I have some tips on that as well, where you'd wanna make sure what are the main factors that are producing the most amount of expenses for a wedding. And I think the guest list is one of the largest factors into how much a wedding can cost. And if you're having trouble trimming down the list,

a tip that my mentor taught me was You know if you wouldn't invite this person to a Tuesday evening dinner at your house Why would you invite them to your wedding? So that helped my wife and I rule out certain folks and we saved a ton of money of trimming down that guest list a little bit Okay, what kind of research should someone put into a large purchase and getting the money ready for it? They should understand what the ultimate cost is, number one. So getting quotes from professionals, just get an idea of how much that actually costs. Number two, are you financially healthy enough?

How do I look at my finances in an objective manner to show I can take on these extra payments? I can afford to save $1,000 per month regularly for the next one to two years to fund this project. And if you aren't able to do that, it's likely that you can't afford this larger purchase and you may have to revisit how important this goal is and how high of a priority this is. When someone is mapping out a big purchase, sometimes they can do it all at once or they can space out the payments.

What should they consider when choosing how to do it? They should consider what their normal cash flow is. Earlier we talked about the 50-20-30 budget, and that's a budget that fits a mold for most people. But sometimes they may have other obligations such as daycare, other debt, like student loans that they need to consider. And when we think about how much of your income can go towards debt, lenders think deeply about that. They want to make sure like, do you have a healthy debt to income ratio? So if you have a mortgage payment that eats up, let's say 45% of your gross income, then you're unlikely to get approved for a HELOC or home equity mortgage. So it's important to make sure how does my

normal cash flow look like? How healthy is it? And is there actual space to make payments and save for future projects? What are some other pitfalls that someone could potentially fall into when planning a large purchase? When planning a large purchase, they're thinking about what their current income level is. If they lose their job, having an additional HELOC payment for $750 per month can really impact their financial

health. They may have to rely on credit card, drain some of their assets or even withdraw from retirement accounts. So I would say when planning major purchases, consider how healthy you are in your career, how healthy you are in earning income, steady income. And do you have a solid emergency fund to fall back on if things don't work out with your job? If somebody's 2025 resolution involves one of these big purchases we've talked about like a home renovation or a car, what are some ways they can stay on track with that goal throughout the year?

Most high yield savings accounts, they have what's called savings buckets. So that allows you to parse out your emergency fund, other savings goals and prioritize based off a specific dollar amount and priority. It could be for the car repair, for the wedding, you can change the priority of these buckets and it'll automatically funnel whatever money you put into your savings account into those buckets. I think that's a very helpful tool. My clients love that feature on high yield savings accounts because it takes the guesswork out of, well, how much exactly should I put into this goal based off of how much time is left? I always tie back to why is this goal important to you? Making sure that you have clarity of,

this is important to me because it's going to help secure this investment in my house or for a wedding. You're not always going to have positive cash flow each month and that's okay. You're going to need to recenter yourself. So really understanding why is it important to you? That's going to be the key to getting you through those tough months.

After a few months, New Year's resolutions can often be forgotten or tossed aside. But if you want 2025 to be different and you're set on following through on your goal, Mark's tip about remembering your why is vital. Make a budget. Do your homework, and check in on your progress so that finished home renovation, perfect wedding, or new car is waiting for you at the finish line. That's it for part three of this special series from Your Money Briefing. Join us tomorrow when we'll discuss saving, but for more than just big ticket items. We'll focus on another 2025 financial resolution, saving enough money to retire comfortably.

We'll hear from another YMB listener and what he wants to know about successfully sailing into retiree life. I guess number one, which I think is everybody has is how long will my money last? What can I do to make it last as long as possible? This episode was produced by Ariana Ospreu. I'm your host, JR Whalen. Sound designed by Michael Laval. possible.