Recently, we’ve had a family situation, which has to lead us to need to make a large purchase. In this case, we needed to purchase a second home for a family member to live in. It wasn’t something that we anticipated in the near future, but it happened sooner than we expected. Since we aren’t able to finance six figures at this point in our lives, we do need to borrow some (with a hefty downpayment in cash). It’s been a process as we’ve started this journey and it hasn’t been easy, but there have been three key lessons that have kept this opportunity possible:
1. Have some money in the bank
It’s more than just an emergency fund, but also keep some cash open and available for other opportunities. Many true investments require some cash upfront. Have you ever heard the saying, you have to have money to make money? Often, it doesn’t take a lot, but it does take some effort and discipline.
If you have been a diligent saver, then you’ll find having cash on hand allows you to enter into investment opportunities when they arise. If you haven’t been a diligent saver, start today. You can always start small and build from there. The habit is the most important part of the process.
If you start the habit, even in small amounts, you’ll be surprised how the amount invested will grow over time. Go through your budget, figure out a way to save even less than $100 per paycheck or month to put into an interest-bearing account to save for a future need. Some banks or credit unions will even offer a round up option, where every time you spend, it will round up your purchase to the highest dollar and the remainder will be put into your savings. This can give you a start to savings, but I highly encourage you to find other larger amounts from your budget too. Collectively, these will grow over time.
Another way to simply do it is by automatically transferring a specific amount from your checking account into savings on a monthly or bi-weekly basis. Make sure you have budgeted the specific amount that you can save in order to avoid having to transfer money back from savings to checking to pay bills. Keeping things automatic can help; it’s the best way to pay yourself first.
One final idea is to have your true emergency account and other longer-term savings goals in a bank/credit union/ or other savings vehicle separated from your everyday checking and savings account(s). Usually, it takes 2 to 3 business days to transfer bank to bank so this can help limit the availability of the funds unless it’s a true emergency or need. If it’s in an account that is difficult to access, then you are less likely to be tempted to “borrow” from it if you overspend.
2. Keep your credit report clean and your credit score high
Thomas just gave a thorough review of how to improve your credit score (read Part 1 here and Part 2 here). It’s important in these situations when you need to purchase large assets that you have a good credit score that will get you the best interest rates. In our case, we didn’t know how quickly we’d need to purchase this home, but it happened sooner than we expected, but since we had good scores and had been diligent at making sure our credit reports were cleaned up and correct, it saved us a lot of time in the end. We had to simply unfreeze our credit so that the banks could check them as they processed our pre-approval for a mortgage. (Learn more about credit freezes here: https://www.consumer.ftc.gov/articles/0497-credit-freeze-faqs)
3. Find true investments, not depreciating assets
Last, but certainly not least, it is important that you are purchasing a true investment. You can ask my husband, my least favorite word misused is the word investment. I’ve heard people justify purchases from shoes to cars by using the word “investment”. Let me tell you now, a depreciating asset is NOT an investment. Take shoes and clothing for an example, how much can you get to resale a used pair of shoes or shirt? Much less than you paid for it if you can sell it at all. (I see lots of new and used clothing and shoes on online garage sale pages all of the time where the person selling can’t get rid of them for any price…usually other than free).
Cars are another great example of a depreciating asset. I had a friend tell me the other day about how her new Tesla was an “investment”; all I could do is smile and say “how lovely”. But inside I really wanted to scream, did you realize you lost over $10k or more the moment you drove it off the lot? Just think about the car you have now. It’s not worth the amount you paid for it, regardless if you bought it new or used. Cars lose value just like cell phones, computers, and electronics of any kind. Make sure that when you are talking about purchasing an investment, that it is a true investment where over time, your money can appreciate. (Keep in mind there is still risk with any investment and you may lose money, (including on a house as we saw during 2007-2009), but usually with a long-term investment and if you’ve done your research, you’ll see an increase in value over time if you stay the course and have a long-term mindset.)
These are just three key lessons I’ve been reminded of recently and wanted to share. Stick with these principles and you’ll find that you are well on your way to seeing your money increase as you plan and prepare for the unexpected.