By now, many of you would have seen the headline that a startling amount of consumers are living paycheck to paycheck. Around 40 percent of Americans cannot cover a $400 expense comfortably, according to the Federal Reserve’s Survey of Household Economics and Decision Making. With many households being short on cash and facing increasing debt levels, paying for home maintenance expenses, a new car, or other large expenses can be difficult. The alternative: relying on high-cost credit options like credit cards and payday loans. With a little planning ahead and a few budgeting hacks, you can avoid the common debt traps and keep your finances intact.
Keep On Top Of Your Credit Score
Approximately 37 percent of Americans don’t know how their credit scores are calculated, according to an online survey by CompareCards by Lending Tree. In fact, 13 percent admitted they don’t know their credit scores in another study by OnePoll. Yet, your credit scores play a major impact on your finances, including the credit options you can access and your affordability.
Keeping your credit score in good shape means you are more likely to access better interest rates on credit cards, loans, and even in-store installment plans. So, if you do use a credit card for those big-ticket purchases, having a good credit score will help in the overall affordability. For instance, a 36-month auto loan of $10,000 with a credit score range of 620-659 would cost you $325 monthly and $1,686 in interest. However, if your score improved to 690-711, you would pay $301 monthly and $830 in interest.
As a general rule, individuals should periodically check their credit scores using 1 of the 3 available credit reporting agencies (Experian, Equifax, and TransUnion). Make sure your credit payments are on time and your credit utilization rato is at its the optimal level. Typically, you want to aim for a credit score of at least 670, which is where most lenders set their lending criteria. Also, if you have a poor financial history and want car financing, it pays to do your homework. Using finance matching platforms like myAutoLoan.com to see the available financing offers for your impending purchase can give you an idea of how much to budget for.
Keep A Replacement/Repair Schedule
For home and car owners, a common big-ticket expense is the ongoing maintenance commitments. A poll by Harris Poll and Ally Bank found that Americans spend $397 on vehicle maintenance annually or almost $2,000 in the last 5 years. For their homes, homeowners spent $9,081 including $1,108 on home maintenance costs. Creating a spreadsheet of upcoming expenses gives you time to plan for them. For instance, making note of upcoming home repairs using a home maintenance checklist according to seasons or conditions. If you want to go further you can also extend your expense spreadsheet to include a mini-budget for each item, tracking the amount of money you have saved towards the cost as you go along.
Start A Sinking Fund ASAP
Another way to improve your budgeting approach for large expenses is to create an ongoing sinking fund, the earlier the better. In your household budget, set aside a dedicated percentage of your income to go towards your sinking fund every month. For example 10 percent of residual income after household bills. You can also use your expenses schedule or home maintenance list as a guide of how much you should aim to save in your sinking fund.
By putting aside a bit of money each month, the financial strain on your finances when those large purchases do arise is much less. To make the process hassle-free and simple, consider automating your transfers to a sinking fund after each payday. You can also create more than one sinking fund for specific upcoming expenses like a new car, home repairs, or purchasing a new television.
Big-ticket purchases do not need to be complicated. With a bit of planning ahead and the right budgeting techniques like creating a sinking fund, you can make it possible and financially painless.