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How to save and pay for a big purchase

Effectively plan for a large purchase or major life event, while also staying on track to your long-term financial goals.

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Whether you’re planning to buy a car, renovate your home or take that dream vacation, funding a significant purchase or major life event can be exciting. But managing the short-term liquidity needs for a large purchase with your longer-term financial priorities can be a difficult task.

An Ameriprise financial advisor can help you evaluate your options for paying for a significant purchase while keeping you on track for your other financial goals, such as saving for retirement. Here’s what to consider when planning a major purchase.

Assess your goals, needs and timeline

When planning and saving for a major purchase, consider the timeline. Some major purchases — such as a home repair or a new car — may require urgent attention, while you may have more time to save for others. As you consider your timeline, discuss and document your new goal with your financial advisor.

Determine the true cost and your budget

It’s easier to stay on track when saving for a big purchase if you have a price tag, so determining the true cost of a large purchase is critical. Talk to trusted individuals for recommendations, get multiple quotes, do some comparison shopping and take time to understand all costs associated with your purchase.

Once you know the cost, assess how much cash you can allocate to this purchase and how much to save or borrow. If you plan to borrow, calculate your debt-to-income ratio — which is the percentage of your monthly gross income that is allocated toward paying your debts — for a clearer picture on the reality of financing this purchase. In general, a good debt-to-income-ratio is below 36%.

Learn more: Personal budgeting strategies to help reach your goals

If time is on your side, create a systematic savings plan

If you don’t have enough readily available funds to pay for your big purchase and you have a longer time horizon, create a systematic savings plan. One way to do this is to set aside a lump sum each month until you reach your goal. You also may want to set aside assets in a high-interest savings account or certificate of deposit (CD) specifically allocated for your purchase. These dedicated savings vehicles can help you easily track your progress, while ensuring the money keeps pace with inflation.

The longer the time horizon, the more options you have to potentially earn a return on the money you put aside. If you aim to buy a car in six months, your options may be limited to a high-interest savings account. On the other hand, if you’re saving for a wedding that may not happen for five years, you will have many options for investing and potentially growing your money.

Learn more: How a systematic savings plan can help you reach your goals

For purchases stemming from unexpected events, check your insurance coverage

Some major purchases arise unexpectedly due to adverse events, making them impossible to plan for. For example, you may need to repair your roof because of weather or purchase a new car after an accident. In these scenarios, contact your insurance carrier and determine if any of the costs will be covered to fund the replacement purchase.

Determine if you need to leverage traditional lending options

In certain circumstances, it may make sense to use a loan or credit to help finance your purchase. When used strategically, lending options can help you reach your financial goals — but it’s important to understand the terms and conditions, as well as the repayment plan.

Type of lending solution

 

Benefits

 

Considerations

Secured personal loan (car loans, etc.)

  • A personal loan through your bank, credit union or other financial institution that is backed by collateral.
  • Can offer quick access to cash.
  • Because it’s backed by collateral, interest rates will be lower than an unsecured loan and credit cards.
  • Some come with significant fees and penalties that may add to the cost of borrowing.
  • You risk losing the collateral if you are not able to fulfill your repayment obligations.

 

Unsecured personal loan

  • A personal loan through your bank, credit union or other financial institution that is not backed by collateral.
  • Can offer quick access to cash.
  • Lower interest rates than credit cards.
  • Some come with significant fees and penalties that may add to the cost of borrowing.
  • An unsecured loan is not backed by collateral, meaning interest rates will likely be higher than a secured loan.

 

Credit card

  • Credit cards offer a lot of conveniences.
  • If your card offers rewards or points, it may be beneficial to use the credit card to fund the purchase — but only if you have the liquidity to pay it off before interest accrues.

 

  • Often come with the cost of high interest rates.
  • If you’re thinking about using credit cards to fund a major purchase, consider establishing a plan to pay it off as soon as you’re able — and keep your credit limit in mind.

Understand your asset-backed lending options

In some cases, it may make sense to pay for a large purchase by borrowing against your assets. However, doing so comes with different levels of risk. An Ameriprise financial advisor can help you understand the advantages, limitations and risks of the different asset-backed lending options available to you:

Type of lending option

 

Benefits

 

Considerations

Home equity line of credit (HELOC)

  • Allows you to borrow against the equity you’ve built in your home.
  • You risk losing the collateral if you are not able to fulfill your repayment obligations.

Margin loan

  • Allows you to borrow money against a portion of your non-retirement investment portfolio to purchase securities or meet liquidity needs.
  • No minimum initial draw.
  • Flexible repayment schedule.
  • You risk losing the collateral if you are not able to fulfill your repayment obligations.
  • Interest rates may rise, increasing the cost of borrowing.
  • You can lose more money than you deposit in a margin account.

Securities-based line of credit

  • Allows you to borrow against a portion of your non-retirement investment portfolio.
  • Access liquidity while keeping your investment portfolio and strategy intact.
  • No application, origination or annual fees.
  • Flexible repayment schedule.

 

  • Unlike margin loans, the money cannot be used to purchase other securities (or pay down margin loans).
  • Interest rates may rise, increasing the cost of borrowing.
  • You risk losing the collateral if you are not able to fulfill your repayment obligations.

Finance your major purchase — with more confidence

An Ameriprise financial advisor can help you decide how to confidently pay for a large purchase, while helping you stay on track to reach your long-term financial goals.

I’m saving for a big purchase but won’t need the money for several years. What savings vehicle and strategies should I use? How can I use my investment portfolio to fund a major purchase? Which accounts should I tap into to fund my next big purchase?

When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.

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At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's. 

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Background and qualification information is available at FINRA's BrokerCheck website.

This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.
Ameriprise Financial cannot guarantee future financial results.
The initial consultation provides an overview of financial planning concepts. You will not receive written analysis and/or recommendations.
Margin loans carry certain risk. They include, but are not limited to: potential to increase investment losses, clients can lose more money than they deposit in a margin account, risk that clients could be forced to sell investments if maintenance requirements are not met, we can sell securities (with or without advance notice to the client) to meet margin calls at our discretion, and clients are not entitled to an extension of time to meet any margin calls. Margin maintenance requirements can change at any time.
Securities-based lending is the use of a portfolio of securities as collateral for a loan to the account owner. It includes traditional margin lending, subject to Federal Reserve Reg T, Exchange Act and FINRA requirements, as well as loans by third party banks. Like margin lending, third-party pledge loans carry certain risks. They include but are not limited to suspension and/or termination of the Borrower’s line of credit as well as the forced sale of securities to reduce or pay off the loan balance.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Securities offered by Ameriprise Financial Services, LLC. Member FINRA and SIPC.

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