How Do You Know If You Really Can Afford Something?
Smart Quiz: How Do You Know if You Really Can Afford Something?
- Enough in Savings
- Room on Credit Card
- It Won’t Break You
- Dedicated Savings
Answer: Dedicated Savings
(FinancialHealth.com) – We all see extras we’d like to buy from time to time, but bills and other financial obligations simply have to come first. While it’s not necessary to ignore every “want” on the list, it’s important to know it’s affordable. But how? The best way is to start a dedicated savings plan specifically for that item.
What is Dedicated Savings?
Major purchases, and sometimes even smaller ones, mean planning ahead. Dedicated savings is exactly that. It is the method of saving money dedicated to a particular purchase or goal — not just adding to a general rainy day fund.
How to Start Dedicated Saving
To get started, one has to know what they want, how much they need to obtain it, and more importantly, how much of their income they can dedicate to accomplishing this.
Trying to go on a vacation? Do some research to figure out how much airfare, accommodations, and food will cost. Don’t forget to budget for incidentals and souvenirs while on the road.
Buying a new television? Consider the cost, taxes and any new wiring that might be needed to get it to work properly. Consider all of the “extras” that will make the purchase complete when totaling up the actual cost.
Next, decide how much you can realistically dedicate to savings. Those following the 50/30/20 rule for distributing income are already putting 20% into savings. Can any of that money be earmarked for the expense in question?
Take a close look to see how much money you have to dedicate after you’ve paid your bills, debts and contributed to your regular savings. Would reducing the cable bill or cutting out the weekly take-out be enough to save towards your goal?
Create a Separate Savings Space
It’s not a good idea to put dedicated savings in with general savings. For big-ticket items, find a suitable bank that offers high-interest rates and other financial promotions on savings accounts and deposit the money there.
Keeping this money completely separate will reduce the urge to spend it when something more immediate comes up. For smaller purchases, something simpler might work just as well, like keeping cash in an envelope marked for its use.
The only way to be sure something is affordable is to plan, save and pay for it outright. A dedicated savings plan helps to set financial goals and achieve them over time so that affordability isn’t even a factor.
~Here’s to Your Financial Health!
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