How much to save each month for a big purchase: the full calculation
Almost everyone divides the price by the number of months. That number is wrong, and always low.
In short
To work out how much to save each month: add up the real price — the item, tax, delivery or transfer, and the first year of running it — subtract what you already have set aside, and divide by the months until your date. If the result does not fit your monthly surplus there are only three ways out: move the date, lower the target, or raise the surplus. Moving the date is almost always the best of the three.
A savings goal gets abandoned for a very specific and very avoidable reason: the monthly amount was wrong from the start, so failing was a matter of time rather than discipline.
The formula
Real price
Not the one on the label
The item, tax, delivery or transfer, and the first year of running it
Minus what is there
The starting point
What is already set aside for this, not your whole balance
Divided by the months
Until the date
And the date is a decision, not a given
The three costs almost nobody adds
This is the difference between a goal that completes and one that stalls at 80%.
- Tax, duties and fees. Depending on the country and the item these can be a large share of the total, and they are not in the price you looked at.
- The cost of putting it into service. Delivery, transfer, installation, registration, the compulsory first-year insurance.
- The first year of owning it. A car has insurance, servicing and fuel. A computer has software. A move has a deposit. This is not part of the saving, but it is part of the decision, and finding out afterwards is what makes a purchase feel sour.
A rule that works out well almost always: add 15% to the price you saw and calculate on that. If there is money left at the end, it is the only pleasant surprise personal finance offers.
When the monthly amount does not fit
You do the division, a number comes out, and it does not fit what is left each month. That is normal the first time. And there are only three real ways out:
- Move the date. Almost always the best, and almost always considered last. Four more months usually turn an impossible amount into a comfortable one, and the purchase still happens.
- Lower the target. The previous model, second-hand, the version without the extras.
- Raise the surplus. Genuinely, not imaginarily: cutting thirty a month for eight months is a plan, "I will spend less" is not.
What is not a way out is financing it so the monthly amount fits. That does not lower the cost, it raises it, and moves the problem into a year that will have problems of its own.
Why the date matters more than the sum
A goal with no date is not a goal but a wish, and it competes every month with whatever turns up. A goal with a date has an instalment, and an instalment gets paid the way the electricity bill gets paid: without being argued about each month.
The date is also the only thing that tells you whether you are on track. In month four of a ten-month plan you either have 40% or you do not, and that takes five seconds to check.
Keep it out of sight
Goal money cannot live in the account you buy bread from. Not for discipline: in that account the balance is the signal you use to decide whether you can afford something, and a balance inflated by goal money makes you overspend without noticing.
A separate account, a transfer on payday, and the everyday balance tells the truth again.
If there are several goals at once
Two work, four do not. With four, none moves far enough to be visible, and what is visible is what sustains the habit. Pick the two that matter most, finish one, and let the next in. It is developed in financial goals.
Common questions
- How much should I save each month to buy a car?
- Add tax, registration and the first year of insurance to the price, subtract what you already have set aside, and divide by the months until your chosen date. That calculation usually comes out 15 to 25% above the sticker price divided by the months, which is the sum almost everyone does.
- Is it better to save up or to finance it?
- Saving costs less whenever the financing charges interest, and the difference is a few months of waiting. Interest-free instalments are the separate case: there is no extra cost, but they commit your month for a year, and they are worth adding to what you already owe before agreeing.
- Where should I keep goal money?
- In an account separate from your everyday one, and not for discipline: the everyday balance is the signal you use to decide whether you can afford something, and inflating it with money that already has an owner makes you overspend without noticing.
Try it on your own money
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