How to save and pay for a big purchase (2024)

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

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%.

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 circ*mstances, 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 thanyou 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.