MJ.$ Reader Asks: What’s the Best Way to Save for Big Purchases?

by Matt Jones, CPA

MJ.$ reader Dan asks: How can I earn better interest on my savings for a purchase?

When it comes to earning interest on your savings, things aren’t looking good right now. Interest rates are at record lows. That’s great news if you (can find and) buy a house with a low mortgage rate, but it presents a challenge for your savings. A reader asked how he could earn more on money that he’s saving for a vacation. Here’s my advice to Dan with some additional thoughts. 

Dan plans to set up a separate savings account for his vacation fund, contributing to it over time. With online banking this is a smart and easy way to save up ahead of time. When he takes the trip (and buys the tickets) Dan won’t feel the financial impact because he’s spreading the expense over 6-8 months. Instead, he can just sit back, relax, and enjoy the Piña Coladas. Similarly, he won’t return home to a massive unfunded credit card statement (he should have an account for this too). I commend Dan for his planning, it’ll be a more relaxing vacation for these reasons. 

However, Dan wanted to take it a step further and asked how to earn more interest on his savings along the way. “An intelligent lad! A remarkable lad!” 1 He even suggested opening a money market savings account which provides a (slightly) better interest rate with a few restrictions. Not a bad idea, but I challenged Dan on what his real goal was: affording the vacation more easily.

I asked if he had his finances under control and from the nature of his initial question I expected he did. I suggested he look into a rewards credit card that might more than cover the vacation cost rather than the savings account that earns a few extra dollars of interest. Some rewards credit cards provide points for travel, and his savings account would then pay for the remaining costs of the trip or credit card fee. 

As I told Dan, “it sounds like the basics are really clicking for you and you’re thinking of ways to get better, so it may be time to look at bigger opportunities. Of course, this all assumes you have your finances under control, a budget, goals, etc.” My wife and I used 250,000 reward points to pay for most of our honeymoon to Southeast Asia, so I know from experience that this strategy can be highly effective.

Whether or not Dan utilizes a rewards credit card for his trip it’s an option worth investigating. Because he has his finances otherwise in order, Dan can look at these next level opportunities. 

The same way I challenged Dan to reevaluate the premise of his question, I’ll ask you to reconsider your own goals. With this year drawing to a close, now is a great time to plan for coming year(s), financial and otherwise. Rather than improve by a few percentage points, take a fresh look at your ultimate goal, and with a blank slate, consider how you could achieve it faster, easier or at less cost. 

As an example, maybe you’re considering a new home. Try asking yourself if you really want a new house, or just a nicer kitchen; a bigger yard or simply a more enjoyable outdoor space? The opposite could also be true: maybe you’re planning a large renovation of your home and moving could cost less in time, energy, and money. Maybe there is a way to achieve your real goal sooner and with much lower effort and expense.

If you have a question of your own, please feel free to reach out to me with it. You can email or ask anonymously.

From my family to yours, Happy Holidays and a very Happy New Year! 

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