Large purchases can define your financial picture. Think about it, they command your money wherever you’re at. Here’s our guide if you’re looking to save for a large purchase.
If you’re struggling to get by and you need to make a large purchase, you may charge it on a credit card, which you will have to pay off in payments. Now, that means more money coming out of your pocket to pay off that debt every month. More pressure.
If you have the money saved in the bank or in some kind of investment when the time comes for you to start spending it, you drop a boatload of liquid cash on that new; home, wedding, vacation, education, boat or car of your dreams. Less cash.
Although you don’t have to make a monthly payment to pay off that new car now since you paid cash, you’re still definitely operating with less capital now (you just spent a bunch of your cash) and in the event of an emergency, that’s less money you have to potentially bail you out, which can force you to borrow your way out of a rainy day. And when it rains, it pours, doesn’t it?
Doesn’t it seem like bad things tend to lump together when our savings dip a little bit lower than usual or when we don’t have any savings at all? First, your dishwasher blows out, then you have a flat tire on your car, then you get an unexpected bill in the mail, things pop up.
Before you know it, all that extra money you had just laying around a couple months back seems to be drying up rather quickly.
Don’t let it happen to you!
Yes, there’s a right and a wrong way to make large purchases. I want to give you some tips that can help you determine whether or not it’s time to buy if you’ve been saving for a large purchase…
- Determine if you want to buy something, or if you need to buy something. Is this purchase a want, or a need? There’s a big difference between the two.
A want is something that may make your life easier, but if you held off for a couple months or a year you probably wouldn’t be any worse off if you didn’t have it. A want is not critically important to your life.
A need, however, is critically important. A need is something that has a deadline. When the battery goes out on your car, you need a new battery. In fact, if you don’t replace that dead battery with a new one, you’re not going anywhere.
- Think about the impact that your purchase will have on your financial picture over the next 12 months. One year is a relatively short amount of time in the grand scheme of things, but a year is usually long enough to get a pretty good idea of how large purchase will affect you.
I believe the best way to make a large purchase is to plan for its impact.
If you’re using credit to make your purchase, you need to have a plan to pay that money back. In fact, I usually recommend that large purchases are not made on credit unless you’re in a position where you can predictably pay at least 10% of that debt off on a monthly basis. If you’re able to do this, your debt will be paid off in close to a year, depending on how much interest you’re paying.
So how much of your monthly income would be eaten up by a 10% payment of your balance on that credit card? If it’s more than 10% of your total monthly income, you may want to pass unless you’re absolutely sure it’s affordable.
The point is if you decide to put your purchase on credit, my recommendation is to make sure you can pay it off within the next year.
But they said it’s no interest for 24 months! Perfect, then do the same math I just showed you above and make sure that you can pay that off in equal installments over the next 24 months without spending more than 10% of your income on the payment unless you’re absolutely sure you can afford it.
- Make sure your reserves are covered! I’ve seen people make this mistake before, I’ve also done it myself. Don’t spend your emergency fund on a big purchase. And if you don’t have an emergency fund, start one.
This is especially important when buying a home, I recommend NOT spending all of your emergency savings on a down payment, regardless of how good of an investment you think it is!
Here’s a great calculator to help you determine how much house you can afford to buy…
What makes a good emergency fund? Somewhere safe from stock market volatility like a checking or savings account for you can easily access your money for emergencies only.
How much money should be in my emergency fund? I recommend that if you work at a job with a stable income that you feel is secure to have at least 3 to 6 months worth of your monthly expenses (not your income, just the amount it costs you to live) saved for a rainy day. Those who have an income that fluctuates or who are paid on commission should have between 6 to 12 months’ worth of their monthly expenses saved to smooth out any instabilities in income or any emergency expenses.
Your Emergency Fund should exist outside of your next big purchase
This is the tricky part about spending money…
Time and time again, I have seen people spread themselves too thin financially by dipping into their emergency fund to make a large purchase. You have to maintain a cushion of emergency savings at all times, this is key to having a stable set of financial vitals. So my recommendation, again, is if you’re looking to make a large purchase, especially if you’re making it on credit is to have a well-stocked emergency fund with 3 to 12 months worth of your emergency expenses saved, depending on what type of work you do.
- Spend wisely and buy wisely. If you’re spending money on a computer, take a look at a few different computers at a few different places, preferably online.
Do your own research as well. I always recommend reading reviews on any types of products you buy. From cars to TVs, there’s someone else out there who has bought what you’re thinking of buying and has an opinion about it, look at other people’s opinions and see if anything resonates with you, good or bad.
Don’t be afraid to negotiate. And yes, there is a way to negotiate the price or payment for a big ticket item such as a car or even a house without being taken advantage of or being too pushy. When I make large purchases I always ask if there’s any additional discounts or coupons they can throw on, this doesn’t always work, but sometimes you’ll get someone having a good day who was feeling generous and they’ll slap a 10% off coupon on your order.
That’s 10% off you wouldn’t have received if you’de never asked, so ask. I have a friend who will not do business with anyone unless they give some kind of concession to him like a discount, a rebate, or something in return for making the purchase off of their bottom line. It can actually be kind of embarrassing to watch him do his thing, but he consistently pays less for most large purchases than what the sticker prices say.
I live and die by the price match! Large retailers want your business, and many of them are willing to match or beat each other’s prices, you just have to find some other prices to beat first. Stores like Staples and Best Buy, in particular, or even price match items that you can find online from places like Amazon or other retailers.
Price matching also exists for pretty much anything else you’re interested in buying, although it’s not always advertised, it’s just good business.
My advice is to look to see how much other people are paying for the item you’re thinking of buying that they very good starting point for negotiating a fair price. This gives you leverage, because if you could go across town to make that same purchase and it would cost less money than whoever is selling you that large ticket item literally has to come down in price to match (if they want your business that is).
And if they don’t want your business, they’ll tell you that they won’t lower the price to match that competitor across town, so get in your car and go pay less somewhere else.
Why go big when you can go small? Consider working with a local small business, if possible, to make your large purchase. Working with local small businesses can help you potentially save money and it can also help your community by allowing those businesses to flourish. You don’t always get a better deal when you work with small businesses on big-ticket items but it’s definitely worth investigating because depending on what you’re buying, working with the right type of professional could save you a lot of money.
You don’t always get a better deal when you work with a small business on big-ticket items but it’s definitely worth investigating because depending on what you’re buying, working with the right type of professional could save you a lot of money.
One perfect example of an industry where bigger isn’t always better is the wedding industry. I recommend working with a wedding planner when planning your wedding. A good wedding planner can help you on a few different levels…
They know how to work on a budget, and will help you stick to that budget and eliminate things that you may not really need which could cause you to spend more than you want to on your wedding day. A good wedding planner also has relationships with vendors that could potentially save you money as well.
Wedding planners can help you save money on things like photographers, videographers, catering and food, entertainment, and even the venue you decide to have your wedding at. A good wedding planner can also keep you organized and on track, telling you exactly what you need to do step-by-step and working with you to take the burden of planning for your big day off your shoulders because it can be an extremely heavy burden.
Time is money, more for some than others, but there’s definitely something to be said for working alongside a professional that helps you save time and also helps you save money.
It pays to have a plan
I know it can be extremely difficult to practice restraint when you want something and you feel like money is burning a hole in your pocket.
It can even be difficult to hold back when you want something and you DON’T have any money in your pocket as well.
If you stop to take a few minutes and examine the potential impact of your choices before you buy, you’ll be saving yourself a lot of potential problems that can be brought on by making a purchase that’s too big too soon.
Good Saving, Good Planning, and Good Investing!
Success With Money Takes Smart Planning and Simple Fundamentals
Are Your Ready to Start Taking Control of Your Money for Good This Time? I Can Help You…