How Can You Plan for Making Larger Purchases?

For most Americans, developing a budget to plan for large purchases is an inevitable part of life in the U.S. Having a home is a fundamental necessity. In many areas, having reliable transportation is essential, and this often means purchasing a car. While a car is more feasible in terms of paying cash to purchase the asset outright, buying a home translates into obtaining a mortgage and providing a down payment (unless you have $300,000 or more laying around somewhere).

But large purchases aren’t limited to homes and cars. You’ll need to first consider the necessity of the item. Indeed, it doesn’t even have to be an “item” per se. It could be planning to return to school or going on an extended vacation. 

So, the initial questions to ask yourself are: 

• Do you need it? Is this just for fun? 
• What value does it add, either intrinsically or extrinsically? 

Granted, not everything you purchase requires that you have a specific financial return on the investment. Yet, depending on your financial situation, some have a greater ability to book a trip to Europe and travel there for a month without it greatly impacting their savings, investments, and continuing to pay their bills at home while traveling. 

Indeed, if the purchase you’re planning means you’ll be cutting into finances reserved for the essentials (rent/mortgage, utilities, or any collateralized loans where the creditor can retake possession of property), then it’s likely that the purchase should be delayed until you’re in a better financial position. The purchase may not be practical for now.

Large Purchase Payment Possibilities

All is not lost. If you do some shopping around to seek price comparisons or possible rebates, you can try to negotiate the price depending on the item or other intended purchase. You’re not completely stuck with paying the initial asking price. Car dealers will often lower their price to get the prior years’ model off their lot. (They are losing money each day on their inventory, as cars depreciate in value.) Homes are trickier to negotiate, but there’s generally some wiggle room depending on other factors, including the local housing market and how fast the seller wants to sell their home.  

After you’ve crunched some numbers (using an online calculator is highly recommended), and decided that the purchase is feasible, then it’s time to consider how you’ll pay for it.  

Do you have a sizable savings or other investments that don’t level a penalty for cashing out some of the monies earned or invested? 

If at all possible, if you have an emergency funds reserve, keep that untouched and locked away for emergencies only. 

Financing vs. Paying Cash

As previously stated, large purchases often require taking out a loan or some advanced budgeting techniques. Having a collateralized loan on your credit report can boost your credit score. But if you’re trying to finance something consumable and it isn’t a business purchase (e.g. buying clothes to resell and earn income), then financing the purchase will likely cost you more money due to paying interest on the loan.

This isn’t to say that you shouldn’t buy something for fun. If you have the cash on hand and all other financial signals are giving you the green light, then dipping into your savings might be the way to go.

The point here is to weigh the cost versus the benefit of either financing or paying cash. A basic rule of thumb is, if the item appreciates in value (such as a home or business purchase), then you’re in a better position to finance the purchase as long as you have good credit, as well as a a solid debt repayment strategy.

Yet, if it’s just for fun and the primary value is for entertainment, then you’ll save money in the long run if you purchase whatever it is outright, because your purchase won’t serve to build long-term wealth. Keep in mind that your credit score is also a determinant as to whether financing is available and the interest rate you’ll be charged by the creditor.

Ultimately, your decision comes down to your financial objectives both in the short and long term, for both you and your partner, if you have one. For fun purchases, paying cash will cost you less than financing. Meanwhile, for essential purchases or items that appreciate in value over time, the appreciative value can offset the interest you’ll pay.