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When preparing for major expenses such as upgrading your computer, buying a reliable car, or going on a dream vacation, it is crucial to plan your budget accordingly. If you have the time, foresight, and flexibility, you can even set longer-term goals, like saving for a down payment on a house.
Keep in mind that significant purchases like a car or a house usually require a loan or mortgage. It is essential to consider your FICO® credit score, as it plays a vital role in determining the interest rate on your loan. If your credit score is not where it should be, focus on improving it during the planning phase. A higher score will help you secure a better interest rate, ultimately saving you money.
Read more about What is Credit
Set a Budget
Carefully look over your budget and know what you can realistically afford for your purchase. Depending on your purchase, you may be introducing a new monthly bill to your overall budget. It’s important that you can comfortably afford to pay this new bill.
Salespeople, friends, or even family may try to push you to increase your budget, but only you know what amount you are comfortable spending. Stick to your budget and brush off the pressure you may feel to spend more. Some large purchases may also come with other costs that require additional budgeting to accommodate. These can include for insurance, maintenance costs, and other fees for upkeep. Work with your budget to include all additional costs.
Research the Purchase
While getting the newest item with the best technology sounds like it is the best fit for you, take some time and research your purchase. You can begin by going online and exploring your options. This will give you an idea of the averages cost(s) you can expect, anticipated interest rates (if you’ll be needing a loan to finance the purchase), industry reviews that give you a good cross reference of the options available along with costs, features, benefits and any downsides to be aware of.
Ask for Expert Advice
When conducting research for a major purchase, consider reaching out to friends and family who may offer valuable insights based on their own experiences. They can provide guidance on negotiation strategies when it comes time to commit. Ensure you take the time to carefully review online feedback, including both positive and negative reviews. Look for any recurring issues or malfunctions that may be costly in the long run. Assess whether the product will truly benefit you and prepare yourself for the financial impact it will have on various aspects of your life.
Shop Around
Depending on your circumstances, you may be able to check out prices by visiting different brick and mortar stores or negotiate with different salespeople, if your large purchase is one that needs to be made rather quickly. Check out the prices locally and nationally to try to find the best deal possible.
If you have the time available to plan and wait, research the best time of year to make your large purchase. Certain products tend to be less expensive during certain times, such as Black Friday and Cyber Monday, Labor Day, or Memorial Day.
Paying for the Purchase
Cash
In a perfect world, paying for major purchases in cash is typically best because you will avoid incurring any debt and your monthly budget will not be impacted. Paying with money out of your checking or savings accounts results in you not having to make interest payments and there is no risk associated to being able to finance the purchase because you have all the funds ready to go. Depending on the purchase, this may be an unexpected expense and you may have to access your emergency funds to help pay.
Read more: What is the Difference Between a Savings and Checking Account?
Credit Cards
Using a credit card to earn points can be a temping idea for major purchases; this is only worth-while if you have the money to pay the card off when the bill comes due. Some credit cards offer 0% interest for a certain amount of time after opening a new card. Paying with a credit card that offers a 0% introductory rate may be an option if you already know you’ll be able to pay off the balance before the end of the introductory period. If you believe paying with a credit card is in your best interest, you should check and see if your credit limit is high enough to make this financial move and if you can afford to pay the higher monthly payment and are willing to pay the higher interest rates that credit cards charge vs installment loans.
Most often, a credit card is not the right option for many to make a large purchase due to the high interest rate that is associated with cards. If you are not able to immediately pay off the purchase, making only minimum payments to pay off expensive purchases can take years to pay off, as well as making the item much more expensive than the initial price of the product.
Financing
When you decide to make a large purchase, you will most likely need to take out a loan to finance the cost. Typically financing involves taking out an installment loan that gives you a set number of months to make monthly payments in order to repay the loan with interest as agreed upon in the terms of the loan.
Installment loans are the most common way to make large purchases, given most people do not have large sums of cash available to cover the costs of a large purchase. Lenders will offer varying terms dependent upon the type of the loan and your credit score and credit history. In some instances, you will have the option of either a variable or fixed interest rate. The variable rate, while typically lower than the fixed rate initially, can increase over time and may result in more interest paid than with the fixed rate. There may also be fees associated with taking out a loan that should be included when considering the total cost of the major purchase.
Some vendors give consumers the option for a “buy now, pay later” deal with no interest for a certain amount of time when you make a purchase. While these kind of financing deals may initially seem helpful to your situation, make sure you carefully read the fine print. You should understand what will happen at the end of the time period—you may be charge interest from that point going forward, or (more common) you may be charged interest from the date of purchase.
It’s important, especially when making a large purchase, where interest represents a significant cost to factor in, to carefully research your options and compare those against your budget to determine which method of financing is best for you.
Invest in Yourself
If you are able to give yourself the gift of time when it comes to large expenses, you can prepare your finances to take on the possible burden of another bill, find another source of income, move money around in your budget, or save up a larger down payment (reducing the amount you would need to finance and ultimately allows you to pay less in interest). With a little time and planning, you can budget for your planned large expenses.
If you have a significant amount of time before your intended purchase, you may want to use an investment product to help you save even more money. Options such as a high-yield savings account or a certificate of deposit (CD account) can be opened through your financial institution. These low-risk options may have a variety of interest rates and rules regarding how you can access your money. You may also look into investing in stocks to grow your money before making a large purchase, but it’s important to note that while there could possibly be a larger payout, there is also more risk involved.
Read more about Investments for Beginners