- Questions to ask before making a big purchase:
- Define the Purchase and What It Does for You
- Estimating the Cost and How to Pay for it
- Goal Alternatives
- Make a decision and have a plan
In our lifetime there are many large purchases we will make that will require planning. Purchases like a home, a car, a boat, another property, or college education are all examples. Today let’s focus on items that we will purchase that cost more than $5,000. Our discussion will cover questions you should ask yourself before making a big purchase and ways to fund your purchase.
The purpose of questions one and two is to get someone thinking about their needs vs. wants. What would happen if I couldn’t make this purchase? Is it essential to spend a significant amount of money on it and what would happen if I didn’t buy the item? There is always a trade-off when it comes to money. If I purchase a $20,000 boat today my opportunity cost might be that my family cannot go on vacation for the next two years. Understanding our opportunity costs can help us make confident choices about our money; helping us to avoid regret later.
One large purchase most of us make is a car. Cars vary significantly in price, and it will be essential to narrow down and research the details of the vehicle we want (or think we want). Let’s use an example of my desire to buy a new Cadillac Escalade for my family. Let’s go through the above 8 questions before I make my car purchase.
1. My ideal car purchase is a 2018 Escalade.
2. The new car allows me to transport my large family and any guests to functions we have on a weekly basis. My family needs something reliable that will last a long time, and we trust buying new the most. This car would make me happy, and make me feel like all my hard work is paying off. It would be a nice reward.
Determining the purchase cost is vital. The estimate requires research, and I will need to be as realistic as possible.
3. I have looked up the 2018 Cadillac Escalades online, and I know I will spend at least $80,000. Some models go as high as $95,000. Finding sales or rebates on this vehicle is difficult.
4. $80,000 to $95,000 is a substantial amount of money. It would be ideal to save for the entire purchase price of the vehicle and pay cash, but I don’t have the money to do that. I would need to consider other financing options to pay for this car.
A great online auto loan calculator can help you estimate the monthly payment on an auto loan; try this one from Bankrate. It tells me to expect a payment of $876 per month for my Escalade. A lot of factors go into the calculation let’s review them to make sure we are using realistic variables. Here is an image below from bankrate.com’s calculator.
A type of financing option for a car purchase is to lease it. It is kind of like renting to own an appliance or a house. There is less of a down payment needed to lease a vehicle, and the monthly payments are usually less than loan payments. A lease is set for some number of years or months, and then you can turn the car in and get another one. The other option is you may purchase the vehicle at the end of the lease contract instead of turning it in for another vehicle.
Some drawbacks to a lease are that you do not own the asset. Therefore you are not building equity in the car. Also, there is usually a mileage restriction on the lease each year, or you will pay a fee when you return it after the lease contract is up. You may also be subject to a fee if the wear and tear on the vehicle is excessive.
Individuals who like leases look to drive vehicles out of their price range, like to have a new car, and do not put excessive miles on their cars each year.
It is valuable to know what alternatives may exist to large purchase ideas, which you may not have considered. Many times there are alternatives that will help you meet your needs and make you satisfied as well. If you have gone through questions 1-4 and you are nervous about the savings or financing commitments needed you should be open to alternatives. Even if you feel comfortable with the above obligations be open-minded because you just may be better off with another goal you have if you consider the alternative.
5. Are there any alternatives to buying an Escalade?
6. What are the pros and cons of making my ideal purchase?
Review your answers to all of the above and make a decision: remember your alternatives, be realistic whether or not you can afford the purchase, what else is given up in my budget or will you have to sacrifice other goals to make the purchase?
7. It’s time to make a decision.
For the Escalade purchase goal, I am going to go with an alternative purchase of the 1-year-old GMC Yukon. This decision will help keep my monthly savings and finance payments to reasonable levels. With an Escalade, my budget would be uncomfortable, and I would lose my sense of financial freedom.
Be prepared for unexpected costs. I found in my research that new tires are quite expensive for these large SUVs so I will have some money set aside for that purchase in a couple of years when needed.
8. Define steps:
In two years I will be ready to make my large purchase of a new vehicle. This is the same process we use for our other big purchases as well. It is essential to know all your options and to think them through thoroughly. Don’t rush your decision-making process.
If you are unsure about your purchase, seek advice from a professional or from someone you trust. Go through your ideas together and let them help you think it through pros and cons. Ask for the best places they know to make your purchase. Maybe they can refer you to a friend or someone who can help you get the right price. Sometimes it’s about who you know!
Our final thoughts about making large purchases are to have a plan for if the purchase becomes a burden down the road. Don’t be afraid to make decisions that will better your situation if the purchase was a mistake or your financial situation changes. Sell the item that is beginning to cause you stress or financial ruin. No one will think poorly of you for making the right decision. Making tough choices is what makes you a success. Do what is best and don’t allow your financial independence to suffer because of your ego.