At some point in life, you’ll be in the market to buy something that costs a significant amount of money. No matter the purchase, sometimes the decision can be hard to make. Here are three things you should ask yourself before you spend your hard-earned money:
Is it needed? Impulse-buying is more frequent than ever before with ever present smartphones and online shopping platforms. While these platforms are not always the avenue to buy the item we know we can quickly and easily be targeted for a new set of golf clubs, vacation, renovation project, automobile or vacation home. How often can someone look at these options and have the discipline and will power to decline from moving forward. Taking the time to evaluate whether or not this purchase fits in to your plan can help avoid rash purchases that impact your future goals. For clients who have a written plan with specific goals it make the process of evaluating potential purchases much easier.
Do you have to borrow? Large purchases often come along with the necessity to take on debt in order to pay for them. When deciding whether or not to make a purchase, factor in the amount that would be borrowed and interest would be paid, which is dependent on the type of purchase and loan needed. With the recent uptick in interest rates the difference in costs for a potential large purchase today verse just 18 months ago can be very dramatic. For example, if you were looking to buy a ski condo or summer home 18 months ago for $500,000 and put a 20% down payment the financing at 3% interest would have been $1,686/month. Keep in mind this is just principal and interest and does not include insurance, taxes, condo fees and general maintenance. Today, assuming a 6.5% interest rate the payment would increase to $2,528/month, increase of almost $900/month.
Is it part of the plan? You work hard to afford a happy life and a comfortable retirement. Sometimes, some opportunities are too good to pass up. Whether it’s taking a big vacation, buying that dream car, or finding your perfect summer home, opportunities don’t always align with the timing you had planned and you have to jump on them. Make sure the purchase aligns with your plans; both short and long term so you can have confidence in your decision. We encourage clients to model these large purchases in your financial projections to see how they may impact other important components on your financial life which may include saving for college and retirement. We refer to this process as getting into the proverbial financial flight simulator before moving forward on these important decisions.
Goals, dreams, and aspirations guide a financial plan, not the other way around. Let’s be ready when those opportunities emerge so we can be sure they line up with your goals! We are always happy to talk through big purchases and answer any questions you have.