A major part of our lives is striving towards fulfillment. Some would argue that is what life is about. Self-actualization and attaining one's highest potential. In the US, much of our lives revolve around major milestones that cost a significant amount of money. Typically they are financed or leveraged because we don't have enough cash today, but want to do the event or purchase sooner.
- Go to college
- Buy a car
- Get married
- Buy a home
- Renovate home or purchase another
- Major events or milestones
The list could go on and on…. There are 3 things I always want our clients to think about when it comes to major purchase planning.
1. How much cash will it take, and what does that do to my plans?
If you're saving up for a major purchase like a computer or phone, that may be something that you can save up enough cash for and pay the whole thing off after a few months of saving. A $1000 phone (holy cow, yeah that’s what they cost now) could be purchased in cash after 4 months of saving $250. Not awful, but maybe do-able for some people.
What will that do to your short term savings? Experts agree that having 3-6 months worth of expenses saved in cash on hand is a good target to shoot for. Do you know where this comes from? Most group disability plans kick in after 90 days. If you were to purchase a car and deplete all of your savings, would you be ok if something happened and you needed a major repair?
If you're purchasing a home, the down payment can be anywhere from 3.5% up to 20% (or more if you'd like). You have to work backwards from your goal. If houses in your desired area are going for $250,000, then 10% down would mean $25,000. If you can save $1,000 per month, it will take about 2 years to get there. So be real with yourself about the timing.
2. What is your credit and how can you use leverage?
Are you hoping to start a business but need a loan to start? We have to work backwards here again too. Say you want to start your own food truck (we love our food trucks up here in MN!) It may cost $50,000 to get a truck and kit it out with all the necessary kitchen and safety needs. Rather than wait 10 years to save up enough cash, you can get a loan to purchase it sooner. That is what leverage is all about. Suppose you can profit $10,000 per year while paying yourself some sort of salary and servicing the loan. Then after a few years the loan will be paid off and you'll be in a better position earlier at that point in time than if you had waited to just save up enough cash.
You'll need to still have some sort of down payment or collateral for the loan. Also, credit will be important. If you know that you have less than stellar credit, it may take 6-9 months to really improve your score enough to the point where you'd get approved for the loan. We'll talk more in other posts about how, but good credit is a ticket to early access.
3. What is the real value compared to your happiness and fulfillment?
Are you going on the trip just to put pictures on Instagram for a few hundred likes, or will you be visiting the land where your ancestors came from and it's a once in a lifetime experience? Will you be moving into your dream home in a dream neighborhood or are you just getting a home because you read some other blog that said it's not good to rent?
The most important part of planning for a major purchase is the fulfillment you receive from it. A really candid example is weddings. The average wedding in the US is over $30,000! https://www.businessinsider.com/average-wedding-cost-in-america-most-expensive-2018-3 Yes, it's the biggest and most important day ever and you want to celebrate, but there is no evidence that shows someone spending $50k is happier years later than a couple that spent $5k.
With a goal like this you have to think about all of the rest of life, the homes, the cars, the trips or cabins etc… that will come after the wedding and if you're setting yourself up for success or turmoil.
All in all, when planning for major purchases it's important to think about your cashflow and how comfortable you are with that. You must consider your credit and using leverage. And lastly, what is the real value in terms of happiness and fulfillment you'll get out of the purchase?
Want to discuss more surrounding major purchase planning? Schedule a call using the link below!