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Wednesday, April 24, 2024   

Planning for Large Purchases
by Shawn McAnnally
Shawn McAnnally is a man on a budget and founder of BudgetBrains.com, a site that helps regular people find simple solutions to life's complicated financial problems.
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Shawn McAnnally

One of the biggest challenges people face in their struggles to avoid debt are large purchases. The easy availability of credit in virtually every retail store makes it hard to resist. You don't need to save for the things you want, you can simply finance the purchase with a new credit card or store account. While this is true, and it does allow for faster gratification, it comes with a hefty hidden cost.

Nobody will lend you money for free. With the exception of some 0% offers, all financing costs you more than it would if you bought the item outright. This is the compensation that financiers require for extending you the privilege to buy things before you can actually afford them. Beyond this tangible cost is another type of expense that people typically don't think about. It is one that applies even if the financing rate is 0%.

Financing reduces your economic mobility. In simple terms, the more you owe, the higher your future monthly obligations are. When you add a financed purchase, you are adding a bill. Every month, that new bill reduces your free cash flow, or the amount of money you can control the use of. In the short term, you have gained the most recent object of your desire. In the long term, you have diminished your ability to make new purchases. At some point, you will want to acquire something else. You may be able to afford it the first few times, but eventually you will run out of purchasing power as the rising tide of your debt drowns you in minimum payments and interest charges. These bills will exist long after that purchase has lost its allure.

Everyone knows the feeling that a five year financed car purchase brings. Sooner or later, there is another item that you want, but you're stuck spending your money on something you financed months or even years ago. You gave up the ability to choose the direction your money flows today in exchange for something yesterday. Worse yet, if faced with an emergency medical expense or sudden job loss, the amount of money that must be spent each month is higher than it would be if you were just paying standard bills. This can encourage further financing and can greatly worsen your overall economic situation at a time when you can least afford it.

Getting Some Time to Think
It is easy to make the choice to finance, and all too difficult to think about the long-term effects when you are in the midst of a purchasing frenzy. The trick is to make these decisions outside the bubble of your desire and by doing so, make them in a more rational way. To do that, you must train yourself to view them as the long-term commitments that they are. You can do this by vowing to avoid making large purchases without an evaluation period. When you decide that you want something, give yourself a holding period during which you can let the initial impulse fade. Spend some time considering the true cost of the purchase and make a list of the benefits and drawbacks. Think of what else you could use the money for.

Sometimes, after the initial buzz fades, you will find that the purchase isnít worth it. Other times, you will still feel that strong desire. The point of the evaluation period isnít to prevent you from all large purchases, but to help you weed out the ones that will bring the least amount of satisfaction. Itís about taking your emotions out of your spending decisions so that your judgments will be sound. Thatís a key first step to controlling your spending, but not the only one. Once youíve decided to make a purchase, you owe it to yourself to make the purchase as affordable as you can. Read on.

Paying the Lowest Amount
Part of the evaluation detailed above involves considering the true cost of the item. That includes the cost associated with financing. Financing a purchase is expensive. Most people donít think twice about comparison shopping for cars or even groceries. Those same people then put the purchase on a credit card they wonít pay off when the statement arrives or sign a five-year loan agreement with ďaffordableĒ payments. This drastically raises the cost of the purchase and negates the benefits sought when wisely looking for the lowest price.

There is only one way to avoid the burden that debt brings and that is to save for large purchases, paying for them with your own money and not somebody else's. You can only truly alleviate the problems associated with debt by not incurring debt in the first place. For many people this seems like a fantastic proposition, but not one that is readily attainable. The truth is that it is much easier to do than you would think. Don't give into the myth that credit is the only way to buy expensive things. It isn't.

You simply have to plan ahead. Use your evaluation period to outline a plan to pay for your purchase on your own, without the pricey aid that credit card companies and banks will all too willingly provide. Most large purchases are easy to foresee and almost anything can easily be paid for with cash if you think about it beforehand.

There are two steps to this sort of planning and both are simple. First, you need to identify the total cost. Next, break that amount into smaller, more manageable pieces. To do this you need to set a goal date, the time at which you want to have the money available to make the purchase. You then divide the total cost by the paychecks you will receive before the selected goal date. The result is the amount you need to save each period. If this doesn't fit into your budget, you need to evaluate whether a cheaper alternative would be more appropriate, whether you can lengthen the time until the purchase, or whether changes in your budget will allow you to reach your goal.

The process is relatively short and easy. Fifteen to twenty minutes now can provide you with the financial power to purchase the things you want without sacrificing either your financial security or freedom. Purchases made without these types of stressful baggage are always the best ones.



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