Everybody at some point in his or her life is faced with a major purchase decision. Your major purchase may be a necessity such as replacing a refrigerator or buying a car, or it may be a pleasurable purchase such as a camp trailer or a boat.
A consumer’s two biggest concerns when making a large purchase are “How am I going to pay for this purchase?” and “How do I get the best price?” With the ease of online price comparison and widespread cell phone use, getting the best price is simple. Sometimes the best way to pay for your purchase is not so black and white. Let’s talk about the advantages and disadvantages of the two most commonplace purchasing options.
Should I save or should I charge?
Some people may think this a simple question but with the cash back incentives and point driven benefits that some credit cards offer these days, it takes some consideration to learn which is right for you.
Save: The biggest and most obvious advantage of saving is that you will avoid interest charges. If you have a 0% APR window, this benefit may be mitigated. However, you must be able to pay the entire purchase off within the interest-free time frame, or your purchase will cost you more money. Another advantage is that if you save the money rather than charge it, your credit score will not be impacted. Your credit utilization ratio is the amount of credit you are using compared to the amount of credit you have available. Ideally, your ratio should be less than 35%, or your credit rate will suffer. The only minor disadvantage of choosing to save your money to make your purchase is that you will have to practice patience. Saving money takes time, but you know what they say about all good things.
Charge: The advantages of using a credit card for large purchases are only as good as your credit cards benefits. Some cards give you a percentage of your money back; others give you points or flight miles for every dollar spent. Some cards offer additional benefits such as extended warranties, price protection, and the ability to dispute charges in case of defective or broken merchandise. These are all significant benefits that can be used to your advantage, but are arguably only advantageous if you have a 0% interest and can pay it off within the allotted time frame. If you do not pay it back within your interest-free window, your purchase will cost you more than if you had saved the money. Also, keep in mind that should you hit financial hardship and be unable to make the minimum payment, you may be hit with penalties that will drive up the final cost of your major purchase.
If you are living tightly from paycheck-to-paycheck or are concerned about your financial future, it is always a good idea to get and stay out of debt. Saving your money for large purchases is the safest, and most conscientious decision you can make to stay debt free. Starting your path to saving is easy and only requires strategy and patience.
Be aware of “wants” disguised as “needs”.
As with any savings strategy, the first step is to sit down and write your list of “needs” vs. “wants”. Utilizing this list, you slowly eliminate anything that is not necessary. It is probably no surprise to you that we live in an immediate gratification culture. Today, almost anything can be delivered to your door with the click of a mouse. Most people think that knowing the difference between a need and a want is elementary, but is it? It is no surprise that food, shelter, utilities, transportation and personal hygiene products are recognized as essential needs. However, even these necessities can harbor money leaking “wants” disguised as “needs”. Let’s take a closer look at the basics.
Food. Food and hydration are an absolute necessity, no question about it. However, the type of food you buy makes a big difference in the amount of money you spend. The best (and healthiest) way to cut costs is to analyze how much nutrition you get for your dollar. High protein sources, whole grains, and fresh produce give you the most nutritional bang for your buck, requiring you to eat less while maintaining your health. Cooking simple, nutritious meals at home will curb both your empty calorie intake and impulse buying, leading to substantial savings. Luckily, the very best hydration available is cheap and readily available, compliments of your household tap! If you don’t like the taste of your tap water, investing in a good water filter will still save you money in time over buying milk, juice, soda, tea or coffee.
Housing. If you are paying a mortgage, your solution to saving money may be a bit more involved, but it is not insurmountable. Downsizing a large home for a smaller one, or refinancing your mortgage for a lesser interest rate may significantly help free up some savings. Renters will have an advantage when it comes to downsizing their home because moving to a cheaper rental is less involved and with the exception of waiting out your lease, it’s easy.
Utilities. Utilities are perhaps the most flexible “need” when it comes to saving. Are you feeling hot? Open some windows or turn on a fan instead of the air-conditioner. Cold? Use a blanket or sweater instead of the furnace. Today, one could argue that phone and internet access is a necessity, and you might be right, depending upon your employment and lifestyle. Being a need does not mean that it is necessary to have the largest plan, the latest app or a brand new phone. Opt for the least expensive options that will meet your basic needs, and avoid the bells and whistles. Contrary to popular belief, TV, Cable, and movie streaming services are not necessities, and if canceled can save you a sizeable sum of money every month. You may also find that getting rid of these services will lead to better time management and will free up your time to pursue more productive passions.
Transportation. Getting to and from your employment, the grocery store, and your appointments is a necessary part of life. This fact puts transportation firmly in the “need” category. Whether that transportation is public or private depends largely on where you live and work. Public transport can save you money by eliminating the need for gas and car maintenance but can take up more of your time. If a private car is necessary for your situation, be sure that you opt for a sensible, reliable car that doesn’t require expensive insurance or upkeep. If you have a high-cost or inefficient car, look at your downsizing options to save money. Reducing your drive time by planning and combining trips is also a good idea when looking for ways to save transportation costs.
Personal care. Personal Hygiene products are a necessity if you want to stay employed and keep your friends. However, getting your hair done at the salon and buying that $50 eye cream are not necessary. A basic Shampoo, Conditioner, Soap, Toothpaste, and Deodorant are all you need to keep things clean and smelling pleasant. If you open up your bathroom cabinet or shower stall to find stacks of bottled products, it may be time to simplify.
As you can see, it is important to take your needs and wants strategy a step further. Evaluating each of your needs, eliminating anything that is nonessential and condensing what is necessary to the least expensive option is essential when trying to find money in your budget to save.
Identify your goals and map a timeline.
If you have an idea rolling around in your head than what you have is a dream. If you take that dream and put it down on paper with a plan and a timeline, it becomes a goal. Goals are paramount when you undertake the task to save money for a large purchase. It gives you not only the motivation, but also a roadmap that you can come back to again and again, to ensure that you are still on the right path. Below are four basic steps to setting your goals and timelines.
Write it down. There is something magical that happens when you physically write your goal down on paper. It is almost as if you physically manifest an intent that creates a commitment to the goal you are making. We recommend you designate a notebook specifically for all your goal setting, whether for money saving or otherwise.
Don’t be vague. When you are writing down your goals, be very specific about what you want. What is your large purchase going to be? Is it a $20,000 down payment for a home or a $2000 refrigerator? When do you want it? Is this a short-term goal (12 months) or a long-term goal (3+ years)?
Be realistic. Let’s face it, all of us want it now because we are a product of our immediate gratification culture. However, if your major purchase is a home down payment, chances are it is going to be a longer project than 12 months. It is important to look at your budget and realistically determine how much you can save every month, either by cutting expenses, earning more money or a combination of the two. If you are not realistic about your saving goals and your timeline, you may quickly get discouraged and give up.
Do the math. Once you figure out how much you can save, doing the math will naturally create your timeline. If your goal is $20,000 and you can save approximately $100 a week, you can reach your goal in just under four years.
That may seem like a long time but remember, a home is likely one of the largest purchases you will make in your lifetime, and that down payment will become instant equity into your new future home.
How to control your spending before your spending controls you.
Do you often find yourself wondering “where did all my money go?” at the end of the month? Do you pay overdraft fees because you forget to account for all your purchases? If so, your spending may be out of control. It is no secret that many of us fall victim to our undisciplined shopping habits but when our loss of control makes it difficult, or even impossible to save, it affects our quality of life. When your spending is out of control, saving for a large purchase feels unattainable, and often this creates a feeling of hopelessness. Fortunately, there are methods and tools you can use to help curb your mindless spending. Imagine you are paying for something with time instead of money: This method is a simple yet effective way to help you determine if your purchase is worth the price of both your time and money. Here is how it works. Before you buy that $100 jacket or $20 mug, think about how long you would have to work to earn that amount. If you make $14 an hour, ask yourself if that jacket is worth working 7 hours, or if that new mug is worth an hour and a half of your time. If the answer is no, then don’t buy it. Many people find this strategy to be very helpful when balancing spending and worth.
Give it some space: If you decide that the purchase is worth it, do not buy it right away. Consider your options by allowing some time to pass before making the decision. Give yourself one day. After sleeping on it, if you still feel it is something you want or need, give yourself permission to purchase it and enjoy it. Use Cash for your purchases: With the exception of your large monthly expenses, such as your mortgage or car payment, you should exclusively use cash. Why? Because using cash curbs spending! You will never again spend more than you have because you cannot. Using cash will help you more quickly ascertain a need vs. a want because you can readily see the amount your spending. Some people are surprised to find that when they change to cash purchasing only, the money leaving their hands deters impulse spending more than swiping that deceptively small plastic card. A good rule of thumb is, if you have to put it on a credit card or use an overdraft account, you cannot afford it.
Monitor your expenses: This extremely useful technique has only two rules; write down everything that you purchase and evaluate. Regular evaluation will make you aware of the amount of impulse buying you do and bring any self-destructive spending patterns to light. You can take it a step further and total the amount of money you spent on frivolous items or services in order to provide motivation to curb unnecessary spending in the future. This process can be as fancy as creating a desktop spreadsheet or as simple as carrying a notebook, pen, and calculator. You decide.
When preparing to save for a future purchase, you should utilize every tool at your disposal. Using the methods and techniques you have learned it should be easy to start controlling your spending before your spending controls you and save up for your next major purchase.