One of the best ways to be in control of your finances is to always consider your purchases carefully, especially if it is a large purchase. It can be easy to act on impulse and buy an expensive item like a car without thinking, but it can leave you with huge financial regrets. So with every large purchase you make, ask yourself these five questions to ensure you make the best financial decision.
1. What is the purpose of the purchase?
The first and most important question to ask yourself before making a large purchase is, what is the reason for wanting to make this purchase? Identify if this is a want or need behind your intended purchase. For example, you want to buy a car. Do you need a car because yours broke down and cannot be repaired, or do you want a newer car because you have had your car for a few years?
If your purchase is a true need, determine how this purchase fits into your long-term financial goal. For example, if you need a car, a car can help you get t work and run your errands. On the other hand, if you want a car, this purchase may not fit into your long-term financial goals because it is more of an impulse than a planned purchase.
2. Can you afford it?
Before making a large purchase, always ask yourself if you can afford this. This may seem like a question you would ask yourself, but so many people don’t think about how their purchase fits their current financial situation.
You need to evaluate your current financial situation and budget. Then, you need to determine the impact of the large purchase on future finances. You should be able to either pay for this in cash with money you saved, or you should be able to pay the monthly payments required if a loan is needed. Next, make a sandbox budget with that item to see how your finances may change. If you feel your financial situation will not change, you can afford it. However, if you are running up against having to change your budget to make this purchase happen, you may not be able to afford it.
3. Will you use it enough to justify the cost?
When deciding whether or not to make a large purchase, ask yourself how you will use this item. For example, a car is a more obvious answer (to take you places), but other large purchases may not be so obvious.
Let’s take, for example, music equipment like mics, amps, guitars, and things like that. If you want a home studio to record music, you really need to make sure this is one thing you will often use to justify the costs. If you are a musician and know you will use this purchase daily, you can calculate the cost per use of that item.
If you aren’t sure your frequency will be high enough for the cost, evaluate potential alternatives to the purchase. It’s always good to test out something like this. For example, can you rent out a studio for a month to see if it’s what you need? Can you find used versions of what you want?
4. Will it retain its value?
Before making a large purchase, always do your research to know the resale value of the item. Then, of course, you want to purchase something that will retain its value. Cars are a great example. We know that a new car depreciates as soon as it has driven off of the lot. But other purchases may not be so clear.
Try to identify anything that may decrease the item’s value. For example, while it’s great if you keep this item forever, there are times when you want to sell this item for something new. Also, think about any repair and maintenance costs that can occur that help retain the item’s value. Will this cost a lot to keep its current value?
5. Is it the Right Time to make the purchase?
Always ask yourself if this is the right time for you to make this purchase. There are a lot of factors to consider, like your current financial and personal circumstances. For example, this purchase may be a better fit for you in a few months when you have saved more money or have finally moved to a new area.
Identify any external factors that could affect the value or availability of this item. For example, there can be times when you may have the money for the item, but global situations like supply chain issues can make this cost more than it should. Can you make do with this until it comes down in price? Always try to make the best financial decision for yourself.
Whenever you are making a large purchase, it’s important to carefully consider that purchase. There are five key questions to ask yourself about a purchase that can help you to make the best financial decision. Every purchase will be different, so it’s good to do this for each purchase, as your financial situation may have changed.
If you want to speak with a Financial Service Representative about your options you can fill out the form here and someone will be in contact with you.
Community Resource FCU