Financial Planning Guide For Big Purchases
The importance of sound financial planning cannot be overstated when making a big purchase. Whether you're buying a new car or home, renovating your house, funding a college education, or taking a dream vacation, having a well-crafted financial plan is essential for long-term financial security. It can guide you through the complexities of major purchases and help you avoid common pitfalls.
In short, planning for big purchases is not just about crunching numbers; it's also about strategically investing in your future. Read on to learn helpful strategies to consider—and steps to take— before making a significant purchase.
There isn't a universal definition of what a big purchase is—it is a subjective metric. What is considered a major purchase for one person might be minor to another. Factors influencing this distinction include an individual's income level, their savings and investment portfolio, and their amount of existing debt. That said, a purchase that costs more than one month's income is generally referred to as a big purchase.
Following are some examples of big purchases that require a sizeable upfront payment or loans or financing:
Before you move forward with a big purchase, it is essential to evaluate your financial situation. Start by checking bank statements to assess your current savings and available funds. Take note of your average daily balance and look for any fluctuations that may impact your purchase decision.
Next, gather credit card bills and any outstanding loan documents (e.g., car loan, home loan, personal loan) and make a list of your monthly expenses (e.g., mortgage, rent, utilities, groceries, transportation, entertainment, etc.). This will give you a good understanding of your income in relation to your expenses.
Once you complete these steps, you might wonder how much money you can afford on a big purchase. Every individual's financial situation is unique, but the 50/30/20 rule is a widely used budgeting strategy worth considering. In a nutshell, the 50/30/20 divides your after-tax income into three distinct categories of spending: 50% is used to pay for essential expenses (e.g., rent, healthcare insurance, groceries), 30% is for discretionary spending (e.g., gifts, vacation, splurge purchases), and 20% is for savings.
Your credit score will impact your borrowing ability if you apply for a loan to finance a home, car, or other big investment. Banks and lenders use your credit score as a key indicator of your creditworthiness, which refers to the likelihood that you will repay borrowed funds on time. A higher credit score may result in better loan terms, including lower interest rates and more considerable borrowing limits. Conversely, a lower credit score could lead to reduced borrowing options or higher costs.
So, checking your personal credit report before applying for a loan is a good idea. Doing so enables you to check to make sure your report is accurate. If you see any errors, discrepancies, or fraudulent activity in your credit report, contact the credit bureau that provided the report and let them know. Addressing these issues can ensure they don't hinder your borrowing power when applying for a loan.
When buying a car, home, or other large purchases, it's easy to focus on the price. However, understanding the true cost of your purchase goes beyond the initial expense. Big purchases carry hidden costs that can impact your finances in ways you might not realize.
For example, when buying a car, insurance premiums, fuel costs, and maintenance/repair fees will add to the overall cost of ownership. Similarly, purchasing a home involves more than the monthly mortgage payment. Property taxes, maintenance and repair costs, utility bills, and homeowner's insurance need to be taken into consideration.
When you take out a loan to finance a big purchase, you will need to repay the principal amount you borrow and the interest that will accumulate over the life of the loan. The loan interest will increase the total cost of your purchase, so remember this when setting a budget for your purchase.
How you pay for your big purchase will depend on several factors, one of which is your savings. The amount you have set aside in a bank account will determine whether you can pay in full or need to explore other purchase options. Keep in mind that using all or even a portion of your savings for a big purchase will reduce your available cash for future needs.
Another option is to finance your purchase with one of the many types of loans available from banks. Ameris Bank, for example, offers personal loans, home loans, auto loans, and home equity lines of credit (HELOCs), among others. These types of loans allow you to spread the purchase cost over a set period, making it more manageable for your budget. By securing a loan from a bank, you can borrow the amount needed, which you can repay in monthly installments, plus interest.
Finally, credit cards can be used for certain purchases, such as electronics, home appliances, or travel expenses. They offer the advantage of allowing you to buy big-ticket items without paying the full amount upfront. However, using a credit card comes with the responsibility of repaying the balance over time. You will need to make monthly payments that accrue interest, which adds to the overall cost of the purchase.
Moving forward with a major purchase can bring a sense of joy and fulfillment. To ensure this experience remains positive and does not compromise your short-term or long-term financial situation, carefully plan and budget your purchase. In addition, choose the most appropriate payment option for your needs. With this approach, you can confidently move forward with your purchase while safeguarding your finances.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ameris Bank does not endorse nor is affiliated with the companies listed in this article.
In short, planning for big purchases is not just about crunching numbers; it's also about strategically investing in your future. Read on to learn helpful strategies to consider—and steps to take— before making a significant purchase.
Examples of a Big Purchase
There isn't a universal definition of what a big purchase is—it is a subjective metric. What is considered a major purchase for one person might be minor to another. Factors influencing this distinction include an individual's income level, their savings and investment portfolio, and their amount of existing debt. That said, a purchase that costs more than one month's income is generally referred to as a big purchase.Following are some examples of big purchases that require a sizeable upfront payment or loans or financing:
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Look at Your Financial Situation
Before you move forward with a big purchase, it is essential to evaluate your financial situation. Start by checking bank statements to assess your current savings and available funds. Take note of your average daily balance and look for any fluctuations that may impact your purchase decision.Next, gather credit card bills and any outstanding loan documents (e.g., car loan, home loan, personal loan) and make a list of your monthly expenses (e.g., mortgage, rent, utilities, groceries, transportation, entertainment, etc.). This will give you a good understanding of your income in relation to your expenses.
Once you complete these steps, you might wonder how much money you can afford on a big purchase. Every individual's financial situation is unique, but the 50/30/20 rule is a widely used budgeting strategy worth considering. In a nutshell, the 50/30/20 divides your after-tax income into three distinct categories of spending: 50% is used to pay for essential expenses (e.g., rent, healthcare insurance, groceries), 30% is for discretionary spending (e.g., gifts, vacation, splurge purchases), and 20% is for savings.
Check Your Credit Score and Report
Your credit score will impact your borrowing ability if you apply for a loan to finance a home, car, or other big investment. Banks and lenders use your credit score as a key indicator of your creditworthiness, which refers to the likelihood that you will repay borrowed funds on time. A higher credit score may result in better loan terms, including lower interest rates and more considerable borrowing limits. Conversely, a lower credit score could lead to reduced borrowing options or higher costs.So, checking your personal credit report before applying for a loan is a good idea. Doing so enables you to check to make sure your report is accurate. If you see any errors, discrepancies, or fraudulent activity in your credit report, contact the credit bureau that provided the report and let them know. Addressing these issues can ensure they don't hinder your borrowing power when applying for a loan.
Understand the Cost of Your Purchase
When buying a car, home, or other large purchases, it's easy to focus on the price. However, understanding the true cost of your purchase goes beyond the initial expense. Big purchases carry hidden costs that can impact your finances in ways you might not realize.For example, when buying a car, insurance premiums, fuel costs, and maintenance/repair fees will add to the overall cost of ownership. Similarly, purchasing a home involves more than the monthly mortgage payment. Property taxes, maintenance and repair costs, utility bills, and homeowner's insurance need to be taken into consideration.
When you take out a loan to finance a big purchase, you will need to repay the principal amount you borrow and the interest that will accumulate over the life of the loan. The loan interest will increase the total cost of your purchase, so remember this when setting a budget for your purchase.
Choose a Purchase Option
How you pay for your big purchase will depend on several factors, one of which is your savings. The amount you have set aside in a bank account will determine whether you can pay in full or need to explore other purchase options. Keep in mind that using all or even a portion of your savings for a big purchase will reduce your available cash for future needs.Another option is to finance your purchase with one of the many types of loans available from banks. Ameris Bank, for example, offers personal loans, home loans, auto loans, and home equity lines of credit (HELOCs), among others. These types of loans allow you to spread the purchase cost over a set period, making it more manageable for your budget. By securing a loan from a bank, you can borrow the amount needed, which you can repay in monthly installments, plus interest.
Finally, credit cards can be used for certain purchases, such as electronics, home appliances, or travel expenses. They offer the advantage of allowing you to buy big-ticket items without paying the full amount upfront. However, using a credit card comes with the responsibility of repaying the balance over time. You will need to make monthly payments that accrue interest, which adds to the overall cost of the purchase.
Conclusion
Moving forward with a major purchase can bring a sense of joy and fulfillment. To ensure this experience remains positive and does not compromise your short-term or long-term financial situation, carefully plan and budget your purchase. In addition, choose the most appropriate payment option for your needs. With this approach, you can confidently move forward with your purchase while safeguarding your finances.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ameris Bank does not endorse nor is affiliated with the companies listed in this article.