How to Prioritize Big Expenses

Budgeting is all about balancing your income and typical monthly expenses. But what happens when you need to make a large purchase, especially one you didn’t plan for? How can you make sure your next big expense doesn’t compromise your financial security?

Most people don’t have budget categories for things like “replacing a broken water heater” or “installing new windows.” And even if you’ve saved up for a big expense, like your kids’ college tuition or a big vacation, you might still feel a lot of anxiety when it comes time to actually spend that money. 

Is there a way to reduce the fear and stress that often comes with spending a lot of money? How can you align big expenditures with your financial priorities? Like all aspects of personal finance, making big purchases comes down to knowing and honoring your values. 

Consider the Timing

In many cases, large purchases are stressful because they are unexpected. Your car dies or your furnace breaks or someone needs to go to the emergency room, and you suddenly need to spend a lot of money that you didn’t plan on. Even if you have a healthy emergency fund to cover these types of expenses, it can feel scary to actually dip into that money, because then you might not be as prepared but the next financial emergency.

Sometimes you can mitigate the stress of a large purchase by adjusting the timing. For example, you might be able to negotiate a payment plan for a big medical bill instead of paying the whole thing at once. Or you may be able to carpool or use public transportation for a while before replacing or repairing your car.

Adjusting the timing of a big expense can help in a lot of cases. However, that doesn’t mean that it’s always possible (or wise) to wait. If taking public transportation to work adds hours to your daily commute, it may be better to buy a new car right away. Likewise, it’s not reasonable to spend all winter without a working furnace. Thinking through the timing of a big purchase helps you know whether it’s best to wait or not.

Analyze Your Options

After you’ve decided when to make your big purchase, the next step is to decide how to pay for it. A common piece of financial advice is to avoid debt at all costs, even if it means waiting months or years to save enough money. While that approach is popular, we don’t think it’s necessarily the best option.

Sometimes waiting to save up the money just isn’t a realistic option. And there can be some benefits to financing a large purchase. For example, spreading the cost out over time allows you to keep more money in your emergency fund. 

If you decide you’re going to finance your purchase, make sure to consider all the options. Some potential solutions include getting a personal loan, applying for a home equity line of credit, or refinancing your home. There are pros and cons to every type of financing, so do the research and figure out which one makes the most sense for you.

Run the Numbers

Big expenses can affect your monthly budget and your overall financial health. It’s crucial to make the calculations so you know exactly how much a large purchase will affect your finances.

For example, if you decide to pay for a new furnace out of your emergency fund, how much will you have left for a rainy day? Will you need to adjust the amount you save every month to refill your emergency fund faster?

If you decide to finance your purchase, you’ll have monthly payments to consider. How will those fit into your budget? Will you need to reduce other expenses to compensate? You can’t truly know the impact of a big purchase until you take the time to crunch the numbers and see exactly how it will fit into your budget.

Look at the Big Picture

There’s often an underlying sense of responsibility when it comes to money; you want to do the right thing with your resources. And often, there’s a sense of guilt that comes with large purchases. Many people feel bad about buying a new car or spending money for a vacation because they “should” be doing something “better” with that money, like investing or saving more for retirement.

But it’s crucial to remember that there isn’t just one right way to manage money well. Your financial decisions are personal, and they must reflect the unique circumstances of your life. 

For example, today’s market features high-interest rates and low stock prices. So conventional wisdom might say that it’s a much better time to buy stocks than to finance a car. But that generic advice might not be right for your specific situation. It’s crucial to consider the big picture of your life and your finances so you can determine which option best honors your needs.

Reducing the Stress of Large Purchases

How do you prepare for a big purchase? Life events don’t always coincide with a full emergency fund or a range of low-interest loan options. A big purchase can have a significant impact on your overall financial health, so it’s important to consider all the angles before you hand over the cash or sign a loan document.