Sometimes, major purchases come in waves. Maybe your AC breaks and your car dies two weeks later. Or maybe you finally take the plunge and put a down payment on a house, and the next day a family member has a medical emergency, and you know big medical bills are coming. What should you do?
You and your partner start asking, “How do we afford this?” But that question has layers. First, there’s the initial sticker shock of multiple big expenses that you weren’t necessarily planning on. Thinking about spending all that money can be stressful.
But once you’ve worked through that aspect, you’re faced with the next part — how should you pay for it? Should you wait until you can cover the whole cost in cash? Should you take out a loan? And if so, should you put money down? Or would it be better to finance the whole purchase and save or invest the cash you have?
As in every financial decision, there’s no objective answer. What’s right for you might not be the best approach for your sibling or best friend. So, how do you make the best decision for yourself and your family? Use the questions below to think through all the considerations.
Question #1: Can It Wait?
It might feel like all of the purchases you want to make need to happen right now. And that might be the case — things like a leaky roof or a necessary medical procedure can’t usually wait. And when it’s a circumstance like that, it might be really easy for you to answer this question.
But some situations aren’t as easy to analyze. If your car dies, you might think you need to replace it right away. But do you? Is there another transportation option you could use for a while?
Let’s say you live in a place where there’s a good mass transit system. You don’t necessarily love using it to get to work, but you would deal with it for a while. Since there is another option, does that mean the “right” answer is to wait?
Not necessarily. Just because you can find another option doesn’t mean you should. And it doesn’t mean you have to. Many people grow up feeling like the cheapest option is always the “right” one. You may have been raised to believe that the harder option is the morally superior one.
But that’s not true. Maybe you can use mass transit for your commute, but that doesn’t mean you have to make that choice. If doing so doubles your commute time and it’s important to you not to give up time with your family, then it might be a better choice to replace your care right away.
Remember, personal finance is personal. Learning to manage your money isn’t just about figuring out what you can afford. It’s also about comparing all the available options and deciding which one works best for you and your family.
Question #2: What Do the Numbers Look Like?
Now it’s time to dive into your budget and bank account to get a complete overview of your financial situation.
- If you decide to make your big purchase now, where will the money come from?
- If you use money from your emergency fund, will you still have enough left to feel comfortable?
- If you want to take out a loan, how will that impact your overall debt load?
- Will you be eligible for 0% financing on the purchase?
- Will you be able to afford the monthly payments?
- Do you have a savings or investment goal that you’d rather put cash toward?
These are just a few of the questions you might want to ask as you’re deciding what to do. There may be others, depending on your situation. For example, if you’re trying to decide whether to buy a house, you might also want to consider the market, interest rates, and available inventory of homes in your price range.
Question #3: What Are My Priorities?
Finally, you need to consider your values and financial priorities. Those should drive your financial decisions, including this one.
For example, let’s go back to the leaky roof example. You have a leak in your roof that needs to get fixed sooner rather than later. But you’re a confident DIYer and you even have a little experience with roofing projects. Doing the repairs yourself would save money — so that’s what you should do, right?
You probably know the answer by now: not necessarily. This is where you have to consider your priorities. If you fix the roof yourself, it will probably take longer than if you hire a contractor. And you’ll lose your evenings and weekends until the project is done. Are those time losses worth the financial savings? Only you can answer that question.
The same principle applies to the idea of saving until you can pay cash for everything. Some of the most popular finance personalities say that you should always wait until you can pay cash. But let’s be honest — sometimes that’s not possible, especially with an urgent purchase.
And you might decide to finance something even if there isn’t a sense of urgency. Maybe it’s more important to you to have a bigger emergency fund. Maybe you’d rather put the money toward retirement. You can choose to do those things instead of paying cash for your purchase simply because that’s the choice that best matches your values.
Whatever you do, make sure it’s the right path and decision for you and your family, regardless of what anyone else might say!
Get on Track for Your Next Big Purchase
There’s so much to consider when it comes to spending a lot of money on a single expense. Sometimes it’s best to save up the cash, and other times it might make more sense to take out a loan. The answer depends on so many factors, and what matters most is taking the time to consider them all before you make a decision.
If you’re not exactly sure where to start, we’ve got something that can help. Our Big Dreams Calculator walks you through all the aspects of deciding how to afford things like a new car or house. And it’s completely free! Download your Big Dreams Calculator now, and start making progress toward your goals.