Planning a Big Purchase? 5 Considerations

Most of us will plan to make a large purchase at one or more points in our lives. Whether it’s a luxurious vacation, a new car or home, or something unique to a hobby, finally spending lots of money on one item or experience can be exciting and daunting. The line between frivolous and rewarding tends to be a fine one, and it can be hard to know if you’re ready for the thing you’ve been eyeing.

In this article, we’ll outline five factors to consider before you go through with a big purchase. This includes both the financial steps to think about as you weigh the decision and the emotional implications of spending large amounts of money at once. We’ll also include the perspectives of two experienced financial advisors familiar with helping clients plan for various parts of their financial pictures.

1. Where You Are In Life

Before any large purchase, you’ll need to decide whether it’s the appropriate choice. Several aspects could influence this, including your needs and desires. It’s also not uncommon to consider where you are currently and where you want to be in the future. One factor that could play into this is your age or current phase in life.

Some big-ticket payments are more typical for people of certain stages of life or generations. One could, for instance, draw contrasts between individuals in their earlier parts of adulthood and those nearing or already in retirement. Stoy Hall, CFP^®, founder and CEO at Black Mammoth, shares his view on the differences from his experience working with clients as a financial advisor:

• Younger people generally want a “brand new car,” a vacation, or “potentially a house,” Hall explains. In their large purchases, younger adults balance bolstering their lifestyle with practical expensive purchases like cars or homes with rewards like vacations or luxury items.
• On the other hand, Hall points out that it’s normal for older people to want bigger “toys” such as boats, vacation homes, or “additions to their home.” Those in the later stages of their lives may have saved or invested lots of their career earnings, and now want to reward themselves with expensive experiential items or practical extras for their homes.

While comparing yourself to others isn’t always best, it can be helpful to reflect on whether the purchase you want to make is characteristic of someone your age range and life situation. For example, if you aren’t able to save and want a car you can’t afford, you may want to shelve that idea for now. Conversely, if you’ve successfully put money away each month and are financially secure, you could have more freedom to pull the trigger on larger purchases.

“Big purchases aren’t just about the money,” Hall emphasizes. Rather, he continues, “they’re about aligning your spending with who you truly are and what you want your lifestyle to be.”

2. Create a Plan and Timeline

If you’re serious about making a big purchase, a critical step is considering realistically how and when you’ll go through with it. That is, you should carefully ponder the steps it will take to get there financially, and what the timeline is. Unless you have the cash ready to spend, you’ll likely need to employ a saving strategy to gather the necessary funds over time.

“In order to save money to make a large purchase, you need to ensure your budget is in order,” says Thomas J. Brock, CFA, CPA, an expert contributor at RetireGuide.com. “You also need to estimate the length of time required to amass the necessary funds,” he adds.

Each large purchase and situation may require different budgeting habits, but you’ll generally need to find out how much of your monthly income you can safely afford to allocate to your fund. To help plan for a future purchase, Hall suggests asking, “How much free income do you have to provide for savings for that?” Then, the next step is to put away a specific monthly amount until you’ve reached your goal.

There are several places you could place your money to accelerate or increase your savings power. For instance, Brock recommends “accumulating the incremental savings in a high-yield savings account or money market mutual fund,” adding that “the most competitive instruments are yielding in excess of 5.00%” at this article’s writing. You could also try investing the funds in a taxable brokerage account, but because of its risk and complexity, it’s wise to consult a financial professional first.

Some purchases may seem out of reach, especially if they’re not necessarily typical for your phase of life. However, it’s usually possible to achieve them if you’re dedicated enough and incorporate a disciplined saving approach. As we’ll mention further, it’s always a good idea to consult with a financial advisor if you need extra help to reach a goal.

3. Understand the Long-Term Impact

Large purchases can leave a lasting effect on your finances, impacting more than just your short-term savings. For instance, the money you spend today could lessen what you’d otherwise reserve for lofty financial goals such as buying a house, saving for your children’s college education, or building up your retirement savings.

Depending on the item and the money you’re spending to acquire it, it can be wise to weigh the trade-off of owning it versus the value you would get putting it toward a long-term goal. Though this can be subjective based on what you perceive you’ll get out of a purchase, consider sitting down with an advisor experienced with helping clients understand the impacts of purchases on a holistic financial plan.

Just because a purchase may have a potential influence on future savings, Hall underscores the importance of rewarding yourself in the present while remaining mindful of what you want to achieve later in life. Specifically, he notes that it’s common for people to think, “Hey, I’m going to retire at 65, 67 and live my life,” but that sometimes going for a desired purchase “can bring a lot of joy to your life” in the present rather than “waiting for some future life of yours.”

4. Consider Your Emotions and Potential Red Flags

A big purchase is often an emotional endeavor. You might feel excited knowing you’re finally getting something you’ve been saving up for; however, you may also feel anxiety from spending a significant sum of money in one transaction. While a combination of both may be normal, it’s smart to keep an even keel and approach the decision objectively and without impulse.

Consider that though you feel excited about an acquisition in the present, it could be a decision you regret later. Before a big purchase, Hall says you must “understand who [you] are” and come to terms with the reality that it could “produce potential buyer’s remorse or depression…because you just spent a lot of money on one item.”

So, how do you avoid buyer’s remorse and preemptively identify a bad purchase? The answer to this question is often subjective and, ultimately, comes down to what you value as a good use of your money. “The telltale sign of a bad purchase is that it does not yield lasting utility and/or joy,” says Brock. “Any money spent on such a good or service is wasteful and is generally motivated by societal pressures or short-sighted behavioral biases,” he adds.

As Brock observes, some purchases may come about because of outside influences. For example, while your current situation can be an effective way to decide if a large purchase is ideal, it can also lead you to buy things you don’t want but are expected to have at your age. You may feel mounting pressure to have things that others in your age or career have, such as taking a tropical vacation or having the latest, greatest devices, for instance. Unfortunately, though, this could lead to unhappiness if you realize you never wanted those things.

To avoid making a bad choice and dealing with future regrets, ask yourself what you think you’ll get from an item and whether it fits into your personal and financial plans. “Before making a big purchase, take a long pause and reflect on whether it is going to bring you lasting value,” suggests Brock.

5. Seek Financial Expertise

While planning for a large purchase can be emotional and take a lot of introspection, you don’t have to go it alone. It’s beneficial to have a trusted financial advisor by your side to help create a roadmap, decide if a purchase is right for you, and be unafraid to tell you if it’s not a good idea quite yet.

Sometimes, big purchases can feel out of reach, and it can be challenging to recognize how to accomplish one. A financial professional could work alongside you to build a saving blueprint that fits your plans and doesn’t hinder your retirement plans or goals. They may look at your monthly cash flow and propose a new budgeting strategy or assist you with opening new savings or brokerage accounts, for example.

Aside from the more practical actionable advice they deliver, a professional could also help you decide if buying something is the right choice and spot the red flags of bad purchases. They can’t decide for you, but they can honestly tell you how it can affect your future and short-term objectives. When his clients want an item they can’t afford, Hall says he doesn’t sugarcoat it: “I flat out tell them it’s bad. Don’t do it. It’s that simple.” Though not always easy to hear, an advisor can help you get out of your own way and put you back on track if something doesn’t make sense.

Overall, a financial advisor can be an invaluable resource as you plan to make a big purchase. If you’re considering hiring one, prioritize ones that uphold a fiduciary duty, have high-quality credentials, and are experienced working with potential clients like you. To find one, you can use this free matching tool, which will pair you with a professional who fits your needs.