Can You Afford That Big Purchase?
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Every day, people across the country spend their hard earned money. The harsh reality is that it’s far easier to spend the money we make than make the money we spend. However, as long as we can manage our spending habits and force ourselves not to buy unnecessary things, there’s always the possibility of putting that extra money towards bigger purchases that will benefit us more in the long run.
Easier said than done, right? True, the ability to make those big purchases really depends on your living situation, your income, what level of debt you’re at, and any number of other financial issues you might have on your plate. We’ll say here that a “big purchase” means something that can’t always be afforded within the bounds of a basic monthly paycheck, that’s generally going to cost $1000 and up. This could be a two-week vacation to your chosen destination, or that new car you’ve been staring at through the bus windows on your way to work. It could be a new entertainment system for your house. Or, you might be saving up for one of the most expensive purchases someone can make in their lifetime, a home.
Whatever your financial goals might be, there are ways to save for them. We’ll start with the smaller expenses and move up to the bigger ones. This should give you a better idea of what your own budget might be and whether or not you’ll be able to afford them in the near future. Again, this all depends on your income, but for a reference point, let’s say you’re working a steady job and making an average of $20,000 – 30,000 a year. You’re living on your own, maybe you have a roommate, partner or spouse, but for the sake of argument, their income doesn’t factor in here.
Gadgets and Gizmos
Like we said above, making a “big purchase” will usually mean that you’re going above and beyond a new iPod or pair of expensive shoes. When it’s raining outside and you’ve got a much needed day off, sometimes you just need lounge in your sweatpants and binge-watch your favorite TV show. You’ve been saving up for a while and are looking to beef up your home theater. You want the whole package, cable box, Blu-ray player, and a 42-inch flat screen complete with surround sound.
Now, all these expenses are easy enough to calculate, depending on where you plan to buy everything. Because new models of these items are released every year, with a bit of research on your part, you should be able to find some decent deals. So, for the flat screen? We’ll say $500. A basic Blu-ray player will be about $100. A cable box and basic digital cable package will set you back about $25-50 a month ( $300-600 yearly), double that if you want internet included. The more difficult choice will be the surround sound system, because there are a bunch of different speaker sets to choose from, ranging anywhere from $300-3,000. Just remember to take whatever the salesperson upsells with a grain of salt. You do not need to buy the most expensive model of Blu-ray player just to play Blu-rays. For the whole set-up, you’re looking at least $1,000.
Then ask yourself: after you buy all this, will you have anything left over for all your other, more important expenses, such as rent/mortgage, groceries, and transportation? If not, it might be better to save this expense for another occasion.
Some vacations can be affordable, depending on when and where you’re going, and how long you’re going for. In fact, a really good trip away to relieve stress can sometimes be more beneficial to the average human than a lot of other expenses. We’ll assume here that this vacation isn’t just a weekend away at a campground. This is the one you’ve been dreaming of, maybe it’s even your honeymoon. Two weeks in Europe, one of the must-go destinations for any aspiring traveller. Assuming you haven’t done your research yet, remember that many places in Europe, because they’re tourist hot spots, are going to be relatively more expensive to travel to, and stay in, than some other places in the world. Before booking, make sure you’ve anticipated all the expenses that you’ll need to make.
Depending on where you’re flying to, and what time of year and the day of the week you’re booking, the flights themselves will be one of the more costly portions of your journey. Close to a $1000 right off the bat, if not more, for a round trip, not including flights you might take between multiple countries. So, once you’re sure of the places you want to go, compare and contrast the prices for flights to various airports in different countries. In fact, taking trains or buses between countries can sometimes be the cheapest, most efficient way to see a lot of Europe. Then again, you might find extremely cheap flights through discount airlines such as Ryanair, once you’re on the continent. We’re talking horrible flight times, hours of layovers, no in-flight movie, and you’ll likely pay well under 100 Euros for airfare between countries if you fly out on a weekday.
Then there’s your stay. Are you going to be overnighting in 4-star hotels? Probably the case if you’re on your honeymoon. If not, you can always save a bit of cash by staying in hostels. And don’t worry, you won’t necessarily be rooming with 12 different people. Actually, most good hostels will have rates on private rooms for less than you would pay at a typical hotel. Then there’s Airbnb to consider. After this, you just have to worry about food, activities, and souvenirs.
So, to be safe, you’ll probably pay between $2,000 – $4,000 for a solid, two-week vacation in the more touristy parts of Europe. That’s about 2-3 months pay, before taxes, assuming that you’re not already paying for a car and/or mortgage. If you can afford this, and still have a comfortable amount of savings left over, you might be doing well enough to start considering the third big expense.
Venturing to the Caribbean instead? Check out this article before you go.
Here is where it pays to do a ton of research before making any decisions. The car, something a large portion of the population needs to get around and one of the quickest guzzlers of both gas and savings money.
Let’s say you want a new car. You’ve found an economic and reasonably priced vehicle. How will you pay? Are you buying or leasing? You most likely won’t want to pay the full amount right away. This means financing, either through the dealership itself, or by getting a loan from a bank, lender, or credit union. With dealership financing, you’ll pay off the car in monthly installments. With a bank, lender or, credit union, your car will be paid off and you’ll make monthly payments to your lender instead. However, remember that both dealerships and lenders are going to charge you interest fees for their services, so shop around for both options beforehand to find the best rates.
For more information on the pros and cons of dealership financing, click here.
Whichever payment option you choose, just remember, a brand new car will cost you upwards of $15,000 dollars, and if you’re financing it, you be paying a few hundred dollars a month over several years. Not only that but if you’re getting a loan from a lender, you’ll need to have good credit. So, once you’ve done some research and are still unsure of whether you’ll be able to make these payments, think about looking into used cars before you go signing any contracts. If you buy a used car through a legitimate dealership, not only will you have an easier time paying for it, but you can also negotiate a warranty, just in case anything goes wrong with the vehicle within the first year or two.
Not sure if buying or leasing a car is right for you? Read this.
Now comes the ultimate expense, buying a house. Depending on how much you managed to purchase it for and what your mortgage rate is, your first home can take many years to finance. There will also be a lot of other costs that go hand-in-hand. Not only will you have the mortgage and a general living budget to deal with, but with a house comes property taxes, home insurance, maintenance issues, etc. Not to mention all the other fees you’ll need to pay before you even start unpacking boxes, like a home inspection, property survey, and closing costs. This is where having a rainy-day fund really comes in handy. While you might be making enough income at the moment to be a stable homeowner, you never know what will happen. If you should get injured on the job, or become unemployed, it’s helpful to have at least 3-6 months of living costs saved up to deal with your general expenses, as well as any other unanticipated expenses like sudden repairs.
Are you in danger of becoming house poor?
It’s usually recommended that you spend no more than about 30% of your monthly income on your mortgage. So, it’s important to make sure that you find a bank, lender, or credit union that will give you a manageable interest rate for your monthly payments and always make sure to make these payments in full and on time. Once you have a rough estimate, based on your income versus what you can afford in terms of mortgage payments, property taxes and other expenses, as well as what your down payment might be, you can start looking for houses in your price range. In Canada, if the overall price of the house is $500,000 and under, the minimum down payment is 5%. However, with a larger down payment comes the possibility of better interest rates on your mortgage afterward. So, let’s say you do wish to purchase that $500,000 house, the minimum down payment of 5% will then amount to $25,000. If you can’t afford this and make the mortgage payments from then on, it’s probably best if you save up for a few more years or find something with a more within a more reasonable price range.
Read this, for more information on how to save for a down payment.
So, Can Your Afford That Big Purchase?
Whether it’s one of your important financial goals or you’re just trying to check a few things off your bucket list while you’re in the prime of your life, whatever that big purchase might be, it’s best to start saving for it, if you haven’t already. However, it is indeed possible to afford these things, as long as you’re doing just that. Working hard and saving your money rather than spending it needlessly.
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