Getting ahead financially involves a lot of steps. Many personal finance experts urge cutbacks in day-to-day spending as a first move.
They point out that taking your lunch to work and passing up that daily latte can add up over time. While that’s true, major purchases, especially those that require taking on debt, can play an even larger role.
During Financial Literacy Month, it pays to assess how major purchase decisions, such as a home or car, can have an oversized impact on your financial health.
"Major purchase decisions are major financial decisions,” Taylor Kovar, CEO at The Money Couple, told ConsumerAffairs. “We all know people who are house poor or drive a car that's outside their budget because they want to keep up with the Joneses. So often, financial experts say to stop spending $4 on coffee in order to get your financial life in order but it takes a whole lot of coffee to make up for that $1,200 a month car payment.”
Markia Brown, a certified financial education instructor at Money Plug, says those hefty monthly payments take money off the table that could be used for investments or simply for savings. She says before making a big purchase you should honestly answer some questions.
Can you really afford it?
“Determine if you can genuinely afford the purchase without jeopardizing your financial goals,” Brown suggests. “Consider the purchase price and associated expenses such as maintenance, insurance, taxes, and interest payments.”
That’s especially true when car shopping. Car insurance rates have risen significantly since the pandemic and certain makes and models often cost more to insure than other vehicles. Checking with your insurance company before you buy a car could save you some money.
Brown says it’s also a good idea to think long-term before making a major purchase. Will you still have money left over each month to add to your savings?
“Consider the opportunity cost of the purchase, which represents the potential benefits you could gain from alternative uses of the funds,” Brown said. “Compare the value of the purchase to other financial priorities, such as paying off high-interest debt or investing for the future.”
“Big ticket items can dominate one's spending and crowd out activities like saving and investing that can really improve one's financial position,” Robert Johnson, professor of finance, Heider College of Business, Creighton University, told us.
ConsumerAffairs researchers have gathered resources to help consumers make good decisions about large purchases. Here’s what we found out about car purchases and here is some helpful information to guide a home purchase.