If you want a new car, house, or another major purchase, you should know that some financing strategies are more economical than others. Budgeting and saving are usually the go-to measures, but did you know you can also invest or borrow different loans? Cashay explains the main options you have when it comes to financing a big-ticket purchase.
Budgeting And Saving For Cash Payments
Making a budget should be your first move because it shows you how and where the intended purchase works into your overarching financial situation. Budgeting boils down to determining how much money you have coming in and how much money goes out each month — your inflows and expenses.
In most cases, cash inflows like monthly paychecks are routine. Expenses are either fixed (rent, mortgage payment, etc.) or variable (leisure activities, hobbies, etc.). Fixed costs are discretionary (you have to pay your heating bill), and variable expenses are non-discretionary (you don’t have to see a movie).
Big purchases are variable — you don’t need to replace your water heater each month. Still, you should identify a significant purchase as discretionary or non-discretionary. When your car breaks down, you can’t wait for a repair. But you can postpone buying a new gaming console.
To help you budget for an expensive purchase, take one month to note your inflows and expenses. This will help you anticipate long-term income needs and identify where you can limit your outflow. The purpose of this activity is to recognize how much money you can routinely save every time you get paid.
While this helps you build up cash reserves to fund a major purchase, some, such as a broken refrigerator, are immediate needs and may require that you take on debt to pay for it.
Automatic Savings And Investments
The easiest way to start saying is establishing an automatic savings program. You may want to schedule automatic transfers from your checking account to a savings or investment account. Most banks and credit unions have this feature, so make sure you take advantage of it.
Most experts advise building an emergency fund first. It should have enough money to cover three to six months of expenses. If you needed to replace your fridge, an emergency fund would help you pay for it.
A certificate of deposit (CD) or money market account is ideal if you have low risk tolerance. Money market investments center on Treasurys and other low-risk securities. They typically have smaller returns but provide long-term growth.
Money market accounts also have high liquidity, which means you can tap your funds easier. For this reason, money market funds are suitable for an emergency fund.
When Should You Leverage Income Investments?
Income investments are an appropriate option for money market accounts. These offer fixed interest and dividend payouts, depending whether you invest in bonds or mutual funds. The most significant benefit is that, unlike growth investors, income investors get paid right away. Thanks to the regular cash flow, the income investment will typically have a lower risk than the growth investment.
When Should You Use Growth Investments?
If your major purchase isn’t immediate, you might prefer a growth investment over a money market account or similar short-term fund. Growth investments are a common way to save for long-term goals and generally offer higher returns — though they do have a higher risk since short-term market conditions can cause them to lose value. For this reason, growth investments are not ideal for emergency funds or saving for upcoming major purchases.
There are several ways you can borrow money for a major purchase.
Home Equity Line Of Credit (HELOC)
With a HELOC, you put your home up as collateral to borrow a line of credit with a variable interest rate. Homeowners frequently utilize HELOCs to pay for major purchases since part of the interest payments are tax-deductible. Your lender will determine your line of credit depending on your home’s value. When your application is approved, you can use the funds at any point.
A second mortgage differs from HELOCs in that you receive a set amount of money that you repay over time. Flat monthly installments are often necessary to pay the entire loan. If you don’t need a revolving line of credit, a second mortgage may be more appealing than a HELOC. Either way, you should compare the expenses of both loans and inquire about hidden costs.
Credit Cards And Installment Loans
Credit cards and installment loans are common forms of financing. Every month, you pay a monthly installment and interest, which may be a fixed or variable rate. The downside is that these usually have costly interest rates, which is why you should avoid using a credit card or installment loan to pay for a large purchase unless you have no other options.
- Fitness, Financial. “How to Finance a Major Purchase.” Cashay, Cashay, 3 Dec. 2020, www.cashay.com/how-to-finance-a-major-purchase-154924203.html.