Making a large purchase can be daunting. For instance, the purchase of a new home can often bring with it a steady stream of sleepless nights due to an overworked brain wracked with worry. We want to make the right decision, after all, we’re stuck with it for the foreseeable future.
Defining a house as a large purchase is easy to do. A house is expensive, therefore, it fits the definition of “large.” What if all of your purchases can be defined within a category? Would you take additional time to think through what you’re buying and why you’re buying it?
All purchases can be broken out into 3 categories: Large, Medium and Small. Let’s take a look closer look at each of them so you can see how to apply this method in your everyday budget:
Large: $5K
A large purchase is anything over $5K. To some, this may seem like a low number. A large purchase for many of you reading this would be anything over $50K, $100K or more. This just means you have more purchasing power than the average person. The number can shift depending on your income, but the thought behind it would still apply.
The key to making a large purchase is to avoid spontaneity. Don’t attend a boat show if you really want a boat but can’t afford it. Chances are, you might be talked into buying one. Avoid stepping foot on the lot of a car dealer if you’re not ready or able to buy a car. Again, you may end up driving away with a new car, a huge car loan and 5-7 years of regret.
A large purchase should take months if not years of thought prior to moving forward.
Medium: $1K – $5K
Vacations come to mind for this category. Too often, the cost of a vacation is placed on a credit card, providing short term pleasure for long term financial pain. The price of a Disney vacation is a great example. Although it can be done within this range, it’d be difficult if you had a family of 4 and wanted to stay on the property. I’m not sure it’s viewed this way anymore, but Disney used to be the gold standard of family vacations. Gold being the operative word when it comes to how much it will cost you.
Taking a more practical approach to a vacation, the purchase of a new refrigerator (one without a TV embedded into the door) or a used car can be challenging. We work hard and feel we deserve nice things. It’s hard to argue with that. What isn’t hard to argue is the number of people who can’t afford something but buy it anyway.
Do your research and truly think about what you’re buying before you plunk down your hard earned cash.
Small: $1K and Under
This is where a majority of our purchases are made. It’s also where we’re losing the most money on a daily, weekly and monthly basis. Browsing Amazon on a Friday night to buy the newest handbag, pair of shoes or iPhone earbuds adds up over time.
Viewing everything you buy as a “large” purchase will help break the cycle of overspending. Instead of spontaneously buying a new pair of shoes, place them in an online cart and let them sit for a week of two. Do you still want them? Can you afford them? Would you rather spend the $100 on shoes rather than investing the money in a retirement account, 529 Plan or other investment? If the answer is yes and you have zero regret, make the purchase.
Being financially responsible is difficult and often boring. It takes discipline to spend less while saving and investing more. In the end, you’ll have more money, less stress and the ability to pay for unexpected expenses.
You’ll also have the ability to watch paint dry in our new home, although I wouldn’t recommend it.
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