If you’re like the typical person, you get an itch – “my car is getting old now and look at all those new car features” or “my house feels small and my mortgage lender told me I could afford more.” That itch convinces you that it is time to upgrade to something bigger and better (and usually more expensive) because “you deserve it” or “you’ve been patient long enough.” When we begin to rationalize our next big purchase, the budget either begins to feel like an evil taskmaster or we choose ignore it altogether. However, once we scratch that itch, we are often left with the sour payment on that overpriced car or the home that cost more than we expected and now we are stretched thin trying to maintain it.
The hard task we all face when considering our next big purchase is to take the emotion out of the process and let the math talk to us instead. I know, I know, that is really hard to do. I’m human just like you; I like nice things too. But learning to live within your means is absolutely vital to living a happy life. And living within your means doesn’t mean stretching your budget to its absolute maximum. The key is maintaining margin in your monthly lifestyle so you can achieve your long-term goals more efficiently.
So how can you get the emotion out? A calculator is your best friend. There are numerous online calculators that you can access that will give you instant feedback, from purchasing a car or dishwasher to buying your next house. By providing some simple information you will be able to get a pretty accurate idea of how much that payment will cost you month-to-month. It will also let you know how much you will pour down the drain in interest during the life of the loan. Don’t ignore that number. Why? Because that is the money you could have been investing and saving instead. For example, let’s suppose at age 35 you will have paid $7000 in interest on a car loan over a 5-year period of time. That works out to be $116 a month. If that $116 was invested each month instead of going to pay the interest, you would have saved $46,000 by age 65 assuming a 7% gain. In other words, that car better be really nice to give up $46,000 at retirement!
Do you want some really sound advice? Save your money and pay cash (other than a mortgage perhaps). Never purchase a brand-new car off the lot. Your best option is to buy one that is 2-3 years old and pay cash if you can (there are a lot of really good cars with low mileage and low cost). But never take a loan for more than 3 years; It’s just not worth it. When you purchase a home, the cost of your payment AND upkeep on the home (the lawn, plumbing, painting, furniture, etc.) should never exceed more than 30% of your total budget. Ideally, keep it closer to 20-25% if you can. Also, if possible, buy less house in order to get into a 15-year fixed loan rather than a 30-year loan. It will cost a bit more each month, but it will save you thousands in the long run that can be saved toward retirement goals.
Before you give in to the itch to buy something bigger and better, calculate the real cost first – not just how much is coming out of your budget each month, but also the amount lost in future gains on your investments due to the cost of interest on your new debt. Let the math guide you into making the best decision rather than emotion. You’ll be glad you did.
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Todd has nearly a decade of experience in financial and retirement planning. Keeping his approach customized and personal is integral to his process. Todd is married to a school teacher, Leigh Ann, with whom he has five children, two cats, and three dogs.
Todd is an SB Financial Group affiliate.