in Planning For Major Purchasesby Tracey

Planning For A Major Purchase

Planning For A Major Purchase – What You Need To Know

Has the time has finally come?  Is it time to replace that old clunker and buy a new vehicle?  Maybe it’s time to renovate your home, fulfill that dream of creating a beautifully landscaped yard, plan an amazing vacation…or, for what is to most of us the greatest purchase we will make, buy a new home.   Whatever your dream is, making that major purchase happen can easily turn into an emotion-filled nightmare if we let it. 

The good news, though, is that it doesn’t have to be that way!  For many of us, our experience making a major purchase has been one of necessity, and often, an unplanned decision.   Unfortunately, these types of necessary purchases are unavoidable, and the result can place a significant burden on your finances.    

In some cases, some of us (you know who I mean), have given way to those urges and splurged on a big purchase, well……just because.    Maybe a new car, a new 72-inch TV, new tech, new whatever!   We’ve all been there, and the chances are, we’ve all had a little regret and more than a little panic after we realized what we’ve done.   

With proper planning, we can remove the stress of making a major purchase and even have money set aside for those rainy-day situations that we just don’t see coming.   The trick is, like with all financial planning, you just have to do it. 

Here are a few tips to help you make planning for your major purchases a more enjoyable, stress-free experience:

  • Prioritize Your Purchases:
    • I know! To those of you who are impulse shoppers, this sounds like a really bad idea.  The reality is the easiest way to plan for major purchases is to determine if you really need them or not.  Maybe now is the time, or, maybe it is something you can kick down the road and make that purchase at a later date when it is more practical, and perhaps more affordable.  This is especially true of tech, where the first release is always the most expensive time to buy.    Whatever your purchase, prioritizing it from “need to have” to “want to have” can add clarity to whether or not this is in fact the best time to buy. 
  • Have A Cash Flow Plan:
    • This is one you will hear us say over and over again. The most effective way to manage your cash flow, and ultimately your ability to really understand if you can afford a major purchase is to have a cash flow plan (a budget) in place, and actually follow it.   Putting together a cash flow plan is not a difficult thing to do.  It involves sitting down and (being true to yourself) listing your total monthly expenses compared to your total monthly net income.    For many, the result can be a real eye opener and may not only allow you to better understand the timing of your purchase, but also identify ways you can enhance your overall financial picture by reducing spending in some ways, or increasing the amount you invest.   Remember, if you have a spouse or partner, it is absolutely necessary that you complete your cash flow plan together.  Having a cash flow plan is a great thing and because of that, it is one of the most effective tools in planning for any major purchase.    
  • Don’t Fall Into The “Easy Credit” Trap:
    • Especially with interest rates on the rise, access to easily obtained credit is one of the greatest threats to your financial security.  Retailers offer easy to obtain financing because it is good for their business.  Often these financing options are offered through third-party partners such as finance companies.   There are many risks with using a third-party financer and typically there are very specific conditions that you need to be aware of.  Some of these conditions may include steep fees if you miss a payment or break the contract early.   They may also limit your flexibility to request payment extensions or skip payments, as well as limiting the amount you can pre-pay in advance with a lump sum payment.  Another common offer is for no interest or payments for a set period of time.  This may sound great, however if you do not pay off the full balance owing before the due date the lender can charge you a steep interest rate going back to the original date of purchase.    It is very important to know and fully understand the interest rate structure in these types of financing schemes as well.  Interest rates through consumer financers are typically much higher than you might normally be able to get through your bank.   All lenders are required by law to provide details related to the financing they are offering.  We always encourage clients to review these details very closely so they fully understand exactly how much they are paying both in the interest rate as well as the actual dollars you will pay.  If your lender resists providing you with a cost of borrowing breakdown, choose a different lender. 
    • There may be times when choosing a financing option makes sense financially. When interest rates are low, or when vendors are eager to liquidate a product, they may offer very low, or zero interest rate options.  Again, it is very important that you take the time to read the details in full and fully understand the contract, but if all is above-board and to your satisfaction, these types of low interest rate options may be right for you.   One word of caution – don’t let the lure of low interest fool you into believing that it automatically makes your purchase affordable.   Always review your purchase against your cash flow plan and be certain that it fits within your ability to spend.   
    • One last word on “easy to obtain” financing – do not let the vendor talk you into a “deal” available only if you accept their financing. First off, coercive tied selling is illegal. Second, there are always alternatives, and it is important that you explore all of them before making a final decision.
  • Have a Good Savings Strategy in Place:
    • One of the most stress-free ways of making a major purchase is to have all, or at least some, of the money required already saved. This is especially true for unexpected major purchases such as buying a new vehicle, or unexpected home repairs.   Setting aside 10% of your net income every month may sound daunting, however once you are in the routine of doing it, you can see almost immediately how quickly your savings can grow.   You don’t need to put all 10% into a rainy-day/emergency fund, there are many facets to a complete financial plan such as having a tax-free savings account, a registered retirement savings plan, registered education savings plan if you have children, in addition to your rainy-day fund.   The less you can rely on credit to make a purchase, the better.
  • If You Use a Credit Card, Pay It Off Quickly:
    • Credit cards are a necessary fact of life, and let’s face it, they make purchasing things both safe and convenient.  The challenge, of course, is paying them off by the payment due date.  According to a 2022 Equifax survey, the average Canadian holding a credit card owes over $2,100 per credit card in their name.   That’s right, if you have 3 credit cards and you are an average Canadian your unpaid balances would exceed $6,300, yikes!   Typically, a Canadian credit card provider charges about 20% annual interest for purchases, some may charge less and others more.   When making a purchase on a credit card you will have a grace period where no interest is charged until the due date on the statement that your purchase appears.  If you do not make a payment in full, you start being charged interest at that rate.   That’s when the costs really start to add up.  Usually, you are required to make a minimum payment of at least 3% of the outstanding balance owing.  If you carry a $5,000 balance on a credit card with an annual interest of 20%, factoring in the minimum payment only, it will take you over 20 years (20 years and 11 months to be exact) to pay off the balance.  To make matters worse, you will have paid over $5,990 in interest on your $5,000 purchase. 
  • Tap Into Your Home Equity:
    • We probably all know someone who, as the saying goes, uses their home as their ATM. While this is sometimes true, utilizing the equity in your home may also be a smart strategy.  Typically, this would be in the form of a Home Equity Line of Credit, or HELOC, a form of revolving credit that is secured by the equity in your home and usually at a very attractive interest rate of bank Prime, or slightly above.   For large purchases that you expect to pay back over a long period of time, a HELOC may be your best solution, providing you have the equity value available in your home.   A simple rule of thumb to consider is whether the money you borrow against your home is charging less than the amount you stand to potentially earn by investing the same amount.   If the interest on your HELOC is less, then perhaps consider using that equity.   If you are thinking of using your home equity for a major purchase, we always recommend having a thorough conversation with your trusted wealth advisor who will be able to provide you with professional advice, guide you through this process, and ensure that this strategy is right for you. 

Wow!  Who thought that making a major purchase would have so many things to consider?   A major purchase is called that for a reason – it’s a pretty big deal.   The good news is that you don’t have to go it alone.   Your wealth advisor is a great first person to check with.  They can provide you with the proper advice you need to make this important decision without all the stress that often comes with it.  Whether you are just starting the planning process, or now is the time for that dream to become reality, at Sea Glass Wealth our mission is to help our clients live extraordinary lives.  We’d love to help you make that dream come true. 

We are looking forward to the opportunity to meet you!  For more information, please feel free to reach out.

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Tracey

Tracey