Budget for Big Purchases: The Why

This is the first of a two part series on making big purchases; the first being on why you should budget for your large purchases and the second is the technical portion on creating the budget for the big purchase.

First, what is a big purchase?  A big purchase is one that may require a large sum of money but not enough that it would require a loan.  Plasma televisions, washing machines, and a new laptop are examples of big purchases.  Larger purchases, such as vehicles and property, will be considered major for the purposes of this website.

Budgeting for Big Purchase Avoids Debt

This is the major benefit of budgeting for the purchase rather than buying on credit.  Instead of adding another $2,000 to your credit card bill, you save for the purchase and pay for it in full.  When you consider the interest you pay, that $2,000 plasma television will not only cost you far more than it would have if you paid for it in full but you will be paying it off for years if you make the minimum payments each month.

Budgeting for Big Purchases Lowers Your Debt-to-Income Ratio

Different financial institutions calculate your debt-to-income ratio in different ways but they all boil down to your debts divided by your income.  Some of these institutions suggest that this number should be below .2.  In other words, less than 20% of the money you make should go toward paying for your debts.  Break out your calculator and find out what your debt-to-income ratio is.  What does your calculator say about your financial situation?

Where this number comes into play is when you are looking for a loan.  Lenders place a lot of weight on this number and the lower the better.  As previously stated, making the minimum payments on that plasma TV will ensure that it remains counted as one of your debts for years to come.  If you are planning to purchase a home in the next few years, it would be in your best interest to get this number as low as possible.  By paying for it in full, you will keep that TV off of your list of debts.

Satisfaction of Owning Free & Clear

Paying for purchases in full takes discipline.  Our culture is one of "enjoy now, pay later" and there are temptations around every corner.  Often paying later has consequences that could have easily been avoided by using a little restraint and "paying now, enjoying slightly later".  Having the discipline to do so can be very rewarding, especially when your friend asks, “How much are the payments on that TV?”

In the next installment of this series, techniques for quickly saving money for these purchases will be discussed.