We've all made major purchases at one time or another. Whether it be a new (or new-to-you) car, a home, an education, or some other ‘big' purchase, dropping a big wad of money on something happens to everybody.
The key, however, is to make sure that your money is well spent.
Here are six questions to ask yourself before making a major purchase:
Why Do I Need This?
This is the first and most important question that you need to ask. Yes, it's more important than anything to do with the money related stuff, because if you can't answer this one, you may not need to answer any other question. Keep in mind that ‘wanting' something is a big difference from actually ‘needing' it, so be very truthful and honest about how you answer this. Now, if your furnace broke and your alternative is to spend the winter without heat, then the answer is pretty obvious, but if it's replacing a car that you've driven for five years and you want another one, you had better do some thinking!
Is this item right for me today?
Nothing is worse than buying something and realizing very quickly after you purchased it that it may not fit your needs. This example may be dated, but think of purchasing a new computer. What if you purchased a desktop computer but quickly realized that a laptop might have been more fitting?
Will this item be right for me tomorrow?
This is an important step to consider when making a major purchase, simply because you don't want to repeat the purchase too soon down the road. Consider a couple purchasing a home. This is definitely a major purchase. When looking at homes and determining what type and size of home to purchase, they need to consider that they may want to start a family. If so, then they should make sure that the homes they look at can fulfill this need, especially since the purchase costs of a home typically take at least a few years to make back, even in an appreciating real estate market.
Is this going to last as long as I need it?
This question can definitely tie back to the purchase price. If you're buying a major appliance, sometimes it might be worth it to pay more for a quality item versus purchasing the cheapest one, only to have to replace it much sooner than planned on.
Can I afford this?
This one is pretty self explanatory. You have to figure out how you're going to pay for whatever it is you're buying. If you can't afford it, you might scrap the idea for now, but in some cases (e.g. the aforementioned furnace that went legs up), you might not have a choice. Then, you get into the fun part of…
How am I going to pay for this?
Deciding how to pay for your purchase is something that you need to spend a lot of time thinking about. Can you afford cash? Can you get a loan? If so, is the interest rate reasonable? How long will you be paying for it? In all cases, you should not only consider the costs associated with each payment option, but consider the trade-offs associated with each item. If you pay cash for something, you might be putting your emergency fund at risk. If you take out a long car loan, you might be hamstrung on your monthly budget in other areas. Broaden your scope of considerations beyond just the cost of that item.
If you consider these six essential steps before making a major purchase, you will definitely be on the right path. Each purchase is unique, so there are assuradely going to be other things you think about depending on what it is you're purchasing and your personal financial situation, but make sure that you don't skip past any of these, and remember, honesty is the best policy!
Readers, what major purchases have you made recently and what were the considerations that you put in before making the purchase? Or did thinking about things make you delay or cancel the purchase altogether? I'd love to hear your input in the comments below.