Rethinking Large Purchase Decisions
I can remember seeing that Chevy Cruze, brand new, just out, and sparkling red sitting in the atrium one day when my wife Tanya and our young (at the time) boys were wandering at the Fox Valley Mall. Man, I wanted that car (Yes, I know it’s a Chevy Cruze, but hey, those were my tastes at the time). I experienced a strong emotional pull to buy something without much consideration. A certain rush of adrenaline comes and, often, a fear of missing out on something I want. Whether it’s a car, a house, or a vacation, these large purchases can get all of us thinking a little kooky sometimes.
Motors and Wheels Go Down in Value
There’s something freeing about going wherever you want on the highway, windows rolled down, and 80 mph (Ahem, I mean 65). There’s something cool about having a car that drives itself, even half-baked self-driving. What I never thought about was that a hunk of metal with all its coolness is a depreciating asset. Its value goes down month after month, year after year. When setting up your financial plan, we expect the motor with wheels to go down in value by 5 – 15% a year.
Not only that, but vehicles are taking up a bigger and bigger piece of our monthly pie. Did you know that the average car payment in 2023 is $725/mo. for a new car and $516/mo. for used cars?! If we must extend the term out six or seven years to get that payment, that’s a red flashing warning sign that we are biting off more than we can chew. If you tie up too much of your net worth and income in assets going down in value, it will be difficult for you to reach your long-term goals. The solution? Buy a vehicle you can afford with cash.
The American Dream
A home is at the top of most of our lists of large purchases. It will likely be your largest purchase, so it bears the largest impact on your long-term financial health. Making it our forever home just like Chip & Joanna’s has my and many of your hearts beating fast. But let’s make sure our place is a blessing, not a curse. If your house dreams take up too much of your financial pie, you will feel the squeeze.
Home Financing 101
It may be tempting to pick the longer mortgage term because it gives you a lower payment and a bigger house. However, by choosing a 30-year mortgage instead of a 15-year mortgage, you will pay SO much more in interest over the life of the loan that it could make you sick. I originally picked a 30-year mortgage, and I remember seeing on the closing statement that we would pay almost the same amount in interest over the 30 years that we paid for our house. Ick! Switching to a 15-year loan was the best financial decision we’ve made.
The Property Brothers Wanted to Come Over
A couple of years ago, Tanya and I were reaching fatigue living with the smells of 1967 cabinets and 30-year-old carpet. We’d talked and dreamed and seen too much HGTV. So much to the point that I was ready to do a cash-out refinance to make it happen. There was no shortage of mortgage re-financers willing to help me take what I thought was enough (it turns out $100k doesn’t go very far in a kitchen) to make it happen. After much deliberation and listening to other voices, I realized that would have been a dumb mistake. Instead, we went the opposite direction, using savings to pay off debt and build a 6mo. emergency fund. That enabled us to get on solid financial footing and start saving forcefully.
A Greater Sense of Freedom
And here’s the point. If you make wise decisions here, especially with a home purchase, you set yourself up to have that much more wiggle room down the line for more saving, vacationing, and generosity. This will set you up to have no house payment when you are ready to stop working. Trust me; you will have greater freedom to chart the course you want. You will make different decisions when you no longer have a house or car payment hanging over your head.
Take a Step Back
I’ve learned the hard way that my friend, the budget, needs to step in and save the day. Taking this step back allows my wife and my emotions to simmer so that we can consider and plan. We ask ourselves, “How will this impact our other goals.” If our goal is to be debt free or to be able to pay for our kids’ college, that knee-jerk reaction to spending money on something big can be put in check as we think about the long-term impact of the large purchase that has caught our eye.
Tools to Decide
As your trusted advisors, The Dala Group is here to listen to your kookie ideas, help you sort through the emotion, and refocus you on the long-term goals you laid out for yourself. Let us show you how each decision will impact your long-term goals. During a scheduled planning session, we can be the counselor to caution you against being unwise and the encourager to reassure you when you feel unnecessarily nervous.
