How to plan for a major purchase
Whether you’re planning to buy a car, renovate your home or take that dream vacation, funding a significant purchase or major life event can be exciting. But managing the short-term liquidity needs for a big purchase with your longer-term financial priorities can be a difficult task.
An Ameriprise financial advisor will help you evaluate your options for paying for a significant purchase while keeping you on track for your other financial goals, such as saving for retirement.
Here’s what to consider when planning a major purchase:
Assess your goals, needs and timeline
When planning for major purchase, consider the timeline. Some major purchases — such as a home repair or a new car — may be critical needs that require urgent attention, while you may have more time to save for others. As you consider your timeline, discuss and document your new goal with your financial advisor.
Determine the true cost and your budget
It’s easier to stay on track if you have a price tag, so determining the true cost of a large purchase is critical. Talk to trusted individuals for recommendations, get multiple quotes, do comparison shopping via the internet and take time to understand all costs associated with your purchase.
Once you know the cost, be realistic with how much cash you can allocate to this purchase (without dipping into your cash reserve) and how much you can comfortably save or borrow. If you plan to borrow, calculate your debt-to-income ratio — which is the percentage of your monthly gross income that is allocated toward paying your debts — for a clearer picture on the reality of financing this purchase. In general, your debt-to-income-ratio should stay below 36%.
If time is on your side, create a systematic savings strategy
If you don’t have enough readily available funds to pay for the purchase and your time horizon is further off, create a savings plan. One way to do this is to set aside a lump sum each month until you reach your goal. You also may want to set aside assets in a high-interest savings account or certificate of deposit (CD) specifically allocated for your purchase. These dedicated savings vehicles can help you easily track your progress, while also ensuring the money keeps pace with inflation.
The longer the time horizon, the more options for potentially earning a return on the money you put aside. If your aim is to buy a car in six months, your options may be limited to a high-interest savings account. On the other hand, if you’re saving for a wedding that may not happen for five years, you will have many options for investing and potentially growing your money.
For purchases stemming from unexpected events, check your insurance coverage
Some major purchases arise unexpectedly due to adverse events, making them impossible to plan for. For example, you may need to repair your roof because of weather or to purchase a new car after an accident. In these scenarios, contact your insurance carrier and determine if any of the costs will be covered to fund the replacement purchase.
Determine if you need to leverage traditional lending options
In certain circumstances, it may make sense to use a loan or credit to help finance your purchase. When used strategically, lending options can help you reach your financial goals — but it’s important to understand the terms and conditions, as well as the repayment plan.
|Type of lending solution||Benefits||Considerations|
|Secured personal loan (car loans, etc.)||
|Unsecured personal loan||
Understand your asset-backed lending options
In some cases, you can borrow against your assets, though doing so comes with different levels of risk. An Ameriprise financial advisor will help you understand the advantages, limitations, and risks of the different asset-backed lending options available to you:
|Type of lending option||Benefits||Considerations|
|Home equity line of credit||
|Securities-based line of credit||
When you’re ready to reach out to an Ameriprise financial advisor for a complimentary consultation, consider bringing these questions to your meeting.
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Finance your major purchase — with confidence
An Ameriprise financial advisor will help you find a suitable way to pay for a major purchase while helping you stay on track to reach your long-term financial goals.
Or, request an appointment online to speak with an advisor.
At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's.
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