5 Steps to Prepare for a Big Purchase
From the experts at GreenPath Financial Wellness
A financial journey typically includes several twists and turns – such as understanding how to manage spending, build savings, and control debt. There might be “speed bumps” in the form of unexpected changes in income. Along the way, you might also navigate milestone purchases such as financing a home or car.
When considering a significant purchase, the destination is within reach when you steer through the following five financial steps. These guidelines set you up to understand how a big purchase fits into your overall financial picture.
1. Look at your financial picture
Start by considering what you can afford given your current income, expenses, and other debt obligations. Get a handle on how much money comes into your household each month, and where the money goes. Make sure to consider your net income- what is available to you after taxes.
For homebuyers: When purchasing a home, a common rule of thumb is to spend about 30% of your monthly gross income on housing. That includes costs like mortgage principal and interest, property taxes, insurance and maintenance.
2. Check your credit score and report
Checking your credit score and report is key when considering a big purchase like a home or car. Pull your credit report from AnnualCreditReport.com and follow the additional instructions to see your current credit score – which influences your overall cost of financing your purchase. The lower your credit score, the more likely you will have a higher interest rate and greater overall cost.
Tip: Be sure to check your report for accuracy. Resolving errors or incorrect information often helps increase your credit score, giving you more attractive financing options. If the report is inaccurate, file a dispute with the credit bureau.
3. Research your financing options
4. Plan your purchase
Timing is everything and having a plan in place for when to pull the trigger can make all the difference. Do you have enough in savings to provide a good down payment on a home or car? Is there a certain time of year that special financing or promotions are generally available?
Now’s also a good time to find someone you trust to help you carry out your big purchase – if you’re buying a home, ask friends or families for a real estate professional they can refer. Having someone in your corner who can help you understand your options and know the warning signs to look out for can make all the difference.
5. Make the deposit
Finally, get ready to make an earnest money deposit for your purchase. In the case of a home purchase, it indicates you are a serious buyer. Generally, earnest money deposits range from 1% to 2% of a home’s purchase price and are only refundable under specific circumstances.
For a new car purchase, deposits typically total about $500 once you agree to the vehicle price in writing.
The Journey Ahead
While not an exhaustive list, these steps should help prepare you for the financial road ahead.