Planning for Major Purchases or Expenses

Thursday, October 17 at 11:20 AM
Category: Personal Finance

With Oct. 17 being Get Smart About Credit Day, it seems appropriate to look at times when there are things you want to buy in addition to your normal living expenses. It may be a new computer, a gift for a special person, some clothes, a nice vacation, or something for your home or apartment. All of these things take money and you will be faced with a decision – should I save until I can afford to pay cash for these things, or should I just charge them on a credit card? In your heart, you know you should probably save and avoid interest costs on your credit card, but the temptation to buy them now can be strong. Let’s take a look at some of the financial factors you should consider.

Saving and paying cash versus charging on a credit card
Paying cash for a new $1,200 computer – save $100 per month for 12 months and it is paid.

Buying a new $1,200 computer with a credit card (15 percent APR) – it will take over 13 months of $100 payments to pay for the computer and the interest costs. Over that period you will pay $126 in interest.

Taking a seven day vacation (seven days at $350 per day plus two plane tickets at $350 each) with a total cost of $3,150 – save $200 per month and you will have the $3,150 in less than 16 months.

If you charge the same vacation and pay the same $200 per month, it will take 19 months to pay the additional $428 in interest you will be charged.

The point is not that you should never charge things on your credit card, but rather you should understand paying interest can be expensive.

Accumulating funds to buy a car
Saving funds for a down payment on a car takes discipline, but there are some ways to save to make it easier.

Let us assume you want to buy a new car that costs $25,000. Let us further assume you want to limit your monthly auto loan payments to $400 (48 month loan of $17,000 with a 6 percent APR). If you do the math, you will find you would need a down payment of about $8,000. How can you accumulate the $8,000 you need?

Start by setting up an automatic savings plan at your financial institution. That way, each month a predetermined amount will be transferred into your savings account.  When you have saved the $8,000, you can then buy the car you want knowing you can afford the $400 monthly payments.

How long does it take to save $8,000?

Savings period    Monthly savings
12 months            $658
18 months            $435
24 months            $324

Other options:

  • Choose a less expensive car. If we keep the same $400 monthly loan payments, but choose a $20,000 car, you will only need a down payment of $3,000. That will take less than half the time to accumulate.
  • Choose a 60 month auto loan instead of one with 48 months.  Again, we will keep the monthly payments at $400 and a 6 percent APR. Under these assumptions, your loan would be about $21,000 and you only need a down payment of $4,400.

Loan payment table

Next time you’re faced with a major purchase, consider these financial factors before taking out your wallet.

Tags: Budgeting, Credit Cards, Financial Education
shannon crow on 10/17/2013 at 12:18 PM
what would help would be able to have one of the debit/credit cards that we could add monies to. sort of a temp savings acct so that we could then use for that lap top or vacation. Because once it goes into general savings - then for my house - it is up for grabs. Currently I have to put into an envelope and try to stay out of it
Arvest Blog Admin on 10/17/2013 at 1:53 PM

Shannon - Thanks for your comment. You may want to consider an Arvest Spending Card which is a reloadable prepaid debit card which allows you to add money to your card as many times as you'd like. You can learn more about the Arvest Spending Card at: https://www.arvest.com/?page=personal/accounts/debit/spending.

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