How to prepare for a big purchase

At some point in time, it’s likely that you’ll have to make a significant purchase. You might want to buy a house or a new car or need to replace your roof or heating system. Unlike day-to-day expenses that you’re used to, these types of purchases can come with a hefty price tag and lead to anxiety. How will you pay for it? When is the right time to buy? Is it a good idea? If you have more questions than answers, here’s how to prepare for a large purchase.  

What is a big purchase?  

If you’re making a purchase that costs more than your monthly income, you’re likely making a big purchase.  

Some examples of a big purchase include: 

• House 
• Car
• Dream vacation 
• Roof replacement 
• Home renovation 
• Boat  

Of course, what’s a big purchase to one person might not be to another, depending on income. In general, the purchases listed above are considered significant as they may require a large sum upfront or require financing.  

And if you’re wondering “Should I make a big purchase on my credit card?” Spoiler alert: it’s generally not a good idea to make a major purchase on a credit card, because of the interest rates, unless you pay it off in full.  

When making a large purchase, it’s crucial to avoid buying on impulse and waiting until you have a clear head. Though it can be exciting to imagine buying something you really want, if it’s out of your budget it can cause more stress in the long run. In other words, the consequences will far outlast the moments of excitement.  

To help manage the anxiety around making a significant purchase, you can create a plan, give yourself some time, and review the numbers.  

​​Tips for preparing for a big purchase 

If you’re thinking of making a big purchase, ask yourself some important questions first.  

• Do I really need this item? A need might be a new roof but a want is your dream vacation.  
• Can I afford this item? Review if you have cash on hand for the purchase or run some calculations to see prospective monthly payments.  
• Do I need to buy this item right now? Cash flow is important and sometimes delaying a purchase can be helpful. For example, if you’re paying for your child’s college tuition this month, consider waiting so you’re not making several big purchases at once.  
• Will this fit into my monthly budget? Review your take-home income and subtract your total monthly expenses. Is there a buffer of cash for this monthly payment? Can you afford it without compromising other goals like savings or retirement?  
• Have I done enough research to justify buying the item? Our emotions can get the best of us when we’re excited to make a purchase but you want to go into a large purchase doing enough research. What is the cost? Are there hidden fees? How long do you expect to have the item? What do online reviews say? 
• What are the pros and cons of buying this item? Be honest about the pros and cons. For example, a pro of buying a house is having a place to call home. A con is the potential for more maintenance expenses. For every pro you come up with, come up with a con and review your list.  

These questions can help you make an informed and thoughtful decision. Making a large purchase can have a much bigger impact on your finances than a spontaneous coffee run. So to prepare for a large purchase, answer these questions and go through the process. Additionally, you can consider these tips for saving for a big purchase.  

Use the 50/30/20 rule  

Wondering how much to spend on a large purchase? Use the 50/30/20 rule. This states that 50% of your income should go towards “needs,” 30% toward your “wants” and 20% toward savings and debt.  

If you want to pay in cash, you can use the 30% for wants. If you plan on financing, make sure it matches up with the 20% mark.  

Consider your upcoming and recurring expenses  

What other expenses do you have on the horizon? You may have a tax bill coming up, childcare payments, or your home insurance payment. Think about all of your upcoming and recurring expenses. A large purchase can affect your cash flow if too much money is going out at the same time.  

Compare different payment methods  

Calculate how much different payment methods will cost you. For example, how much interest will you lose out on if you pay in cash versus how much interest will you pay if you finance the purchase? 

Look at your options  

Certain big ticket items may be good even if they’re used. For example, a used car or a refurbished laptop. Compare prices, warranties, and lifespan of the item. Also, consider renting or leasing in certain cases and compare the total costs of buying. It may make sense to buy but look at the numbers, your needs, and what you want to get out of the item.  

To help you save for a big purchase, you can use the BMO Savings Goals app. Set up your goals, track your progress, and get support so you reach your goals.  

Review the opportunity costs  

To prepare for a large purchase, calculate the opportunity costs related to buying the big purchase. In other words, what are you potentially missing out on by making this choice? For example, you might put $20,000 toward a home renovation.  

If you’re close to retirement, is this going to delay when you can retire? Could that money pay off other existing debt or earn more in a savings account or the stock market? There’s not necessarily a wrong answer here, but you want to consider all sides.  

Steps to take before making a big purchase  

If you’re thinking of making a big purchase, there are steps you want to go through before rushing into anything. Remember, you don’t want to just think of the short-term gain. You also want to consider any long-term pain you might feel as well.  

So, what are the five steps you should take before making a significant purchase? Here we break them down and offer an example.  

Let’s say you want to buy a new car, which costs an average of $48,275, according to Kelley Blue Book. You have your eyes set on something new and have already decided you don’t want a used vehicle.  

Step 1: Assess your financial situation  

To prepare for a large purchase like a car, assess your current financial situation. Look at the numbers how they are now, not how they might be in the future. Look at your income, expenses, debt obligations, and cash reserves.  

Reviewing the numbers can show you if you have a buffer to handle a potential new monthly payment for a car. Using BMO’s Total Look tool allows users to see their financial picture all in one place.  

If things are already tight, or you’re in over your head with debt, it may not be the right time to make a big purchase.  

Step 2: Consider your credit history and credit score  

If you need financing for a large purchase — which many people do — consider your credit history and check your credit score. Make sure there are no errors on your credit report at With BMO Credit View.   

Review your credit score to see if you qualify for financing at a competitive rate. A credit score of 721 or higher is generally considered “good,” according to TransUnion. If your score doesn’t quite hit the mark, you may want to build your credit up first.  

Also, consider your current debt-to-income (DTI) ratio and what your debt-to-income ratio might be with the added payment. Lenders review your DTI to assess your financial situation. If too much of your income is servicing debt, you may be considered a risky borrower.  

If you’re adding a monthly payment for a new car, you want to have enough room in your budget to withstand it and other surprises that may come up.  

Step 3: Review your payment options  

The next step to prepare for a significant purchase is to review your payment options. In the example of buying a car, your options are typically: 

• Buy outright and in full 
• Lease
• Finance 

Let’s say you want to finance the vehicle. Review your repayment term, potential interest rate, and monthly payment. How much of your income is that monthly payment? Can you afford it easily or will it cause financial strain? Do you have a down payment? Will you still be able to save?  

Look at the numbers so you understand how this large purchase will affect your finances in the future.  

Step 4: Create a purchasing plan  

After reviewing the numbers, come up with a purchasing plan. This can mean reviewing lenders and offerings and applying for financing.  

In the case of a new car, you may need to move money around and put 20% as a down payment. From there, choose a lender that offers you the best rate and a term that makes sense for your budget. Review terms and conditions as well as total interest costs.  

Step 5: Make the big purchase  

After doing your research and due diligence — and getting the right auto financing in place — you can buy the new car you’ve been dreaming about. In this case, and with any significant purchase, take steps to protect your investment.  

For example, getting the right insurance, parking in a safe place, doing repairs and maintenance as needed, etc. Most importantly, stay on top of payments and enjoy your purchase!  

The bottom line  

Making any significant purchase can cause a mix of excitement and anxiety, which is totally normal. To help manage those feelings, you can sit down and go through this process to prepare for a large purchase. Asking the right questions, running calculations, and waiting for the right time can make a big difference. That way, your big purchase isn’t a big burden but a joyful experience.  

Ready to save for your big purchase? Check out BMO savings accounts to get started.