How to Plan for Big Purchases Without Going into Debt (2024)

An individual can easily plan big purchases considering points such as their financial situation, credit score & report, various financing options, plan the purchase in a proper way and make deposits.

1. Evaluate Your Financial Situation.

• Start by assessing your affordability based on your current income, expenses and existing debt obligations. Understand how much money flows into your household each month and where it is spent. Focus on your net income - what remains after taxes.
• When buying a home, a common guideline is to allocate about 30% of your monthly gross income, to housing costs, including mortgage principal and interest, property taxes, insurance, and maintainance.
• For transportation, aim to keep total monthly car expenses around 20% of your monthly take-home pay.These benchmarks help you understand how a significant purchase fits into your overall financial picture.

2. Check your credit score and report.

• Checking your credit score and report is crucial when planning  a major purchase like a home or car. Obtain your credit report online and follow the steps to your current credit score, which affects your borrowing costs. A higher score generally means lower interest rates and borrowing costs.
• Ensure your credit report from bank website and follow the steps to view your current credit score, which also affects your borrowing costs. A higher score generally means lower interest rates and borrowing costs.
• Ensure your credit report is accurate. Correcting errors or incorrect information can boost your credit score, leading to better financing options. Dispute any inaccuracies with the credit bureau. Check all three bureaus, as they may have differing information. 

3. Explore Financing Options.

• Take time to research mortgage options before purchasing a home, including mortgage types, terms, fees, and interest rates. Consider obtaining a preapproval or prequalification letter from a lender, especially in a competitive market with limited housing inventory.
• When financing a car, compare the most competitive loans offered by dealerships, credit unions, banks, or other lenders. Rely on trusted, unbiased sources of information rather than those who may benefit from your choice. Check for any pre-penalties if you pay off your loan early. 

4. Plan the purchase.

• Understand the timing for making your purchase. Do you have sufficient savings for a substantial down payment on a home or car?
• Build a reliable team. Find a trustworthy real estate professional through referrals from friends or family. For a car purchase, ensure the dealership provides valuable advice and guidance.Research vehicle makes and models from reputable sources. 
• Organize necessary documentation, such as proof of employment, insurance, or other financial information.

5. Make the deposit.

• Prepare to make an earnest money deposit when buying a home, signaling your serious intent to purchase. Earnest money deposits typically range from 1% to 2% of the home’s a refunpurchase price and are refundable only under specific  conditions.
• For a new car purchase, deposits usually total around Rs 50000 once you agree to the vehicle price in writing. Verify whether the deposit is refundable if you change your mind.
• By carefully evaluating your situation, reviewing your credit, exploring financing option, planning your purchase, and making informed deposits , you can make significant purchases without going into debt.

Thus an individual can plan to buy big purchases by opting for these above mentioned options wisely and also have a decent amount of saving in the long run.

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Author- Ayush Naik  

Ayush Naik is an expert in personal finance with an MBA in Finance. With over five years of experience working alongside stock market traders, Ayush has a deep understanding of market dynamics and investment strategies. His practical insights and analytical skills have helped many individuals navigate the complexities of financial planning and investment. Ayush’s professional background and commitment to educating others make him a valuable contributor to our personal finance blog.