Since not all big purchases can be made with cash, it is a good idea to have money saved for a down payment. Whether you’re buying a home appliance, a car, or a house, you need to have a good amount of money for a down payment and you need to make sure you can afford the loan payments. If you can’t do these two things then you are not ready to make the purchase.
Hypothetically, let’s say you want to buy a $20,000 boat (don’t we all wish?). Most likely you don’t have $20,000 under your mattress, so you will need to take out a loan. Your down payment on the boat should be 20-25% of the purchase price. Let’s go with 25% in this case, meaning you need to save $5,000 before you can even start thinking about buying the boat.
Now you need to make sure you can afford the monthly payments once you’re cruising around the lake, loving life. When calculating what your payment will be, you need to take sales tax and interest rates into account as well as the term of the loan (36 months is the most common). Once you know how much money you will need each month, start living as if you are already making the payment. For 3 months take that amount out of your account and add it to your savings (look at that…It will go towards your savings for the down payment! Brilliant). After the 3 months is up, take a step back and evaluate whether you are able to live comfortably and still make the payment. If so, keep saving until you reach your down payment goal. If not you may need to find a less expensive boat or hold off until you are in a better financial state.
Click here to calculate the monthly payment on a loan.
Are you saving for a big purchase?