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Every so often, you’re going to make large purchases – not necessarily a home or car, but more along the lines of a television, computer, plane tickets, etc. Although many of these expenses can be anticipated, forking over a large amount of money upfront is understandably difficult for many people. So, how do you manage large purchases? The key is to ask yourself a series of questions before making your decision.
Do you need it?
Generally speaking, you never technically need anything, it’s more a matter of wanting it. Now there’s nothing wrong with wanting things, but the best way to determine if you need it is to wait 24 hours before deciding to make the purchase. If after 24 hours, you still feel that you need that item, then that’s probably a good sign. However, quite often you may realize that you don’t actually need it after all and decide to “walk away” from the purchase.
Of course, if it’s an actual need such as medical expenses or your computer breaking down, you may not have a choice.
Do you have the money for it?
Now that you’ve established that you need to make this purchase, you need to ask yourself if you have the money for it. This sounds simple enough, but there’s not always a simple answer. If you have the cash on hand, then you probably won’t stress about it. But what if the only funds you have available is your emergency fund?
With the above example, medical expenses definitely qualify as a good use of your emergency fund, but a computer may not necessarily be worth dipping into your savings.
Is this the best time to buy it?
If you’re in a position to wait on this large purchase, you need to ask yourself if this is the best time to buy. For example, if you’ve been coveting a new television set but know Black Friday is right around the corner, it makes sense to hold off and wait for the inevitable sales.
Another major purchase you might be able to wait on is airfare. Prices of plane tickets go up and down so if you’re not travelling for a while, you might as well set up a price alert and just wait a bit. Keep in mind that the closer you get to your travel date, the more likely prices will go up.
If you have to buy it now, how are you going to pay for it?
Let’s assume that you don’t have any cash on hand, and this is a purchase that must be made now. Your only option will most likely be to pay for the purchase using your credit card. If you know you’ll be able to come up with the money before your bill becomes due, it’s really not a big deal. But what happens if you know you’re going to have to carry a balance?
Obviously, you’ll have to pay interest, but you can minimize the amount of those charges by using a low interest credit card. With the best low interest credit cards, you’ll pay about half the usual interest rate that most rewards credit cards carry (typically 19.99% in Canada). Here are two cards suited to making large purchases:
American Express Essential Credit Card
With an 8.99% interest rate on all purchases and cash advances, the American Express Essential Credit Card is one of the best low interest credit cards currently available in Canada. There’s no annual fee, and new cardholders can take advantage of a 1.99% introductory interest rate on balance transfers for the first six months (8.99% after that).
BMO Preferred Rate MasterCard
The BMO Preferred Rate MasterCard has a $20 annual fee and a slightly higher interest rate, but has the advantage of being straightforward: it offers a flat interest rate of 11.99% on purchases, cash advances, and balance transfers, so there’s no confusion as to what interest rate you’re paying for different transactions, and no teaser balance transfer interest rate that will skyrocket after a certain period of time.
Of course, part of managing a large purchase is knowing exactly how and when you’ll pay it off. If you’re going to pay for a large purchases using a credit card but know you can’t pay it off right away, you should have a repayment plan in place before swiping your card.
RateHub.ca is an independent financial product comparison site that empowers Canadians to make smart financial decisions by comparing rates on mortgages, credit cards, chequing accounts, savings accounts and insurance.
*Many of the credit card offers that appear on RateHub.ca are offered by companies from which RateHub receives compensation. However, all credit card assessments and reviews are based on objectively weighing the cards' quantitative and qualitative attributes. Cards do not receive any preferential treatment or advantage based on compensation.
Invisor is not affiliated with, and does not receive any sort of compensation from, RateHub.ca or the companies mentioned in this blog post.