Step 12: Big Purchases

You’ve come this far down the path to financial independence. You paid down all of your major debt and fully fund your retirement accounts. The amount you save each year might be north of 35-50% of your income. Even if you’ve been hardcore FIRE until now, you have at least one big purchase you want to make. A car, a house, a dream vacation, or something else you’ve held off on.

That is more than ok. Expected even. I have some very strong opinions on certain categories of purchases but everyone values things differently. Get that house, go on that trip, or remodel your kitchen. Just make sure you plan and save for the big purchase.

Big purchases are often milestones

Wait… I want to start at the beginning.
Link to the previous step – Step 11: Max IRA Contributions

The contemporary culture view of the quintessential American experience is often boiled down to a series of milestones based on large, planned purchases.  Whether you agree with that sentiment or agree people should be spending the amount of money they do on these things is a whole other issue.  I promise I’ll lay out my opinions on some of these purchases and the financial math that underpins them later because I certainly have opinions on them.  I’ll link those below when they are available because you are going to want to argue with me regarding those positions.

Opinions aside for the moment, big purchase as referred to here would be large, planned expenses.  This isn’t necessarily for splurges or last minute expenses.  Examples include a college fund for your children, a house downpayment, a new (to you) car, a vacation, licenses or certifications, a boat, a pool, or just about anything else you choose to spend your money on.  These are all expenses that could not reasonably be bought with the remaining funds in a monthly budget and need to be considered ahead of time.

We’ll look at college savings later

Note: a college fund is definitely a large, planned expense but you might want to hold off on including it here for planning purposes.  The general consensus in the personal finance community is to save for your own retirement first before saving for a child’s college expense.  Sort of a “secure your own oxygen mask first before helping others” sort of deal.  You can start planning for it now at this step but know that the ‘official’ step for this type of savings is a couple units ahead.  

The logic is that your child could potentially get scholarships, go to a cheaper school, skip college altogether, or pay their own way through college but you can’t go back in time and save more for your retirement.  We’ll get further into all of these considerations later on the path to financial independence during the step where you set up the college fund. Until then, read about how I made college significantly cheaper with those strategies.

Think twice, spend once

Ideally, you would first evaluate the purchase to see if this is something you really feel provides value to your life and is worth the expense.  Don’t just consider whether or not you can afford it because at this point in the journey to financial independence you probably could.  Consider the opportunity cost of this purchase… What are you giving up in terms of savings, opportunities, and time to financial independence by making this purchase now?  

I’m not here to pass judgement on how you choose to spend your money (unless you are buying a new luxury vehicle or a boat, then I most certainly will… haha).  As a fellow valuist, you decide what brings joy in your life and point your money in that direction.

Fire up that piggy bank

Once you have decided the purchase makes sense in your financial life, determine the number of months until purchase (if a time horizon is specified) or the dollar amount you are willing to set aside each month for this project.  Add that dollar amount into your monthly budget and make sure to save it each month like you are doing for your retirement accounts.  Keep saving until you have enough money in the account to make your big purchase and enjoy.

If you have more than one project to save up for, repeat the process as many times as necessary or run some of them concurrently if needed.

That sinking feeling… 🙂

I should note that this is commonly referred to in the finance community as a sinking fund.  An account distinct from your emergency fund with a specific purchase in mind where you are saving up with the intention of eventually draining the account.  Please do not use your emergency fund to buy these things.  Don’t even use your emergency fund to save up for these things by commingling the funds.  Side accounts are generally free to have at most financial institutions and it’ll make your life a lot easier to keep things separate.

Babies are expensive

The examples above are many of the most common large purchases people will encounter or immediately think of when asked.  One large (sometimes) planned expense people don’t often consider is having a baby.   Per Nerdwallet, 54% of would be parents believe a baby’s first year will cost $5,000 or less. They cost a lot more in reality.

There are doctor bills, hospital bills, baby equipment like a stroller or car seat, baby furniture like a crib or pack-n-play, baby supplies like food and diapers, childcare expenses, and lost wages. Those are just the obvious ones too.

People may not consider the choice of one parent choosing to stay-at-home with the baby as a “big purchase” but it truly should be accounted for in your plan and budget. If possible, start saving up in a sinking fund for all of the known expenses as soon as you can.  Start searching second-hand stores, family, and friends for baby equipment and furniture they no longer need or can lend you for the time being.  Planning can really help manage the initial front-loading of expenses related to having a child.

Of course I built a spreadsheet

When we found out we were going to have a baby I built a what-if income statement budget in Excel with sliders for her monthly income.  We used that to determine just how many hours she needed to work part-time each month for us to break-even and not go backward if at all possible.  

I know not everyone is going to go to those lengths in planning their finances around the birth of a child but it was very reassuring to us knowing she only needed 8 hours a week to break-even.  The world seems far less overwhelming and scary when you know the scale of everything in your path.  Having that “map” made at least one part of the equation less ambiguous and scary.  Actually parenting a tiny human we are now responsible for is scary enough.

All in moderation

Big purchases are fine, contrary to some of the more hard core FIRE proponents out there, if they are reasonable and planned for in your budget.  Going neck deep into the min-max FIRE lifestyle to achieve financial independence 6 months earlier just isn’t a worthwhile trade-off for many of us. 

I’m not saying you should buy that $25,000 boat or take that $15,000 vacation to Europe every year if you want to retire any time soon, but living your life now through intentional spending is encouraged.

TL;DR

If you have a large, planned purchase on the horizon like a house, vehicle, or other reasonable thing you need to set up a plan now to save for it.  Set up a sinking fund and contribute accordingly.

Link to the next step – Save 15% for Retirement