From time to time, you’ll make a major purchase that may require more cash than you have on hand. Maybe the money is for a wedding, a new home or a luxury purchase like a new boat.
By asking yourself a few key questions—and understanding the available funding or financing options—you’ll be able to select the one that best fits with your financial plan. When thinking about how to pay for something expensive, some factors to consider are:
- How much will it cost? Be sure to include actual upfront cost and any ongoing maintenance, storage, repair or other expenses. For example, a home improvement project may go over budget, and a large boat will have to be docked and maintained over time.
- What is your timeline? Do you need the money quickly or is this an expense that you have more time to plan and budget for?
- How will it affect your financial plan? How will this purchase factor into and/or align with your broader financial priorities?
- What is the “time value” of the money? If, for example, you’re thinking of withdrawing money from an investment account, how much would that money have earned in compound interest and growth over the next 10 to 15 years? Is it worth losing that sum in exchange for paying cash for a new boat, business or second home?
These are important questions to ask, especially if your decision would affect your retirement savings or the legacy you’ll be able to leave to people or causes you care about.
Ways of financing major purchases
There are several ways of paying for something expensive, including cash (from checking or savings), credit cards, personal loans and lines of credit. Each comes with its own set of caveats.
Here are some of the pros and cons of your options to pay for major purchases:
- Cash: While convenient to access and readily available, using cash to pay for a major purchase may tighten up your liquidity and force you to borrow for other expenses at a higher interest rate in the current environment. It may also create issues in the case of an unexpected medical expense or other costly situation.
- Credit cards: They’re easy to swipe, and your credit line may be high enough to cover the purchase, but credit cards are also the most expensive money you can borrow. While you may want to book that vacation on a credit card to get the points associated with the purchase, be sure to pay it off within the billing period to avoid double-digit interest.
- Personal loans: These loans generally feature lower rates than credit cards, and they tend to be very good for debt consolidation (for example, when you don't have another avenue and the higher-interest balances can be moved to an option with more manageable rates). “This type of unsecured debt may not be the best strategy for affluent individuals,” says Kyle McBroom, assistant vice president and affluent banking leader at U.S. Bank. “Most have some type of collateral to put up against a loan.
- Home equity line of credit (HELOC): McBroom says HELOCs are a popular choice for their tax advantages. “If you’re making home improvements, the interest paid on HELOCs may be tax deductible,” he points out.
- Securities-based line of credit: Also called liquid asset secured financing, this type of lending—using your investment portfolio as collateral for a loan against your existing investments—features lower interest rates than personal loans. It can be a good option for someone who is making a cash offer on a home or another major purchase and who doesn’t want to go through the lengthy mortgage process.
- Investment account: As stated earlier, be sure to factor the time value of money into the equation before withdrawing from an investment account to fund a large purchase. “The key here is to not throw your retirement plan off track in exchange for a wedding, vacation or second home,” says McBroom, “and to pay attention to the tax implications of prematurely withdrawing money from an IRA or 401(k).”
Make sure your major purchases align with your financial plan
As with all good financial decisions, the best way to pay for something expensive should complement your overall financial plan. For example, if you’ve allocated most of your cash to improving your current home, then you may not be able to make a strong offer on a new property or take advantage of a good investment property buying opportunity.
Also consider your timeline, both in terms of the immediate major purchase and your mid- and long-term financial goals. Many financial institutions offer interactive tools to help you determine the long-term consequences of any larger, short-term financial decisions.
“You can work out how a big expenditure will fit into your financial plan quickly on your own using these digital platforms,” says McBroom. “And if you need more advice, we're here for you.”
Learn more about your options for funding major purchases and life events.