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Before You Sign on the Bottom Line2/17/2016
Are you considering a major purchase? Are you saving and planning? Making a purchase can be exciting. Do you plan, save and do research before you buy? Some take a lot of time to investigate their purchase before they buy, while others purchase when their emotions are high. Are you married and planning a major purchase? Does one of you make this decision, or both of you?
Making a major purchase and signing a contract is a serious commitment. Major purchases have security tied to them, such as a vehicle, property or personal assets. What is your process for making the final decision of what, where, how much and terms you consider fair? Do you have a system, a plan, an understanding of how to negotiate before you purchase?
As you can see there are many questions. Without a plan, a system, a plan A, B, and C, you may end up making a bad decision that could cost you dearly. Donít allow a bad financial decision to put your job, security clearance, career, or marriage in jeopardy? Do you have a plan if later you canít afford the purchase? Seldom is this question considered before many make their purchase. This question is as important as the purchase itself.
Are you a two income household making a major purchase? If one income is lost can you still balance your budget? How long will your savings last before you are falling behind on your bills? Will this purchase deplete your emergency savings?
A good example was in 2006 the housing market started its collapse. Many had purchased investment real estate. When their property became vacant they realized their plan ďAĒ didnít work when their investment stop supporting itself. Oops! Rock and hard place. Most didnít have a back-up plan, a plan B, or a plan C in case their plan A failed. Few thought about this before they made their purchase, many ended in foreclosure and bankruptcy.
Before you purchase, be sure to use a household budget that works. Know your Debt to Income Ratios. How long can you survive on one income if you are a two income household? If youíre a one income household how long will your emergency savings last with no income? At least six-month income is recommended.
Key points to consider before you sign on the bottom line:
Will you have a proper emergency fund of at least six months income after your purchase
Never take financial advice from anyone with a vested interest in you signing on the bottom line
Did you get several competitive quotes before you finalized, donít rush, sleep on it!
If it sounds too good to be true, it probably is
Will your down payment be large enough to provide enough equity to sell quickly if your financial conditions change and you no longer can afford the payments.
Have a back-up plan when plan A fails and you canít afford the purchase
Before you purchase check insurance premiums, taxes and up-keep costs
Never ask for a co-signer, or co-sign for someone else, not even family.
If making a major purchase means you can no longer meet your monthly savings goals, you canít afford it.
Trust the Debt-to Income Ratios. A house payment should be around 25% or below of your household gross income. Work on keeping your total household debts about 33% or below of household gross income. Car payments not to exceed 10% of your household gross income.
Never put a purchase ahead of your career or familyís financial security
If you are military could you PCS in the next three to four years, if so do not purchase a house.
If your spouse does not approve of the purchase donít buy it.
Phillip Day, President
Academy of Financial Literacy, Inc
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