Planning for Big Purchases: All You Need to Know

Before diving in and looking at the various ways you can save for big purchases, it's important to know exactly what kinds of items are considered big-ticket purchases. 

If you're 35 years old, have been working steadily since college, and have a few investments, buying a new Ksh100,000 couch may not necessarily sound that 'big.' 

But if you're 25 years old and just starting life after graduating from college, many household purchases may seem enormous and unattainable.

What is a Big Purchase? 

The answer is different for everyone. For instance, if a 25-year-old is just starting in life, they are most likely moving into their first apartment and would need furniture. They may also be figuring out what car to buy or how to finance it.

We can consider this a big purchase. In general, any item that costs Ksh30,0000 or more could be considered a big purchase - especially if you don't have thousands of shillings lying around.

The items range from essential to moderately essential to nonessential or discretionary comfort purchases.They could include:

• A more comfortable mattress 
• A high-end laptop for work
• Kitchen equipment such as cookers and fridges
• A washing machine
• An expensive coffee table or stereo system (or both).
• A car if you need one soon.
• Furniture sets and appliances.
• Home work-out equipment

Planning for Big Purchases

Many young professionals fail with their money because they don’t plan for big purchases. Consider that you'll be using the item for many years to come. So it's best to buy something of high quality that will last. Here is how to plan for big purchases

1. Name your goal

The first step when planning for big purchases even before deciding what you want to buy and how much it will cost, is why you need it. Assess the usefulness of the item in your current financial situation and determine if this is an expense that can wait.

Once you have ascertained that the purchase is a worthwhile expenditure, then establish the cost through comparison and negotiation to have a clear picture of how much you need to be saving up for every month to reach the goal. 

You can also choose to get financing for the purchase if it is urgent and of consequence to your future earning potential. By the end of this step, you have a goal with timelines. 

2. Put the purchase on hold

Now that you know how much you need to contribute towards your big-ticket purchase each month, you need to check if it fits your budget. At most times, you’ll need to make some adjustments. 

Consider putting the purchase on hold to give you more time to save or even shop for a cheaper alternative. Although it might take time, comparing prices can save you money.

3. Research more about the item

Research is a critical step when planning for big purchases. Check reviews about the product to ascertain what you’re looking for. You should also check its resale price and long-term value.

What Big Purchases Will a 25-year-old Need?

As a 25-year-old, there are big purchases that can have a positive impact on your life and future. You’re probably familiar with most of them. They include:

1. Quality cooking tools and appliances

To avoid falling into the trap of eating out every time,  get cooking tools and appliances to help you cook for yourself. Always go for those that last long and have a warranty. Here are some ideas of cooking tools and equipment

• Cookers, pots and pans
• Slow or pressure cooker
• Blender 

2. Contribution towards a retirement fund

You're probably aware of compound interest. Compound interest is the interest earned on a principal sum plus previously accrued interest. So,the earlier you start saving for your retirement, the better. You will grow more if you contribute less over a longer period of time than if you contribute more in a shorter time.

We are including this in the list of big purchases to make since it is one of the smartest things to do early in your career. Opening a retirement account at 25 will guarantee you the highest possible pension amount for the lowest possible monthly contributions. 

3. Long-lasting home appliances

Although you can go for cheaper home appliances, they often don’t last long and eventually become very expensive to replace. Always remember to check the item you purchase has a warranty. Whether it is a washing machine, a coffee maker, a television set or microwave, getting the best quality from the offset will earn you enormous savings in the long run. 

4. Car 

As a full-time employed professional with a good entry-level income and an ambition to rise through the ranks, a car will typically become a necessity - especially if you move around often in the pursuit of career enhancement. 

Between the ages of 25 and 30 is the typical age where working youth in Kenya start buying their first cars. It is time to start seeing the financing options available, knowing the approximate costs of the rides you are interested in and figuring out what savings plans will get you there the fastest. 

5. Home

If you have any plans of getting married and starting a family anytime soon, then buying a house or building one is within the realm of your longer-term financial goals. If you have plans to start a family, then according to Kenyan trends, you are likely to have one by the time you are hitvting 30 or just before 35 - for the majority. 

If we take 35 as the time you are tying the knot and having your first kid and assume you are now aged 25 and already in full time employment, you have exactly 10 years to save up, invest and learn of all options you have such that you could be owning your own home by that age!

Deciding why you need the big purchases

Before spending your hard-earned cash on a big purchase, you need to understand why you need it. Here are 3 questions to guide you.

1. How will it affect people in my life? Is it the best time to purchase the car if you have other responsibilities such as supporting your siblings?
2. Is it worth the time you worked to earn it? 
3. Do you have a good purchasing history? If you have a history of making bad financial decisions, consider asking your friends or family and especially experts, for a different perspective.

Longer-term usefulness of the purchase (longevity)

Longevity is one of the biggest factors to consider when buying big-ticket items. If you're buying a car, it will probably be useful for 5 years or so. A house, on the other hand, might have a useful life measured in decades. The longer your purchase will last, the more likely you'll get good value for money - and there will be little difference between buying new and used.

One common mistake young people make when evaluating big purchases is making decisions on a whim - keeping up with the Joneses.

All my friends and colleagues are buying cars - so I guess it’s time for me to buy one. Otherwise, how will I fit in?

It could be an example of the car fever, or getting bigger furniture, appliances you have never interacted with before or even more consequential investments such as land. Failing to determine the longer-term usefulness of a purchase can lead to a lot of wastage. You are likely to buy something cheap to keep up with your friends - which then means it will not last as long and will need to be replaced, regularly repaired or require expensive servicing that you are not financially prepared for. 

It could also be as simple as you later on realising that you actually did not need that purchase or you no longer like it and now you need to have it disposed of at a loss. 

If you are hoarder, you may eventually find yourself with lots of costly things that you no longer use lying in the house. 

What happens to the items if I get married?

If you’re planning to get married, you should probably be concerned about what will happen to your items if you get married. If they are costing you tens of thousands of shillings right now when you are single, are they worth purchasing if you will have to dispose of them once you are married?

Think about it; if from our earlier hypothesis, it will typically take you a maximum of five years on average to get married, could you have redirected that money to more profitable ventures and just buy household items together with your partner once you are married?

Also Read: 10 Key Financial Moves to Make Before Marriage

Warranties, insurance concerns

Today's marketplaces are filled with products that come with warranties and insurance. But what do you do if you need to replace something?

When buying a major appliance, such as a refrigerator, it's important to know what kind of warranty the manufacturer offers before purchasing.

For insurance, there are even more questions you'll want to ask. Do I need property insurance? Will my current policy cover new purchases like this one? If not, how much extra will I need to pay per month or year for additional protection?

What happens on relocation/what if I move abroad?

If you are planning on relocating or moving countries, it can be difficult for consumer goods companies to keep track of which country's laws govern your purchase(s). This means that warranties may not be valid in some countries, and additional taxes may be applied upon delivery or return of goods depending on where they were purchased from (or who shipped them). Make sure this isn't an issue before committing yourself by asking questions like: "How will my purchases follow me?"

At 25, your life is probably not fully planned out but your ambition is in the right place. Five years from now you may be living in a different town, country or even continent. So, why are you spending so much on furnishing this one-bedroom apartment in Kinoo only to have to hurriedly dispose of these items when you get posted to Kigali?

By mapping out the career trajectory you intend to take, you are able to make decisions that minimise any financial loss associated with big-ticket purchases. 

Implications of Big Ticket Purchases on Ability to Save

Big-ticket items can impact your ability to save, invest, retire comfortably, pay off debt, save for emergencies and generally have a delaying effect on your longer-term financial goals.

As such, If you’re looking at buying a large item, it’s important to consider not just the purchase price but also the ongoing costs like insurance premiums in the case of a car, interest rate if you took an asset financing option and so on. 

In the larger scheme of things, the fancy couch, massive TV and a satisfying stereo system will not matter much when you cannot afford to pay for health insurance, cover emergency expenses and most importantly - invest - for retirement, your children’s education and to guarantee yourself passive income. 

If your goal is to save money and build up a nest egg so that you can retire someday free from financial worries, then keeping certain purchases in check can help you get there faster.

3 Basic Ways of Acquiring Big Ticket Items 

There are a number of ways you can acquire the big items on your wish list. Some of them might be more affordable than others, so it's important to know what each option entails.

• Cash: This is the simplest way to purchase something. Paying in cash is ideal if you have the funds available and do not want to pay interest rates or other fees associated with credit. You will typically have to save up for a while before making that purchase. 

• Hire Purchase: You pay a deposit - which is typically a percentage of the full purchase price, take the item home with you and pay the balance in monthly instalments. You will end up paying more than you would have in cash due to the interest rate and fees charged for the convenience of using the product immediately. Consider if the convenience is worth the cost
• Loan: While hire purchase is offered by retailers or retailers in conjunction with financial institutions, you can choose to take a personal loan from a bank, MFI, MFB or Sacco and have the freedom to purchase whatever you want and pay the lender in monthly instalments according to the agreement. Most lenders also offer tailored asset finance options that restrict the use of the funds to specifically the purchase of the item specified e.g. car finance.  Again, as with all credit, you have to make the decision on whether the additional cost is worth the purchase or should you just keep saving up and purchase when you are ready. 

Read Also: How to Save Up for a Big Purchase, Painlessly

How to Save Up for Big Purchases

Unlike buying groceries, saving up for big purchases requires patience, discipline, and strategy. You need to plan in advance. Follow these tips to save money for big purchases faster.

1. Set a timeline

Setting a timeline will help you avoid procrastinating your next big purchase. However, the target you set should be attainable. 

2. Open a savings account

Big purchases require big savings. So, set up a separate savings account and make deposits into it regularly. If, for example, you're able to put away Ksh20,000 per month (Ksh240,000 per year) and earn 4% in interest on your balance over that period, you'll have accumulated enough cash to pay for most medium-sized household items in about three years. You can check all the available savings accounts here. 

On saving, you must make sure you are earning the highest possible interest per month or annually when choosing where to keep your money. You have several options ranging from a bank savings account, moment market funds, fixed deposit accounts to government securities and even the stock market. 

Learn More>> Where Do I Keep my savings? The 7 Main Places to Put Your Savings

3. Cut down on other expenditures

You need to cut down on nonessential spending to achieve your big purchase goals early.You can cut down on your expenditures by reducing your entertainment budget, lowering your utility spending and so on. 

Also Read: Affordable places to shop for your groceries.

4. Increase your sources of income

You can also save for big purchases faster by increasing your sources of income. This could mean negotiating for a pay rise or starting a side hustle.  The more you earn, the more you’ll save, and the faster you’ll reach your big purchase goals. 

Here are some ideas on how to increase your sources of income.

5. Automate your savings

It’s challenging to rely on your financial discipline. So, ask your bank to automatically deduct a certain amount of your salary towards a savings account. Schedule this for every single paycheck.

Balancing Big Purchases and Long-term Financial Goals 

Ultimately, big purchases are and will remain costly items of convenience but the long term financial goals stand and in terms of priority, big purchases come much lower. 

To make sure you can enjoy the comfort you seek in the big-ticket purchases and still be on course to meet your longer-term financial goals such as home ownership and financial freedom via passive income streams consider these tips;

• Set up a separate savings account dedicated to your goal. This way, every time you get paid or receive an unexpected windfall, you can transfer money straight into this account without having to worry about paying other bills first.
• Consider setting up automatic transfers from your current account (salary account) into your savings account each month if this helps keep you on track.
• Keep your emergency fund updated - you should be working or have worked towards saving at least six months worth of expenses in an emergency fund. This will make sure you are never caught flat footed in case of an illness, a big travel expense etc. Even if you lose employment, you will have six months worry free to get back on track - your goals do not suffer. 
• Get yourself the appropriate insurance coverage - health insurance comes first on the list as it will make sure you do not dip into your savings, or even sell your property to pay medical bills. 

WRAPPING UP

Big purchases seem daunting especially if you’re just starting out. But the sooner you start, the better. All in all, adopting the big purchase tips discussed here can help you achieve your goals.