Q: Each summer we enjoy time with our friends on their boat. After a great day on the water all we can think about is buying a boat of our own. While it’s hard to justify this expense financially, this year it will be harder to resist temptation because we received a small inheritance. What should we consider before we use the money for a down payment and make the leap onto the water ourselves?
A: Whether you have a sum of money to use or not, making a large purchase for emotional reasons, rather than as a wise financial decision, is called impulse spending. Most people are painfully aware of some of the impulsive purchases they’ve made over the years, because they tend to add up on credit card bills.
How Much Can You Actually Afford?
When you start buying impulsively on a big scale, like with the purchase of a recreational vehicle, the additional payments can end up jeopardizing your whole financial well-being. Before you add any commitments to your budget, consider your current financial situation. Ask yourself:
- Could you put your credit cards away for a month and live only on cash?
- Do you spend more than 15% of your take-home pay on debt payments?
- Do you have 3 – 6 months of savings set aside just in case you lose your income?
- Are you on track to enter your retirement years mortgage free and with savings?
- Do you have a realistic household budget that you actively live by?
- Do you plan ahead and save for larger expenses, e.g. property taxes, car and house insurance, home maintenance, vacations, etc.?
- Do you manage routine financial matters effectively, e.g. filing taxes on time, reconciling your bank account and credit card statements?
Truthfully, will how you manage your spending today, allow you to reach your personal as well as financial goals?
Try Before You Buy
Once you’ve taken a careful look at your current situation, pretend that you already own the boat. For 3 months, make extra payments to your savings account equal to the size of a boat loan payment. Then add in the ongoing monthly costs of owning a boat, e.g. insurance, moorage, fuel, licenses, maintenance, as well as equipment you need to outfit the boat.
By test driving owning a boat before you buy one, you’ll find out if you can stay afloat or if it will sink your dream of sailing into the sunset.