The economy in many ways has taken an upturn. I’m not saying it’s perfect or that we are back in the 80s where money was abundant everywhere. What I do see in my practice, though, is a very unnerving trend of overspending.
It does appear that people have been on what I call a “spending starvation”. This is resulting in people everywhere, blowing through lump sums of money that they get from a business, a bonus, or any other surprise income that comes their way.
In general the money is being spent on large ticket items, particularly for entertainment. These are things like boats, RV’s, guns (if you are into hunting) or any other large item that we all refer to as “keeping up with the Joneses”.
The problem is that most people are not factoring in that these types of purchases depreciate big time in the first two years. They also forget that these types of purchases typically come with monthly fees and unexpected maintenance.
Here are a few big tips, for your big ticket item!
Pay your Taxes.
First, when you get a large sum of money, however you do get it, always pay your taxes first. The IRS has new regulations on this, and you are required to pay the tax within 75 days.
You are going to have to pay it anyway, so there is no reason to put it off. I’ve seen many people spend all of their lump sum, only to end up with taxes due at the end of the year, and no money to pay them.
Get this easy step out of the way before you do anything else.
Pay down credit cards and add to savings.
Take the remaining balance and put a significant amount against your debt and into your savings. I recommend as much as 50% of your balance to be split between any credit cards you have with open balances as well as your savings accounts.
If you have a lump sum of money, and you do this, you will still have plenty left over for your new “toy”. Most of all, you will not have the remorse later of realizing that you put all of your money into something that loses so much value in the first year alone.
Enjoy your new purchase!
After you take care of the taxes, the debt, and the savings, then guess what? It’s all yours!
You will find that spending the remaining amount on the toy of your choice will be stress free. You may not realize this, but when you don’t allocate the money evenly, and you spend it all on one thing, you will actually regret it in a very short amount of time because the truth is that you will realize that there was enough to do both.
Make a large down payment.
Because most things that fall under the luxury department depreciate so quickly, you do not want to be upside on a loan. The classic example of this is a boat.
We all hear jokes about getting out from underneath a boat, because it can be difficult to sell. This applies to any type of luxury item.
You do not want to have a loan against a big ticket item over 50% of its value. When you owe more than 50% of that type of item, there is a strong probability that you won’t be able to sell it for the amount you owe on it after 2-3 years.
I see this all the time in my practice.
Don’t forget the maintenance!
When you go to buy your new toy, factor in the monthly fees (if there are any) as well as maintenance. So whatever amount you have left, I recommend you only spend 75% of it on your new toy (or the down payment), and then set the rest into a separate account for unexpected maintenance.
The nature of “toys” in general, comes with repairs! If you have it set aside, you will be able to enjoy it much, much more!
Enjoy your toy and be stress free!