How to Plan for a Big-Ticket Purchase?

The keyword here is “plan”.

We don’t focus on instances when your big purchases are forced, say your mobile phone or laptop conks off suddenly. Or your bike or car is suddenly showing problems and the cost of repair is too high and not justified. There is not much you can do about such instances. You must spend. For such cases, you should have already planned through a robust contingency buffer. Or else you might have to sell assets earmarked for other financial goals. Or borrow and figure out how to repay the loan.

We focus on situations where you know a big expense is coming your way a few months or a few years down the line. And for such cases, you can and must plan.

Plan to Buy during the Discount Season

There are sales around important days and festivals (Independence Day, Navratri, Diwali, New Year, Gudi Padwa etc.) where retailers usually offer discounts. Both online and offline retailers offer discounts. Many banks also offer discounts, cashbacks, and EMI during such times.

If you plan to change your mobile phone/laptop/television or buy a home appliance in the next 6-12 months, see if you can wait until the discount season. Or you can set price alerts and buy when you get a good deal. Therefore, if your purchase timing is flexible, plan to buy during such sales. You might just save some money.

The deals and the discounts are fine, but you still need money to buy. How do you manage the funds for the purchase?  You have a few options.

Accumulate the Funds Gradually

If you need to spend Rs 60,000 after 6 months, you just need to set aside Rs 10,000 per month for the next 6 months. You can keep this money in your savings account, a recurring deposit, or a liquid mutual fund. When you want to buy, redeem the investment, and use the proceeds for the purchase.

Target Your Annual Bonus or Any Other Windfall

Your cash inflow just about meets your regular expenses, loan EMIs, and investment SIPs. In that case, it is difficult to set aside additional money from your monthly budget.

If you belong in this category, consider any windfall including annual bonus that is expected before or around your planned purchase. You can earmark such cashflow for the purchase.

“I Am Still Short of Money”

If the expenditure is big and can’t be met with additional monthly contribution and annual bonuses, then you have 4 broad options.

  1. You delay the purchase until you have accumulated sufficient funds. This may not always be an option but if you have a choice, do consider this.
  2. You stop your existing SIPs (recurring investments) and route money aggressively towards this purchase. This is a contentious choice. Most of us don’t want to disrupt our regular investment discipline and rightly so. Ideally your contingency fund planning should be so robust that you do not have to exercise this option. In most cases, I wouldn’t recommend this option.
  3. You redeem a portion of your investments to fund the purchase. Again, not desired, unless you are redeeming from the emergency/contingency fund. And yes, if you are drawing from your contingency fund, you must replenish the fund soon after. If the investment is earmarked for another financial goal, this sets your financial planning back. This approach may also have an adverse tax impact since capital gains are taxed.
  4. You take credit. This could mean swiping your credit card or taking a loan. However, all loans must be repaid. If you are using your credit card, you must figure out how you will settle the bill by the next due date. Or if you take a loan (or convert credit card purchase into a loan), you must figure out how you will manage the EMIs from your cash flows. If your cashflows don’t support such repayment, you will be back to (2) or (3).

Ideally, you should be able to save enough so that you do not have to delay the purchase, stop SIPs, redeem investments, or take a loan. Or have enough money in the contingency fund that you do not have to stop SIPs or sell investments.

However, if you are short despite your best efforts, then (1) is the best option (if you have the option).

Among (2), (3) and (4), the answer is not very clear. The answer will vary depending on your financial situation, behavior, and preferences.

(4) is credit and irresponsible credit behavior can lead to major problems. Therefore, always be careful while taking credit. However, assuming that’s not the case, (4) is fine provided the cost of loan is not very high and the EMI payments are manageable. You may earn cashbacks and reward points. No-cost EMIs may reduce the cost of loan significantly. More importantly, you don’t break the investment discipline (2) and sell investments earmarked for other goals (3).

Between (2, stopping SIPs) and (3, redeeming investments), (2) has no tax impact but I prefer (3) because (3) does not disrupt discipline and selling investments hurts. Using (3) is also a clear signal that you need to plan better. This will improve your future financial planning.

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