Purchasing Big Ticket Items
A Helpful Guide
This guide will give you some helpful steps to successfully purchase big-ticket items, like cars, boats, houses, etc…. With this guide we’re going to give you a structure to follow when making purchases so that you can have a positive experience, get good value for your money, and spend your money wisely. It’s important to remember, you are not going to have a lot of opportunities in life to buy big-ticket items and doing it right ensures that you are using your hard-earned money wisely while doing it wrong has the potential to waste a large amount of money that it took you a long time to earn. This is going to be more of an analytical approach than an emotional approach.
Another thing you’ll notice about this approach, you probably aren’t going to be able to go out right now and make that purchase. The steps involved in this guide take some time before you go to get you prepared so that you’re protected from making a poor emotional decision with your hard-earned money.
Before you go out and buy any big-ticket item, there are some things that you should keep in mind, we’ll call these definitions for the purpose of this guide.
Asset: You might think you’re buying an asset because we’ve all been trained that anything that is a piece of property is an asset. That’s WRONG. An asset is only something that will earn you money on a regular basis. An asset creates more cash. A car, a boat, or a home for yourself is NOT an asset, it’s an expense. A business or a rental property is an asset.
Expense: An expense, as we stated above, are things like personal cars, boats, homes, clothes, memorabilia, and other items that you purchase that don’t create any cash. A car is nothing more than an expense, the house you live in is an expense, that Kobe Bryant card you purchase is an expense. These things aren’t putting more money in your pocket, so they are expenses.
Cash: Cash is the money you are going to spend on your purchase. As a rule of thumb, spend your cash buying assets, not expenses, and finance purchases of expenses.
Emotions: During the purchasing experience you are going to experience powerful emotions. You are going to find that item you love, you are going to want it, and you are going to have to have it, now. Once that happens, there is a very high probability you are going to make bad decisions on your purchase. During the “deal-making” process you are going to feel stress, it’s going to cloud your judgment and make you just want to be done with the process. Stress can also lead to you missing details you should have seen. Finally, once you finally own your purchase, you are going to experience the most powerful and long term of these emotions, Buyer’s Remorse. When you take a look at the Wikipedia article, this process is trying to address some of the elements of cognitive dissonance that you experience after the purchase, before you walk in the door so that you have the confidence to know your purchase was a sound one.
The Deal: The deal is the price you are going to pay, the financing rate you are going to pay, any add-ons you might get suckered into, and the government taxes you’ll pay on the purchase.
The Sellers Motivations: When you go to make that purchase remember that everyone you interact with is going to want to get more money from you than you want to spend or should spend. The salespeople work on commission, so the higher the price the more money they make. The sales manager is the person who is ultimately responsible for the deal you make. These are highly trained and experienced salespeople who are going to find weaknesses in your emotions of the deal. Once they find that weakness, they are going to spend all their time trying to exploit it. The Finance and Insurance (F&I) people, the last stop before you get your item, are the most highly trained salespeople in the building and they also get a commission for keeping the prices high, giving you financing
Negotiating: Even with a watertight plan going in, you are still going to need to negotiate. The process of negotiating is a little like a dance, a little like a fight. You want to get what you want and they want to get what they want. Ultimately, you have to be willing to move and they have to be willing to move for the negotiation to work well. You must be prepared to negotiate.
Depreciation: Virtual every item you purchase, expense or asset, is going to depreciate. If you are thinking about buying a new car, you can assume that the car is going to depreciate between 5% and 35% the day you drive it off the lot. You could put 100 miles on your new car, it could be in new condition, and the best you could do selling it the week after purchasing it would be getting 75% back. You have to factor this loss of money into your purchase strategy. In many cases, you can avoid the depreciation loss purchasing a low mileage used car of the model you are looking for. Buying new cars, boats, or game consoles is usually not a great investment.
The objective of this guide:
The objective of this guide, and your objective with the purchase of your item: Pay the least amount possible for your purchase, getting the most favorable financing (if you’re aren’t paying cash), with the fewest (preferably $0) possible add-ons during the Deal for an item that meets your purchasing criteria. This guide is going to deal exclusively with buying expenses per the definitions above and we’re going to use cars in the rest of the guide for illustration purposes.
Planning the purchase:
What is the financial impact of a car?
If you’re going to do this on your own it’s important to understand ALL the financial impacts of car ownership, here are some examples:
Down payment: This is the amount of cash that’s going to come out of your bank account as either a down payment of a new car or used car.
Monthly payment: If you aren’t paying cash for the entire purchase, this is how much you’ll spend monthly in payments.
Usage: Do some math here, how many miles are you going to drive per month (totMiles). What is the combined Miles Per Gallon (cMPG) of your car? What is the price of gas per gallon (pGas). Your monthly used expenses are (totMiles/cMPG)*pGas + Other where Other are tolls, tickets, etc…
Maintenance: You can choose to do regular maintenance and have your car last, or skip the maintenance on a regular basis and pay for it later (usually 10x) with larger maintenance. If you amortize all of the maintenance items listed below, you’re probably looking at about $50-$75/month. Examples of maintenance include:
Oil Change $30-$50 every 3 months or 3,000 miles, whichever comes first. Oil is like the blood of your car when you let it get dirty by not changing it regularly the major systems of the car wear out quickly causing problems later on. In addition, when you go to sell your car most used car buys are going to look at the repair record and avoid cars that haven’t been appropriately maintained.
Car wash with wax $15 per month. No matter where you live, unless your car is sitting inside all the time you, you need to get it washed on a monthly basis. A single bird crap when left on your car within a couple of days will permanently damage your paint. Permanently. Sap from trees. Salt from driving around snow. Decomposing leaves. All of these things can damage your car. Get it washed.
Scheduled maintenance typically every 30k miles, price varies from >$300. Your car has a maintenance schedule in its manual. Every 30k miles or so you are in store for a “major service”. An example of a major service might be something like a timing belt, which if it breaks completely destroys your engine. Read the book, do the maintenance. In addition, not doing regular maintenance can void your warranty. Put calendar requests in your calendar to remind you.
Insurance: $100-$500/month. This is another one of those things you need to research before purchasing any car. The insurance company’s base insurance prices on risk and value. If you’re young and buy and expensive sports car you’re going to pay upwards of $5,000/year for insurance. If you are old and buy a used compact car you aren’t going to pay very much. Use some common sense when thinking about buying cars, if it’s expensive, the insurance will be too, if it’s a sports car prone to reckless driving, even an older one, it’s going to be expensive as well. It’s best if possible to just get on your parents insurance until you are fully moved out and on your own. However, don’t drop a lot of money on a sports car and then expect the insurance to be cheap because it’s on your parent’s policy. If you ever want to see a hidden cost that your parents absorbed without saying much, ask them how much their auto insurance went up when they put you on the policy. Or how much their renewal went up when you got that ticket.
Know what you should spend:
You’re probably wondering why this is at the beginning of the planning process. Before you think about what you are going to buy, it’s imperative that you set the financial limits for what you should spend on the purchase. You should only purchase a big-ticket item when you are prepared for the financial impact and know exactly how it’s going to impact you long term. Will the down payment deplete your cash? Do you make enough to afford the monthly payment plus insurance plus maintenance of a new car? Are you factoring in all of the expenses for the car? This is where you need to have an accurate appraisal of your finances. There are some things you need to know in detail: How much cash can you spend for a down payment, what is a safe monthly payment for the car, what will my usage, insurance and maintenance costs be.
As a rule of thumb, you’re probably going to need 20% of the total price or your purchase as a minimum for a down payment. The total price is the items price, plus commissions and taxes including sales taxes. Do you know the sales tax percentage in the city you are going to purchase? Have you factored that into your total price?
Remember, you’re purchasing an EXPENSE and if you spend too much of your CASH you won’t have enough left over to take advantage of ASSET purchasing opportunities when they arise.
Arrange the financing in advance:
At this point, you have probably had your own bank account for a while and hopefully, you have started to build some credit by lightly using a credit card for purchases and paying the entire balance every month (Establishing credit should be another manhood item). One of the best places you can go to get pre-approved for financing is the bank you already know. If you don’t already have a bank, you should consider opening an account and checking with a local credit union. Credit unions usually have much more favorable rates than banks, usually, a couple points less. If possible don’t apply online, go to the credit union or bank in person. When applying for financing, you should walk out with a pre-approval document with a maximum amount and rate. This pre-approval gives you a starting point to help you decide ….
If for some reason you are unable to get pre-approved for financing you will probably need to sign up a co-signer for the loan, typically a parent or relative. It’s important to remember, a co-signer has the same financial risk that you do, they are on the loan papers and if something doesn’t get paid on time it reflects negatively on their credit as well as yours. Don’t screw your cosigner, it’s bad karma.
Know what you need vs what you want:
This is one of the most important parts of the plan and the piece of the process that has the potential to cause a lot of anguish if you don’t do this analytically. Now you’re excited, and you have an amount that you could possibly afford based on your pre-approval, it’s time to start looking at all the possibilities. But hold on, just because you can afford something, doesn’t mean you should use up all of your credit. Now is where we get to the want vs need. You may want a Camaro, but you only need a Cruze. You may want a Porsche but only need a VW. This is where you need to be very pragmatic with what you need, because remember, this purchase is an expense that’s going to keep you from investing in a real asset. Go for the minimum of what you want. Always keep asking yourself, is this the least expensive option I can get while satisfying all of my needs. Here are some questions about car buying that you should ask yourself.
Research cars online that meet your needs and keep track of the ones you like.
- New/ Used
- Proj $
- Misc (Incentives, Warranty, etc…)
- Location (Shipping Expense?)
- Link to car
Keep this list with you, you’ll use it later when you are making the deal to remind yourself that you don’t need THAT car because there are others that will meet your needs.
Create your rank:
As the last step before you go to make the purchase, go back to the list and create a rank. The rank is a very personal choice based on what’s important to you but ultimately there are a few different criteria you should incorporate into your rank:
- Purchase Price
- Monthly Proj $
- I like it
I wouldn’t recommend having the “I like it” criteria at the top, but you definitely need to incorporate it. If you have a long commute or are otherwise going to be spending a lot of time in your car you really need to like it.
Making the purchase:
You have analytically figured out a shortlist of great candidates, have your budget and your budget fits with the items, you have your financing in hand and you are ready to go make the purchase.
Where will you go:
Hopefully, in the list you made, you have your rank and your locations. Print out the information for some cars you are considering and take them with you. If you want to get to a greater level of detail, you can use the manufacturers’ car configurator to build your perfect car and take that with you. Most times it will be hard to find an exact match and you should not expect to find one, but it makes for a good start point.
You should make a plan to go to at least the top 3 before making any decisions.
New car purchasing:
If you buy a new car, go shopping late in the year (Like 12/31), late in the quarter, the last day of the month or late in the model’s run, there is a good chance that there are dealer incentives. Check both the manufacturer and dealer web-site to have an idea of what incentives are available. Write them down and save the link so you can show the dealer. To battle depreciation, always look to purchase new models that have good dealer incentives. Note: newer and popular models will not having any incentives and usually have little discounting. Dealers have no motivation to sell popular cars cheap.
Used car purchasing:
Unless you are great at doing auto inspections (mechanic level) NEVER BUY A USED CAR WITHOUT A PRE-PURCHASE INSPECTION! ALWAYS DO THE PPI! A PPI can be done at a dealer or certified independent mechanic with an appointment and might cost anywhere from $50-$200 depending upon the car. If someone is honest and wants to sell you the car they will not argue if you want to meet them at a dealer who will perform a pre-purchase inspection for you.
When you are buying a used car, you have to do a lot more research. You won’t have a warranty as long as a new car, you don’t know what the previous owners have done to the car and unless you are a mechanic you’re taking a chance with your money. Here are some of the things that you can research before you consider buying a used car:
What is the price range that the model should be within? Check the resources at the end.
What is the standard warranty? How much if any is left?
Where is the nearest dealer/mechanic who can repair it? If you buy a Fiat it might be a long drive to a mechanic.
Phone a friend:
Because of the emotional nature of the process, the excitement and stress you’ll feel, you need to phone a friend. Once you have chosen someone who can help represent you, you need to educate them on everything you have in your plan and empower them to tell you when you’re making a bad decision. You can even come up with a code, like touching your nose, when you are deviating from your plan. Hand your friend your ID and tell them they should not give it to you if they think you are going against your plan. Respect them during the process.
It’s also a good idea if you feel like you have a high probability of buying, ask your friend to drive so you have the potential if all the stars align to drive home in your car.
Be prepared for the process:
You’re going to be dealing with only salespeople from this point on. If they are good they are going to find your weakness while becoming your friend, if they are bad they are going to sound cheesy and annoying. No matter what happens, either way, you have to work the process. Sweat the details. Don’t let them get you off track. If they can’t answer a question, have them walk away and go find the answer, now. Keep a poker face all the time, don’t get excited, and don’t get depressed.
The most important thing you have to be ready to say is: No. No, this car is not a good fit for me. No, this deal doesn’t make sense for me. No, this car doesn’t look like what was advertised. No, this isn’t what I want. And most importantly, at any point in the process, you need to be prepared to get up and walk out. If the numbers don’t work, or the deal doesn’t seem right, or the process seems to high pressure, look them in the eye, say Thank You, and walk out.
Examining the cars:
Is the car in good condition?
Detail check the paint for scratches and differences in shade that indicate it’s been repaired. You can gently use your knuckle to knock on the car in different places, body repairs (and plastic panels) make a sound that is hollower than the rest. You can knock on both sides and if they sound different, run away.
Are all of the panel gaps the same? Look at the gaps around the doors, hood, and trunk and make sure they are the same.
Is the paint in good condition?
How much tread is on the tires? Are all four tires the same? (You’d be surprised) Is the spare tire in good shape?
Is the interior in good shape, front and back? Any scratches. Do the lights, blinkers, hazard lights all work. Does the A/C work? Heater? Radio including the CD (cd players go bad with age)?
- No cracks or chips in the windshield.
- Do the seats move without issue.
- When you close the door does it sound solid.
- Engine compartment clean
- No signs of oil.
- Not too much dirt, although they all get dirty.
- Fluid levels are good?
Always take a car on at least two road tests before purchasing. The first time you should be very safe and:
Once it’s your turn to drive. Get in the car, set the seat first until you are comfortable, and then set the mirrors to match. How is the visibility? Are the pedals too close or too far?
Turn everything off. It’s ok to tell the salesperson in the car with you to please be quiet while you listen to the car.
Start the car.
Just listen to the engine and make sure it’s smooth. Make sure it doesn’t stutter (no, it’s not bad gas) and accelerates smoothly.
When you accelerate, does the car accelerate in a straight line? Does the wheel feel like it’s pulling your hands? That’s bad if it does.
Make sure the brakes are working great. When you apply the brakes hard, does the car stop straight?
On a flat road when you let your hand off the wheel for a second while coasting does the car go straight?
Can you hear the tires?
Now, turn the A/C on, is it loud? Does it make any noises?
Turn on the stereo, do the controls work?
Do the steering wheel controls work?
Do you feel safe in this car?
After the test:
You’ve driven the car, if it feels good but you aren’t ready yet or it’s not the right car say thank you, give them your spare google voice phone number (they are going to call a lot when you leave the dealership) and move on to the next one. After seeing a few more if this one seems to make more sense, go back and make a deal.
If you think this might be the car you want to purchase, ask the salesman for a few minutes while you discuss the details with your friend. At this point you need to work out the details of a deal that’s going to make sense for you. Review your notes on prices, get your financing pre-approval ready and discuss with your friend where you want to start the negotiations and the maximum price. Remember, at some point, you may have to get up and walk out, that’s part of the negotiation. Take a breath and go make a deal!
Making the deal:
So you’ve found a car you like and you’ve answered the “are you ready to buy” question with a yes.
Hopefully, you’ve seen at least 3 different cars by this time so you have some choices. You must lead the conversation. You must start with, “This car could be a good fit if we can make a good deal. I have my financing worked out, here is the rate I’m currently getting and if you can compete with the rate that’s fine. I would like to pay $xx,xxx for this car. Can we make a deal?”
Typically there are three steps to making a deal to buy a car: 1. Propose a deal to the salesman you are working with, 2. Negotiate the deal with your salesman who is working with their sales manager, and 3. Once the terms are agreed upon work with the Finance and Insurance person (F&I). REMEMBER, each one of these people is going to try to deviate from the deal and you have to stick to your plan.
Typically the way this goes is: You propose A, the sales manager comes back with B, you propose C, the sales manager comes back with D, etc… Eventually, you come to A+((B-A)/2) price, usually right in the middle of the first two bids after negotiating, and if that fits with your plan you move on to the next step with F&I. If that price doesn’t work out for you, shake hands, say thank you and move on to your next car. They have your number if they want to negotiate more.
If this is a used car: Now is a great time to ask for the Carfax and a PPI. Before you go too far down the road with a deal, check the history and get the car inspected.
If you do finally come to an agreement, now is a great time to ask the salesperson if they could give the car a quick wash and fill the tank. Plus that gets them out of your hair.
Dealing with F&I:
F&I is where car dealers make most of their money. Read that again. Whether it’s a “diamond coat” sealer, a Lojack tracking system, an extended warranty, upgraded floor mats, an upgraded stereo, or roadside assistance, F&I are going to come at you with the add-ons you probably don’t want. You’ll get an idea as to what they are pushing by looking at all the little pamphlets on the table as you walk in the F&I office. Just say no. Even the extended warranty is usually not a great deal unless you think the car is going to blow up, soon.
After F&I gets through the add-ons, then they are going to start talking about financing. You’ll need to present to them your financing pre-approval again and ask if they are going to try to compete on the financing. This is all about numbers not which financing is better or which finance company is better or what’s easier. Either they can give you a better rate, or they can’t.
Once you’re done negotiating any financing, and you’re still on board, you have a bunch of papers to sign. While I would love to tell you to read each one, they are super long, standard and filled with legal ease. Knock yourself out if you want to speed read them, or, just ask the F&I person to explain in more detail what they are. You can always stop the process and ask questions.
When the deal is done and they hand you the keys:
At some point you’ll be done signing papers, the car will be all cleaned up and fueled and someone will hand you the keys. At this point, you should have someone walk around the car and explain to you how everything works. One of the most important things to do is drive away with enough knowledge to know how to operate everything in the car. How does the cruise control work? How do you check the oil? How do you get to the gas cap to put gas in? Can you open the trunk? Do the seats fold?
Congratulations, you setup your finances, you did your research and you made a decision on a good car that fits within your financial means. Now you get to enjoy the fruits of your label for the next few years!
Wait – Within 24 hours!
Sorry, you’re aren’t done yet! One of the first things you need to do is call your insurance company and get that car insured! They may have known you were buying a car but it’s your responsibility, within 24 hours, to tell them all the details.
Also, if for any reason something doesn’t sit right with you, TAKE THE CAR BACK. Under most states “buyers remorse” laws you have only 24 hours to return the car and unwind the deal completely. If you end up not wanting it, take it back and tell them you want to unwind the deal. Make sure you’ve taken a quick look at your states buyers remorse laws before going back so you can use the correct terminology.
OK, now you are done! Congrats and enjoy!
How long do you want to own this car?
If you do the regular maintenance, you can keep a car for 10 years with little problems. In 5 years you are probably going to be CEO of some company so at least you’ll have kept the car in good shape which will increase the resale value. Good job.
- Do the preparation so you walk in knowing what you can buy.
- Make sure you are buying based on Need and not Want.
- Calculate your monthly cost with each option beforehand.
- On new cars, look for incentives and deals and never pay sticker.
- On used cars ALWAYS do a PPI
- Follow the maintenance schedule, including the wash!
Resources for buying cars:
www.carfax.com Most dealers will provide a copy of the Carfax. You have to see this before even starting a deal for a used car.
www.cargurus.com great site because it will show you a range of prices for a make/model/year.
www.carfax.com absolutely essential when buying a used car.
www.carmax.com US retailer who prices their cars at the bottom of retail.
www.costco.com You won’t get absolutely the best deal but you’ll get fleet pricing which is usually cheaper than retail, you get to deal with the fleet staff at the dealership who are usually more experienced AND you can negotiate a little.
www.porsche.com , www.honda.com , www.toyota.com, etc… New car web-sites with configurators.