Unless you are into living like a hermit, big ticket items are a fact of life, as unavoidable as death, taxes and people who say “death and taxes”. Big ticket items are those items we cannot responsibly buy on a whim with our normal cash flow. If I have $200 left over after all by bills and essentials are paid for then I cannot responsibly buy a television for $2,000 without a credit card or some financing. Most people just buy the television anyway and figure out the details later, which is as useful a strategy for purchasing things as leaving a literal calling-card behind is for getting away with murder. This is why most American’s find themselves in debt up to their greedy eyeballs.
An Example of Idiocy
I have some tips, rules and strategies for you take into consideration when going through this process, but first an example. I have a friend who makes more money than I do, makes more money than many other people I know and is worth less than pretty much everyone I know. There are meth-addicts in New Mexico with dental hygiene that would make Austin Powers flinch that are worth more than my friend. The reason he is worthless in a financial sense is because he wants everyone to think he is worth more in a financial sense. He owns three HD televisions, lives in an expensive luxury apartment, wears designer fashions, and drives a Lexus. He is worth negative amounts, but if you just met him you would think twice about introducing him to your girlfriend or friends. How does he do it? He finances the televisions on best buy credit cards (24.5% interest), buys the designer clothing with another credit card, wears them until they stand on their own (can’t afford the dry cleaning), leases the Lexus, and pays the minimum on his massive student loans to afford the apartment. That’s the life, right?
Sacrifice to the Financial Gods
My friend unfortunately is in good company, as most of America is woefully over-levered. He doesn’t like saving, may not even know the word, and so has cast his lot. You are smarter than he is, you can get all he has and more and still build a positive net worth. Saving for a big ticket item should hurt, you should feel it. It should require a sacrifice to the financial gods, unless you’re filthy rich, in which case you’ve obviously paid those gods off. This sacrifice can come in the form of working extra hours at your job, working side gigs in addition to your job, selling the crap you have been mindlessly holding on to, or performing draconian cost cutting to your non-essential budget items. Pick your poison, my friend.
Rules for Saving for Big Ticket Items
- Never forego retirement savings for a big ticket item. That new car or television isn’t going to pay your health care bills and keep a roof over your head when you are old, wrinkly and unsexable. So if “temporarily” pressing pause on your automatic investments until your house is adorned with a $5,000 dollar suit of armor is tempting, you are on a slippery slope, my friend.
- Never dip into your emergency fund. It’s an emergency fund, and no, having a giant television for the start of the football season does not constitute an emergency. You will be doing a wrong to everyone who depends on you should you bend to this temptation; if no one depends on you, then you are doing your future-self a disservice. Either way someone will be mad at you should the shit hit the fan—and it always does at some point.
- Never use credit for an item you could pay cash for. This one is a bit vague, admittedly. Technically anyone could save long enough to pay cash for anything, although they may be savings for a long, long time. I said saving for a big ticket item should require a sacrifice to the financial gods, not enslavement. A general rule of thumb is that if the item would take more than two years of pious, miserable saving to purchase with cash (and I am not saying you should be saving in a pious, miserable way), then credit may be acceptable pending the financing options available to you. Example: if it will take longer than two years to save for a new car, consider a used one before looking at credit options. Sometimes we set our sights too high.
Tips for Saving for Big Ticket Items
- Look at your budget, and cut ruthlessly. Ramit Sethi is a large advocate for this, and I agree in full. Think about the results of your Personal Income Statement exercise, where I asked you to break down your budget in granular detail in the Now, and Round 1 and 2 (that will be posted soon). Is there anything you missed?
- Work extra hours or a side gig. Working extra hours has an opportunity cost that differs pending the job you work. If you are paid hourly then it carries a low opportunity cost, while if you are salary it should be higher (because you will not be compensated for the extra time immediately, if ever). Pending which side you fall on, a side gig may be a great option to earn extra money for that big ticket item. Check your local craigslist, newspapers, and network to see what is available. Warning: you may have to check your pride at the door. Consider it character building.
- Sell crap you don’t need. I linked this above, so please click there to get even more information on why you should sell the crap you have but aren’t using. To paint a quick picture: if you have or have ever seen a garage, basement or attic stuffed like a greedy hamster’s mouth then you have seen the result of non-mal adaptive hording. Good money was paid for that stuff; chances are people will pay you good money to take it off your hands.
- Consider the future cost of a new item. Emotionally we are not very good at doing this. We like to think in current terms, not future terms, and thusly tend to think the pile of cash we must save to be bigger than it in fact need be. Saving for a car is a typical example of this: the car is priced at say, $20,000 new, which may take a year and a half to save up for. In a year and a half this exact year and model car will cost significantly less. “Ah!” someone says, “but the new model in a year and a half will still be $20,000!” Don’t get cocky, you would be falling victim to another psychological malady—commonly called pig-headedness. Why wouldn’t a used car meet your needs? What will change about the things you liked in the current, new model in a year and a half? Nothing. Release the ego and think logically. Televisions are another example: you want the new $3,000 3-D model, how much will an equivalent 3-D model cost in the time it will take you to save $3,000? So do you really need to save $3,000?
- Buy used if possible. A big ticket item becomes a medium-ticket item if bought used. Do you really need it new? Maybe you do, but often times you don’t. Okay, this is basically the same point as in #4, and I am repeating myself like Snooki is a repeat offender.
Strategies for buying a big ticket item
- Perform quick, rudimentary research before you begin savings. Get a general idea of how much the item costs new (don’t worry about finding the lowest possible price just yet), and how much the item costs used. You may decide the new item is the one you want, but if you find the savings process to be too prolonged or something else you need to save for pops up, the used price will be key in your considerations.
- Look at the best way to purchase the item. Check your credit card company, insurance company, employer or any other resource you may have at your disposal for offers and benefits that may reduce the price of the item, and provide significant post-purchase benefits.
- Spend time looking for the lowest price possible when ready to purchase. A little effort at the end of a long effort often times multiplies the return greatly.
The Benefits of this Process
This process of savings is contrary to what most American’s do, but it’s exactly what most rich American’s do. This process has benefits that outweigh the pain, like sexual asphyxiation. Like anything though, don’t overdo it and pull a David Carradine. The goal is to save money on something you want, not to hunt down savings for sport.
- Prolonged savings forces you to think harder about your purchase. To save as aggressively as I am advocating here for a potentially long time means you have to really want the big ticket item. If gives you time to think of other uses for that money, or the item’s carrying costs. You will have plenty of time to bow out or look at other options if you reconsider (saving you a lot of money).
- Extended, aggressive savings reduces buyer’s remorse. I mentioned here that it’s the act of shopping that creates the shopper’s high, which is equivalent chemically to doing drugs. A premeditated purchase often times does not carry the same high as an impulsive purchase does. Additionally, the savings process and all the sacrifice is forces upon you adds an emotional value to the item; you will feel like you earned it. No, this is not the same as Towlie “getting high as a reward”.
- Aggressive savings allows you to “do it all”. The reason most people can’t save for retirement and a new pair of skis is that they want the skis sacrifice free. I promise you, with aggressive, targeted cost cutting and a bit of extra initiative you can do both.
- You may discover a lot about your values. Aggressive cost cutting, working longer hours, working a side gig, selling you useless crap—you may be shocked to find that working extra hours at work has paid off in more recognition, or maybe a promotion, and that that side gig has turned into a real passion; perhaps you found that you need less than you thought to be happy, redefining your enoughness. If this process helps you grow as a person then it’s saved you a lot more than money.
 A note on houses and other hugely expensive items: its okay to use credit on these items, but don’t ditch the savings period. You still need a down payment, homie.