This Is How Dave Ramsey Decides Whether To Make a Big Purchase — Should You Try It?
Written by
Peter Burns
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Amen Oyiboke
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The older you get, the more large purchases you end up making. Buying a home, car, or engagement ring may require a large loan or considerable savings, so it’s best to be certain you’re making the right choice.
Personal finance experts have different ways to help consumers determine whether their purchase aligns with a healthy financial future. Dave Ramsey, founder of Ramsey Solutions and host of The Ramsey Show, touched on this topic in a recent YouTube video.
Here’s how he and other experts make big-money decisions.
Imagine Burning the Money
When Ramsey and his wife contemplate a large financial decision, they imagine burning all of the money they’d spend in the middle of a room. Ramsey explains, “If I took this much money and set fire to it, does my life change? If the answer’s yes, then it’s too expensive.”
This method works because it helps Ramsey put the purchase into perspective. For example, if he were to take the $250,000 he wanted on a luxury car and thought about what would happen if it all disappeared, he could figure out whether taking that amount out of his net worth would negatively affect his family or lifestyle.
Consider Phantom Costs
If you use Ramsey’s burn-the-money method and determine you can afford your large purchase, there may still be some things to consider before buying. Ramit Sethi, another financial expert, cautions that monthly payments aren’t everything.
A large purchase like a house or car usually breaks down into monthly payments, and being able to cover these amounts doesn’t necessarily mean you can afford it. Sethi points out that phantom costs will inflate what you pay each month. For a car, these include registration fees, car insurance, gas and maintenance. For a house, add in renovations, homeowners insurance, property taxes, utilities, and homeowners association fees. In some cases, your expensive purchase leads to other payments you need to make to service the original item.
To determine if you can afford something, Sethi explains that you must use actual numbers. Calculate how much the monthly payments will be along with the phantom costs and find out what it would take to budget this into your finances.
Be Honest With Yourself About Your Intentions
Having the numbers in front of you won’t actually help you determine if you can afford something if you’re not honest with yourself. Suze Orman, a famed finance expert and podcaster, insists her audience members take accountability for their finances.
According to Orman, one of the reasons people make purchases they can’t afford is because they want to impress others. Trying to increase your self-esteem by having the newest tech gizmo or eating at the most expensive restaurant is a surefire way to land yourself in debt.
Ramsey echoes this warning. He explains that when he makes a big purchase, he asks himself contentment questions, such as “If no one ever sees this item except for me, would I still buy it?” By asking this, he can determine the underlying reasons for making the purchase. If he’s buying something to attract attention and envy, it will lead to financial danger.
Buying expensive things for the approval of others may bring temporary satisfaction, but it will have long-term negative ramifications on your financial health. Being honest with yourself about your reasons for spending a large amount of money will help keep your ego and bank account in check.
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