9 Ways To Stress Test Your Budget Before Making a Massive Purchase
Written by
Laura Beck
Edited by
Amber Barkley
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
If you’re in the market to make a big purchase, it’s probably a good idea to see if it fits into your budget. That might seem like a no-brainer, but a lot of people jump into a decision like that without much thought. So, before you commit to a major expense, take a deep breath and read this.
GOBankingRates spoke with financial experts to find out strategies to help determine if you’re truly ready for that significant purchase.
Live on Your Post-Purchase Budget
Jessica Morgan of Canadian Budget suggested a practical approach: “Imagine the purchase is already made and live on the budget you would have if you made the purchase.”
This method allows you to experience the financial impact firsthand.
Factor In All Associated Costs
Morgan said, “Don’t forget to include estimates for any associated costs and any other fees that might not jump out at you at first.”
This includes one-time costs like closing fees on a house and ongoing expenses like insurance and maintenance.
Automate the Expense
Ashley Russo, founder of Russo Wealth Management, recommended creating an auto draft for the potential expense.
“In the months leading up to a major financial change, we often create an auto draft for clients so they can see and feel the effects of the financial change,” she explained.
Evaluate Your Emergency Fund
Erika Kullberg, founder of Erika.com, emphasized the importance of emergency savings. “Ideally, you will have three to six months’ worth of living expenses saved up. If a big purchase will seriously deplete your emergency savings, or leave you without a sufficient cushion, that’s a good sign that it isn’t time to take that purchase on just yet.”
Consider Worst-Case Scenarios
Kullberg also suggested planning for potential setbacks. “Sketching out some potential financial setbacks that could occur after making the purchase can be helpful, just as a way to see how financially resilient you are. Consider things like job loss, medical emergency, your car breaking down, etc.”
Assess Your Ability To Save and Invest
Morgan stresseed the importance of maintaining your financial goals. “Ensure you are still able to save and invest for the future on top of the new expenses you may be taking on, as well as still [being] able to enjoy your everyday life!”
Check Your Emotional Response
Russo pointed out that stress testing isn’t just about numbers.
“The financial aspect is one part of the equation, but coming to terms with how it feels to see less in your bank account should also be a part of the equation,” she explained. “If you end up losing sleep and it starts to affect other aspects of your life, it may not be worth it.”
Set a Clear Timeline
If you’re using a strategy that includes putting some of your money aside — like Morgan’s suggestion to live on your post-purchase budget to see if you’re comfortable — it’s important to keep the extra funds in the right place, depending on how long they’ll be there.
“Be very clear on your timeline,” said Russo. “If you are testing this over a longer period of time, you may choose to invest funds to create growth opportunities and hedge inflation. If your time horizon is shorter, you would want to consider a safer asset like cash to hedge against risk.”
Track Your Spending
Kullberg suggested a thorough approach to budgeting: “Track your spending for a few months to see if you can maintain your current lifestyle without dipping into savings or accumulating debt.”
Remember, the goal of stress testing your budget isn’t to discourage you from making significant purchases, but to ensure you’re fully prepared when you do. As Russo said, “If you find the change has very little effect on your day-to-day life, it might be the right move!”
More From GOBankingRates
