Throughout a person’s lifetime, they will come across key moments when they will want to make big financial purchases. Whether this is something material, such as a car or house, or a business venture like owning a business, these can be both exciting and daunting investments. But with these investments, there is always a risk of making the wrong choice which can set you back financially for years to come. So here are some keys when buying these major purchases in your life.
If you want to buy a small business, make sure you carefully review the business plan, as if you are starting your own business. Make sure the product you are investing in has value and the region has the demographics to support it. Make sure the operating model has a clear and realistic path to profitability.
The average person will likely buy anywhere from five to six cars in their lifetime. Cars, on average, can last anywhere from five to ten years, and simply put, they go through a lot of wear and tear and depreciate heavily. These are fewer investments than they are necessary expenditures, but by the letter of the law, they are property and do hold a value that can be traded in. The key is always making sure you do not buy more than you can afford. It is likely when you are young that you will not have enough money to pay for a car in cash and will have to finance it.
It is recommended you buy a used car that comes at a much cheaper price tag or make sure that a car is not more than ten percent of your gross income. You’ll also want to make sure you put down at least ten percent and pay it off within forty-eight months so you are not hampered by paying more interest than the value of the car when you trade it in down the line.
Start Your Own Business
When you have enough wealth built up, you may consider a dream scenario of owning your own business or being a partial investor into a business venture. But investing in a business is perhaps the riskiest or most rewarding investment opportunity depending on if you make the right choice. If you are starting your own business, it is important to first understand what product you are delivering and making sure you have the right market. Does your product sell in certain demographics, and are those demographics present in your area? Also, make sure before you start a business that you consider the full startup costs. Most businesses will not see a profit in the first few years, so it is important you have cash lying around while your business is in the red.
Owning real estate is one of the smartest financial instruments for building wealth, but many people make too many mistakes when it comes to location and purchase price. When you pre-qualify for a home, the bank will usually qualify you for a house where the monthly payment for a 30-year mortgage is half your gross income. However, this is dangerous, because it can severely limit your cash flow for your other household and discretionary expenditures. Ideally, when you take out a mortgage, you should make sure the monthly payment is no more than thirty-one percent of your take-home pay, and try to do a fifteen-year mortgage. This can save you so much on interest over the life of a loan and free up cash flow for future endeavors including more real estate.
If you plan to rent out a property, location is important. You need to make sure you choose a property whose location is an area in demand for renters. Keep in mind that most renters are those who are in their twenties and thirties trying to build wealth by saving for a down payment on a house. If you buy a fixer-upper, make sure you invest in it so it attracts tenants, perhaps a kitchen remodel. So consider a rental property close to a downtown environment for commuters or near a college/university to ensure you have a renter population to tap into.
Always be careful when investing in these key purchases. Some of these can be profitable endeavors while others can put you in the red for a long time. Just always read into the details and have a strong financial plan and you will end up on top.