Ask the Experts

Big Buys

I’m set to graduate pretty soon, but I don’t feel totally ready for the real world. One thing that I really don’t think I’m ready for is making big purchases, like buying a car or a house. I try hard to save money when I work over the summer, but I don’t think the budgeting lessons I’ve learned while away from campus for a few months at a time have given me anywhere near the level of knowledge I’ll need to buy a $15,000 car or an even more expensive house! So, experts: any tips?

Sure! You no doubt know that buying a car can often involve taking out a loan, and that buying a home nearly always does. Still, to make a big investment like that, you’ll need some money saved up for a downpayment, a steady income to help you make the loan payments, and a solid grasp of budgeting in order to determine just how much car or home you can afford.

It starts, of course, with saving. You can always stand to have a little cash in your checking account, say the financial experts at Watertown, New York’s Carthage Savings and Loan Association, but once you’re comfortable with your ability to write checks and make regular payments, you should start building a nest egg in a savings account. A savings account will offer you a better interest rate than a checking account, making it easier to build wealth. And the money in a savings account will be easy for you to access, making it a smart choice for short-term savings intended to end up as car or house down payments; longer-term savings may be better off in investments or tax-sheltered retirement funds.

Your savings habits will help you determine how much you should spend on a car or a house. There’s no one right answer for either case, but typically consultants like to recommend at least a 20 percent down payment on a car; houses are trickier, but traditionalists favor 20 percent there as well. And don’t forget about the monthly payments--make sure that your income is enough to handle those.

You say that your summer financial lessons won’t be enough to help you, but that’s not necessarily true. Saving really is as simple as spending less than you earn, so if that’s what you mastered during summers on the job, then you’re all set. From there, it’s just about steady execution and a smart evaluation of your means before you take out a loan. Reputable auto dealers will help you find a loan, say the retailers at Alabaster, Alabama’s Ernest McCarty Ford, so steer clear of the shady low-rate dealers and trust your savings habits to help you get financing from a more reputable source. Your good habits will put you on the path to making these sorts of big purchases safely, so don’t worry!

“Economy is idealism in its most practical form.” -- Calvin Coolidge

Marcus Williams is a Senior Financial Consultant in Financial Services and Advisory at EY.