Debt Management

Debt Management Strategy: Prefunding Major Purchases

After you make steps towards paying down your debt, you probably want to remain as debt-free as possible, and there are strategies to help you do so. One effective strategy is prefunding major purchases. A simple formula can help you plan for major purchases (from vehicles to vacations) without incurring any additional debt.

Vehicle Purchase Example

If you plan to purchase a vehicle in the future, and just assumed you would take out a loan in order to finance it, consider using this strategy instead.

Let’s assume that you generally drive a vehicle for 10 years before replacing it. This gives you 10 years, or 120 months, until you plan on purchasing a replacement vehicle. Likewise, if there are two drivers in your family, and each plan on driving their vehicle for 10 years, you would essentially be replacing a vehicle every 5 years, or 60 months. Let’s also assume that the replacement vehicle will cost approximately $30,000 and you plan to get $5,000 for your trade in. This leaves you with approximately $25,000 for your replacement vehicle. So, you have 120 months to save for a purchase that will cost you $25,000. If you divide $25,000 by 120 months, that works out to $208.33 per month. If you deposit $208.33 each month into a money market savings account or other appropriate account specifically earmarked for vehicle purchases, you should be able to purchase your next car with cash.

The Basic Formula:

Total $$$ Needed (divided by)

Number of months before $$$ are needed (equals)

$$$ to save each month

Here is the math for our example:

Cost of replacement vehicle (minus) Credit from trade-in (equals) Total cost of replacement vehicle

$30,000 - $5,000 = $25,000

Total cost of replacement vehicle (divided by) Number of months before purchase (equals) Monthly amount to put into savings account marked for vehicle purchase

$25,000/120 = $208.33

You can use this strategy for anything you would by on credit or with a loan and pre-fund so you can make the purchase debt-free.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Allos Investment Advisors®, LLC.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.

Published for the blog on February 22, 2024 by Allos Investment Advisors®, LLC.


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