Capital expenses are large, one-time outlays that can have a significant impact on a person’s financial purse or well-being, such as purchasing a home, relocating to a different part of the world, buying a car, or starting a business.
Capital expense planning is important in personal finance because it allows people to prioritise their long-term financial goals and major expenditures and make informed spending decisions. If a person spends all of their short-term money on a capital expense but doesn’t have enough money to pay their monthly bills, they may feel stressed. This was my experience when I started my career and signed up for a distance learning program in another country. The sum involved was more than my annual salary, and I had to defer the program when I couldn’t meet up with my monthly expenses.
If you don’t plan ahead for capital expenses, they can quickly wipe out your savings and put you in debt. Major changes to your home, starting a business, or going to college all require a lot of money. By making a budget and a financial plan, you can figure out how much you can comfortably spend on capital expenses and work toward saving for them over time. This reduces financial stress and enables you to make confident, well-informed financial decisions.
In this article, we’ll look at some important steps you can take to financially prepare for a capital expenditure.
Review your current financial situation
Before embarking on a high-cost project, it’s critical to assess your financial situation. To determine how much money you can realistically put towards the project, consider your current income, expenses, debts, and savings. I don’t usually advise people to obtain debt for consumable or non-business items. You may see the need to delay a capital expenditure to a later time.
Make a budget
Putting together a detailed budget is the first step in getting ready financially for a big project. This means making an estimate of all the costs of the project, such as materials, labor, and any other costs that might come up.
Do research and get quotes from different vendors and contractors to make a realistic budget. Don’t forget to account for any unexpected costs that may arise during the course of the project.
Once you’ve determined the costs of the project, you can create a budget that details how much money you’ll need and how much you can afford to spend.
Read also: The literacy barrier to financial inclusion
Prioritise your expenses
It is critical to prioritise your expenses when preparing for a capital expenditure. Determine which expenses can be reduced or eliminated to help you save for your planned major purchase. At the point of executing the capital expenditure, you may also need to trim out nice-to-have items until you are able to afford them.
If you’re remodelling your home, for example, you might have to put repairs and upgrades that are necessary ahead of things that look nice. When starting a business, you may have to put core costs like equipment and inventory ahead of marketing and advertising costs.
Make sure you are using your resources well and getting the most out of your investment by putting your expenses in order of importance.
Compare Prices
Make sure you compare prices from different sellers before committing to any part of a big purchase or project.
Save toward your capital expenditure over time.
If you’re planning a large-scale project, you should start saving as soon as possible. Make a savings plan outlining how much money you need to save each month in order to reach your goal.
Consider creating a separate savings account for your project. This will help you keep your savings organised and prevent you from using them for other purposes.
Keep an eye on your spending
Once your project is underway, it is critical to closely monitor your spending. Keep track of your expenses and compare them to your budget on a regular basis to ensure you’re on track, and to enable you save up for your planned purchase.
If you find that you are spending too much in some areas, cut or get rid of expenses that aren’t necessary. You can avoid going into debt by keeping track of your spending and making adjustments as needed.
Be ready for the unexpected
Unexpected expenses can arise during a high-cost project, regardless of how well you plan and prepare. To avoid being caught off guard, include a contingency fund/ miscellaneous provision in your budget.
Make extra plans for costs that may come up during the project that you didn’t expect. This will assist you in staying on track with your budget and avoiding debt.
