MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
We've got a topic for you today that applies to everyone's financial life at some point or another, and that's big purchases. The ones we see coming—and the ones we don't.
We'll walk through a few helpful strategies, and along the way, I'll share some insights from Chris Kawashima, a senior research analyst in the Financial Planning and Wealth Management group at the Schwab Center for Financial Research.
Let's start with a basic question. What counts as a big purchase? That's not a simple question because the financial situations of people vary dramatically.
Because of that there's not a simple rule of thumb where, if a thing costs $X, it qualifies. It's more of a judgment call. If a single expense requires special planning, compromises, or could materially affect your short-term financial stability, then it likely qualifies.
CHRIS KAWASHIMA: Is there a dollar figure? It is relative to the person based upon their income and the assets that they have. When it comes to a financial-planning perspective, you want people to think through big expenses, big goals that they have in their life as being planned out into the future. So you have set aside some portion of their income for that particular goal.
MARK: As I'm recording this, the fall semester is starting at various colleges, and I mention that because it's a good example of a large expense, but one that isn't unexpected.
Many big purchases are foreseeable, and in some cases even date-specific. So it helps to approach them as if they're financial events with a countdown clock.
One practical starting point is to break the cost into time-based targets. If you're aiming to make a purchase in, say, five years, divide the goal of accumulating the money into monthly or quarterly benchmarks.
A goal without plan is just kind of a dream or a wish. This kind of "reverse budgeting" may not be exciting, but it creates structure and process, and those are the things that turn dreams into realities.
CHRIS: Big purchases, I think, have the advantage of that time component. You can wait, if you're flexible enough, to be able to build up the savings, to build up that cash lever. To sum it up, I mean, less time gives you less options, whereas more time gives you more options to be able to, you know, go into either cash, sell investments, or to perhaps borrow. It's a huge advantage to you the more time you have.
MARK: Another helpful tactic is using tiered liquidity. That's a fancy term, but all it means is to organize your cash and investments into different buckets depending on when you'll need them.
The most liquid tier, cash and cash equivalents, is for expenses you expect within a year. A middle tier comprised of low-volatility investments or CDs could support purchases that are for, let's say, two to four years out. And for goals past that there's room for longer-term investment exposure, depending on your risk tolerance.
This kind of segmentation isn't about maximizing your returns. It's about risk management and making sure you have the money when you need it. When done right it also helps create peace of mind knowing that you're covered.
CHRIS: So I think different behaviors get triggered when it comes to trying to meet a specific, like, target date. You know, there are some folks who perhaps may not have saved enough and are trying to look for that extra to be able to fund the goal or to be able to say that I met the goal. And so you're always looking at that return component. But when it comes to returns, there's always the potential risk. The relative return you're looking for also comes with relatively greater risk.
When it comes to short-term needs, your principal is something that you should value first and foremost, not the potential interest. Because if you lose that principal amount, you're never going to be able to meet that goal.
Certainly, there were some opportunity costs that might be related to it, where maybe looking hindsight, you could have made another percent or two. But is that percent or two really worth the downside risk of not being able to meet that goal from the principal perspective, that principal protection perspective?
MARK: Sometimes, though, you don't get a heads-up before suddenly needing to take on a large expense. When unexpected costs do arise, what matters most is liquidity. Again, that's a fancy term, but it just describes how quickly and easily you can convert an investment into cash.
That's where an emergency fund comes into play. You want to keep your emergency funds in highly liquid vehicles like money market funds and bank accounts. Most guidance suggests having enough money in your emergency fund to cover three to six months of essential living expenses.
The right number for you will vary based on your income stability, household structure, and other factors. With these so-called rainy-day funds, the point is simply having enough cushion to absorb a shock without needing to raid long-term accounts or take on high-interest-rate debt.
CHRIS: If you have that, and there's a purchase that you need to make, things happen. There's unexpected expenses that occur. And that's why that emergency fund is so important to have. Use that cash. That's what it's there for.
MARK: Here's a wrinkle that doesn't get talked about as much. Not every surprise expense is an emergency. Some are just, well, sudden.
For example, a friend invites you on a last-minute trip. You get a chance to buy a car at a steep discount. Your cousin announces a destination wedding, and you'd like to be there. These aren't life-or-death scenarios, but they're meaningful, either for emotional reasons or they represent a great opportunity. Most importantly, they're time sensitive.
Some people find it useful to maintain a separate opportunity fund, something between daily spending and long-term investments that's technically discretionary but available without much friction. Having this kind of "buffer zone" may help you avoid dipping into the wrong accounts when life throws you a curveball that's actually worth swinging at.
For example, imaging having one of these opportunities come up when your emergency fund is already tapped out. Let's assume it was in April 2025 when the stock market was down sharply because of tariff-related concerns, forcing you to sell at the down point.
So what happens when a big purchase can't be paid out of pocket—at least not right away?
CHRIS: This is where we kind of go down this route of how do you then choose what to do when it comes to making that big purchase? Maybe that purchase needs to go beyond what you have available for cash, and so this is where you might think about maybe selling something, selling an investment. But selling investments also has consequences to it, tax consequences to it, and opportunity costs connected with that. This is where also borrowing potentially might come into play.
MARK: In some cases, financing may be appropriate. Low-interest offers, flexible terms, or structured repayment plans can provide you with options. That said, it's important to consider total cost and not just the monthly payment.
It can be tempting to rationalize the affordability of something based on cash flow alone. But if the purchase drags on your saving rate, or interrupts other goals, it may warrant a second look.
CHRIS: It makes you feel like you can potentially afford this through your cash flow. But if that entire purchase was available to you at that time frame, would you make it? That's the question you should ask yourself. Would you make it? Could you make it with what you have through your cash flow as well as through your checking or savings available?
If you can't do it, then wait, defer that gratification because it's playing a game of cat and mouse where you're just kind of pushing or kicking this can down the line further. And the more your cash flow is being log-jammed in regards to having to pay off what you've spent.
MARK: As we love to point out on Financial Decoder, there's also a behavioral layer to all of this. Big purchases come with big emotions. We rationalize. We idealize. Sometimes we panic, and sometimes we procrastinate. One way to guard against that is to come up with a decision buffer.
For instance, you might say, "For purchases that aren't accounted for in my monthly budget, I have to wait three days before committing." Or "Before spending more that X dollars, I have to consult my financial plan or a friend or a family member." These pre-commitments aren't to add friction for its own sake, but to separate impulse from intention.
CHRIS: You know, when it comes to making the decision or the choice to buy, sell your investments, borrow, these are three different routes. They're not mutually exclusive. Oftentimes it's going to be a combination of approaches. It's not so much like, can I go all borrowing? Can I go all cash? I think there's some decisions that can be made. There are choices that you can make that can be smart, but at the very end of it, you want to be able to have the cash flow.
MARK: Which brings us to my final point: Large purchases are rarely one-time events, and their financial impact on your life can vary widely. Some involve multiple phases or ongoing costs. So when evaluating affordability, it can help to zoom out and account for the big picture.
Preparing for a big purchase involves forecasting what you can, building margin for what you can't, and managing your emotions around spending along the way. Just like most aspects of financial planning, you don't need to predict the future. You just need to build a system that allows you to adapt to it.
If today's episode helped clarify some of your own planning decisions, I encourage you to check out Chris's article "5 Questions to Ask Yourself Before a Big Purchase." We'll link to it in the show notes. It includes more of his insights on the topic in addition to those we touched on today.
If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E. And if you follow the show, please consider leaving us a rating or review on Apple Podcasts or comment on the show if you listen to it via Spotify. We always like new listeners.
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For important disclosures, see the show notes and schwab.com/FinancialDecoder.
