SUMMARY: Managing your money well is all about prioritizing your expenses and making sound financial decisions. Here’s what you should consider before splurging on a large purchase (like buying a boat).
“The two best days in a boat owner’s life are the day he buys it and the day he sells it.”
Although the source of this tidbit of wisdom is unknown, it speaks volumes about the dual appeal—and potential headache—of major splurge purchases such as boats. In short, they’re complicated. They require lots of time, care and money.
Add to this competing financial priorities later in life—saving for retirement, supporting your children and grandchildren, upgrading your home, or taking that dream vacation—and it becomes clear that a boat purchase needs to exist in the context of your larger financial outlook.
Get your house in order
Before you head for open water, make sure these essential financial priorities are set up and running smoothly:
- Emergency fund. Three to six months worth of expenses should be ready and waiting for those moments when life throws you a curveball, such as when your boss lays you off, your transmission needs repair or a close relative gets sick.
- Employer-matched funds. Maximize your contributions to your company’s 401(k) or similar plan and claim free money that would otherwise be left on the table.
- Debt service. Make sure to tackle your outstanding debts before gearing up for a boat. Start with those for which the interest rate is at or above 4 percent and work your way down.
- IRA. If you don’t have—or have maxed out—an employer-sponsored retirement account, it’s a no-brainer to set up an IRA. Experts recommend contributing 15 percent of your gross income, up to the 2019 limit of $6,000.
- Retirement. Put in as much as your budget can handle—ideally 15 to 20 percent of your gross income. Every dollar contributed now takes advantage of compound interest down the road.
Consider other big-ticket purchases
Are there other major life purchases or investments that should be considered ahead of a boat?
- Are you contemplating a second house, or major renovation of your current home?
- Do the kids need some help with finances? Do the grandkids need presents, a visit, or help with tuition?
- Is there major travel on the horizon?
- And perhaps most importantly—is your retirement nest egg where it needs to be? Are you prepared for life after work?
Do your research
Contrary to popular belief, you don’t need to be super-rich to buy a boat. That said, it is still a significant financial commitment and you’ll want to do your homework to make sure that your purchase is one that you can afford and sustain over time.
To that end, ask yourself the following questions:
- Why do you want a boat? Are you an avid fisherman? Is water skiing your hobby of choice? Do you hope to sail it along the coast of Madagascar? Each of the answers to these requires a different size of craft at a different price tag.
- How much time will you really spend on it? You may love being on a boat, but when push comes to shove, you may not have all that much time to use it. If that’s the case, you can always rent one.
- Do you need a new boat? Previously owned boats have already depreciated and therefore have lower price tags than brand new ones.
- Are you prepared for unexpected costs? The purchase of the boat itself is just the beginning. Additional expenses will include registration, fuel, moorage and dry docking, insurance and maintenance.
Enjoy tax savings
As valid as many of these cautionary tales are, there may actually be tax incentives for purchasing a boat, if you count the boat as your second home. The IRS allows this if your property (be it a traditional house, condo, mobile home, or boat) is set up for you to cook a meal, use a restroom, and sleep overnight.
Get a second opinion
Any major purchase requires some serious thought, and perhaps outside advice. Friends and family will all have strong opinions on your boat ambitions, so it may be helpful to also consult a financial advisor to make sure this move is aligned with your larger goals.
TDECU can help. Our free e-book, Your Complete Road Map to Retirement, can help you picture whether this decision will put wind in your sails or leave you dead in the water.