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Here's how to decide if you can afford a big post-Covid purchase

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The American economy is awash in economic stimulus and Covid re-opening celebratory spending. The statistics show it: surging retail sales, decreasing unemployment and an increase in inflation are all pointing to a consumer poised to spend. While more jobs and a return to post-pandemic social normalcy may be prompting many Americans to consume, it shouldn't be done arbitrarily.

Some things have changed. Many of us may find ourselves in different circumstances. Before you make any big-ticket purchases, ask yourself, "Can I afford this splurge?"

Here are a few key ways to answer the question. 

Employment situation

The most important factor to consider before splurging is the security of your income stream, or employment status. If you're fully (and securely) employed, caught up on your bills, have minimal debt, and healthy savings, getting to yes is an easier proposition than for the millions of Americans who remain unemployed or underemployed, and reliant upon government stimulus measures. 

As compared to prior recessions, government intervention through stimulus has never been greater, encompassing everything from direct stimulus checks to forbearance programs, and enhanced unemployment programs. Consumers should keep this in mind when assessing big-ticket purchases. 

"Expanded federal unemployment benefits are scheduled to end in September 2021, without additional federal or state measures," said Chris Manderfield, executive vice president at Key Bank. "While there are more job openings now versus pre-pandemic, it is important to remember that these opportunities are concentrated in specific industries like construction, manufacturing, and shipping/distribution." 

Assessing whether you will have the necessary cash-flow to cover expenses in coming months can help avoid regret after splurging. And if you're reliant upon enhanced unemployment benefits, keep in mind that these are likely to be reduced in coming months, further constraining your ability to splurge. 

"As of now, over 40% of Americans are still making more while unemployed than employed, with an effective minimum wage north of $15 an hour," Manderfield said. 

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Your savings

Though splurging can be a natural reaction after a year of hunkering down, it's best to moderate your splurges if your savings aren't up to par. Stimulus checks, the expanded Child Tax Credit, or any other assistance you may be receiving should be prioritized for ensuring your needs are covered, including an emergency savings balance of at least three months of essential expenses. The lesson of the Covid recession should underscore the importance of financial preparedness. 

While most economic variables point to continued GDP growth, including significant growth in industries hardest hit by the pandemic, Manderfield says it is important that consumers ensure they are covered with between three to six months of emergency savings to cover unexpected unemployment. 

Economic outlook 

Waning stimulus, increasing inflation, still-high unemployment rates, and a number of other factors can create uncertainty about the direction of the economy. While the overwhelming majority of indicators point to continued strength, factors such as inflation, in particular, can make big-ticket items even more costly in real and nominal terms. That's particularly important if your earnings aren't keeping pace. Housing, food, and cars, are all more expensive on a year-over-year basis. 

And don't touch your savings in order to splurge, especially not retirement savings.  

"I would hesitate to recommend (this) given the tax implications, potential for continued market growth, and elevated prices due to inflation," Manderfield said. 

While the enthusiasm of relaxed restrictions and a more vibrant economy can seem like reasons to spend more and buy big, the fundamentals of the economy and your own personal financial situation should take precedence.

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