What can you afford: house, car or vacation?
Summer can be a big season for splurges, including escapes to the beach, a new set of wheels or even a new home. If you’re trying to decide which of these purchases you might be able to afford, consider this: They all come with hidden costs. We asked money experts to identify them, along with common mistakes consumers make when it comes to their buying decisions.
Here’s your guide to deciding what you can afford – and what you can’t:
Can I afford a house?
Factors to consider: Whether you’re ready to make a sizable down payment (15 or 20 percent of the home’s sale price), how long you plan to stay, and if you can handle additional expenses such as maintenance costs – as well as swings in the real estate market – all play a role in whether it’s a good time to buy.
The hidden costs: The purchase price of a home is only a wee part of the real cost of buying a home. Aside from closing costs, insurance and fees, buyers also take on the risk of the housing market. If the value of your home goes down, the value of your assets falls. You should also consider the stability of your job, the neighborhood, schools and the overall state of the housing market in the area before taking the plunge.
Renters should only buy a house if the mortgage payment will be similar to their rent payment. That way if you can afford your rent payments, you will be able to afford your house payments.
For some people, though, even that amount can be too high because owning a home involves some extra expenses, namely taxes, common charges and upkeep. If a pipe breaks loose, there’s no super or landlord to cover the cost. It’s all coming out of your pocket.
1. Moving within a few years. Buying a house generates a lot of transaction costs which can add up to around 10 percent of the total purchase price. That means you want to live in the house long enough for price appreciation to offset those costs so plan on settling in for at least five years to offset those initial costs.
2. Borrowing the maximum amount allowed by the bank. It’s tempting to take banks up on their pre-approval offers, but the problem is that they don’t always factor in your future income changes. If you start a family and one spouse stays home, for example, your household income could easily be cut in half so factor that in before you buy.
3. Forgetting to look beyond the numbers. You might be able to financially afford to buy a home, but is it worth it to you? For some, the less spent on your house, the more available for other enjoyable activities, such as trips, dinners out and entertainment. Those things might actually be more important than an expensive house.
Can I afford a car?
Factors to consider: Your lifestyle, maintenance costs and personal preferences all play a role in deciding whether it makes sense to buy a car.
The hidden costs: Depreciation means that the moment you drive your new purchase off the lot, its value plummets. That’s why purchasing a 2 year old car is financially more responsible than purchasing a new car.
Anyone taking out a car loan needs to consider the interest payments and the length of the term. Before deciding whether to lease a car or buy one, ask yourself how long you want to drive the car and how often. People who prefer to drive new cars for relatively short periods of time often save by leasing instead of buying.
1. Failing to maintain it properly. Maintenance isn’t free, but it’s worth it as it helps cars retain their value. Get it detailed every season and stay on top of maintenance schedules, that way, you’ll get more money when and if you trade it in, and you’ll save on repair costs down the road.
2. Losing at the dealership. After your initial meeting with the salesperson, walk away to give yourself time to think. Car salespeople are notorious for using various methods to get people to commit to purchasing. Patient buyers are more likely to come out ahead. By leaving the showroom, you’ll be able to think without any pressure, and you might even get a call with a better deal. Also, research your financing options ahead of time so you don’t have to accept the terms offered by the dealership. Cleaning up your credit report in advance – by getting rid of errors that are dragging down your score – can also help you score a better interest rate.
3. Ignoring gas and maintenance. These costs depend on the type of car as well as your lifestyle; choosing a fuel-efficient vehicle with a reputation for quality can help minimize them. Car insurance is another big factor; consider shopping around to get the best deal.
Can I afford a vacation?
Factors to consider: Travel is a wonderful way to boost happiness. To avoid also savoring credit card bills, save up before the trip to make sure it fits into your overall financial picture. You might also be able to find other creative ways to cut costs, such as asking for relatives’ frequent flier miles as a gift, or staying with friends in foreign cities.
Put aside 2 to 3 percent of your take-home pay for an annual vacation, because even though it’s discretionary, it can be money well-spent.
The hidden costs: In addition to basic costs such as airfare and hotel accommodations, factor in an additional 25 or 50 percent of your overall budget for food, drink and local transportation. Do as much advanced research as possible to make sure you’re getting the best deal and aren’t surprised by unexpected expenses. Entrepreneurs face the added cost of losing out on income while they are away.
1. Charging it. If you can’t afford to pay for your vacation in cash, don’t take it. It doesn’t belong on your credit card.
2. Not planning ahead. This advice is aimed especially at self-employed people who don’t automatically earn vacation days. Plan it as soon as humanly possible, even a year or more ahead of time, so you can save for it and also make sure your projects and clients are prepared.
3. Forgetting to give yourself a time cushion. Goodman recommends leaving a day after you return home to catch up on email, errands and other administrative details that get ignored when you’re away. You can even tell clients you are returning a day later than you actually are in order to give you a buffer.
Bottom line: Big purchases carry hidden costs – but also big rewards. Knowing what you’re getting into before parting with your cash can help you avoid costly mistakes