Houses, cars, and vacations are three big-ticket items that
almost all of us want at some point, but when can we afford them? To
help you decide just how much you can afford, we spoke to seven experts
about how to make these decisions, as well as the most common mistakes
that land people in trouble. Here's your guide to deciding what you can
afford—and what you can't:
[See
10 Smart Ways to Improve Your Budget.]
Can I afford a house?
Factors to consider: Whether you're ready to make a
sizable downpayment (15 or 20 percent), 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," says Carmen Wong Ulrich, author of
The Real Cost of Living.
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. That's why Ulrich says 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.
Elisabeth Leamy,
Good Morning America's consumer correspondent and author of
Save Big: Cut Your Top 5 Costs and Save Thousands,
recommends that renters only buy a house if the mortgage payment will
be similar to their rent payment. That way, she says, "If you can afford
your rent payments, you will be able to afford your house payments.
It's that simple." (She created a
calculator that crunches the numbers for you.)
For some people, though, even that amount can be too high, says
Psych Yourself Rich
author Farnoosh Torabi. "You need to remember that 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."
Common mistakes:
1. Moving within a few years. Buying a house generates a lot of transaction costs; financial expert
Manisha Thakor
estimates that they 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, she says. One rule of thumb
is to plan on settling in for at least five years.
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. "You want to factor that in before you
buy," says Thakor.
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? If you
enjoy a transient lifestyle, then it might not be," says Torabi.
Laura Vanderkam, author of
168 Hours: You Have More Time Than You Think,
adds that the less you spend on your house, the more you'll have for
other enjoyable activities, such as trips, dinners out, and
entertainment. "Those things might actually make you happier than a more
expensive house," she says.
[See
12 Money Mistakes Almost Everyone Makes.]
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
Ulrich asks why anyone would bother purchasing a new car. "Imagine what
else you could do with those thousands of dollars," she says. Instead,
she recommends buying certified pre-owned vehicles.
Can I Afford a House, Car, and Vacation?
A guide to deciding if it’s a good time to buy these big-ticket items, along with common mistakes
March 16, 2011
Print
Anyone taking out a car loan needs to consider the interest payments
and the length of the term, says John Sternal, vice president of
LeaseTrader.com.
Before deciding whether to lease a car or buy one, he recommends asking
yourself how long you want to drive the car, and how often, since
people who prefer to drive new cars for relatively short periods of time
often save by leasing instead of buying.
Common mistakes:
1. Failing to maintain it properly. Maintenance isn't free, but it's
worth it, says Ulrich, because it helps cars retain their value. "Make
the kids clean up after themselves, get it detailed every season, and
stay on top of maintenance schedules," she says. 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, says Sternal. 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, he recommends
researching 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.
[See
50 Ways to Improve Your Finances in 2011.]
Can I afford a vacation?
Factors to consider: "Travel is a wonderful way to
boost happiness. We savor the anticipation, and then we savor the
memories afterwards," says Vanderkam. To avoid also savoring credit card
bills, she recommends saving up before the trip to make sure it fits
into your overall financial picture. "You don't want those memories
spoiled by debt," she says. 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.
Torabi suggests putting 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, Ulrich recommends factoring in an
additional 25 or 50 percent of your overall budget for food, drink, and
local transportation. She recommends doing as much advance 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.
Common mistakes:
1. Charging it. Thakor says that if you can't afford to pay for your
vacation in cash, don't take it. "A vacation is a luxury," which means
it doesn't belong on your credit card, she says.
2. Not planning ahead. This advice is aimed especially at
self-employed people who don't automatically earn vacation days. "The
trick is to 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," says Michelle Goodman, author of
The Anti 9-to-5 Guide.
3. Forgetting to give yourself a time cushion. Goodman recommends
leaving a day after you return home to catch up on e-mail, errands, and
other administrative details that get ignored when you're away. Some
people even tell clients they're returning a day later than they
actually are, to give themselves this buffer.
Can I Afford a House, Car, and Vacation?
A guide to deciding if it’s a good time to buy these big-ticket items, along with common mistakes
March 16, 2011
Print
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.
Kimberly Palmer (@alphaconsumer) is the author of the new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.
