One of the trickiest parts of personal finance is figuring out the actual cost of purchases. It doesn’t sound complex. After all, the cost of something is simply what you pay. Right? While price can be the overall cost, often it is a bit more complicated.
The Real Cost
Buying a house is an excellent example. Right now market prices are lower than they have been in years. Many people are looking at homes and thinking that now might be the time to buy. And it might. However, the actual cost of a house is more than the price listed on the sign in the yard. If you are thinking that you can finally afford a home of your own, make sure you really can.
Mortgage, property taxes, homeowners insurance and even loan fees and interest all factor into the overall cost of homeownership. Plus, there are the little unexpected expenses that renters don’t have to worry about. If the sink breaks in your home, you alone are responsible for fixing it. While a little leak may not cost much, a new heating system or replacing the roof can cost a lot. Home repairs and maintenance must also be figured into the total cost of your home. These little incidentals that aren’t included in the listing price of a home should be considered as you determine the actual cost.
More Than Meets the Eye
Homes aren’t the only expense that can be more than expected. Cars require maintenance, insurance, gas and cleaning. Pets require food. Dinner at a restaurant generally means a tip. The price tag and the final price often don’t match up.
As you plan your spending don’t make the mistake of forgetting the additional expenses. Sometimes these forgotten charges make things more than you can afford. If you are hoping to buy a new car make sure your finances can handle the payment as well as the other expenses associated with owning a car.
Research and Calculate
A great way to determine if you can actually afford something is to make a budget that includes the desired item. Using the car example, you would create a new budget that includes all of your current expenses as well as your new car payment, the new insurance quote, maintenance estimations and other expenses associated with this purchase. Can you make the new budget work? Evaluate your purchases before you make them to make sure you can afford the actual cost of the item. It is important to make sure you can afford items before you buy them.
Learning to master personal finance isn’t an easy task. Constant attention is required. Learning to research purchases in advance will help you avoid the common financial pitfall of getting in over your head.
Have you ever been surprised by the true cost of something you bought?