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.
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deborah HORTON of TX 11:46AM September 29, 2011
The Agent 9:10PM August 23, 2011
segun of NY 10:05AM August 16, 2011