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:
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."
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.
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.
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.
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.
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.
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.
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.