Can I Afford a House, Car, and Vacation?

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."

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.

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.

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.

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.

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.

Source: http://money.usnews.com

5 Myths About Generation Debt

The term “generation debt” tends to get thrown around a lot when it comes to describing today’s young professionals. Media pundits—especially older ones who have long paid off their own student loans—like to point out that we carry a lot of debt and spend more than our paychecks. But is that really true?

we don’t deserve that label anymore. Here are five myths—and truths—about our generation and money.

5. Myth: We’re clueless about finances.

Truth: It turns out we know a lot—in some cases, more than our parents’ generation. A survey by the online brokerage firm Scottrade found that the recession actually inspired 20-somethings to educate themselves about how the economy works as well as to learn more about their own personal financial situations.

In addition, a higher percentage of respondents said they’re doing more research before investing relative to older groups. Scottrade reports that part of the reason we’re excelling at managing our money is because we see it as fun, instead of a tedious obligation.

4. Myth: We’re depressed about our financial future. 

Truth: It’s true, we’ve had it rough: We’ve experienced two recessions before we’ve even hit our career strides (first from the dot-com bust, then from the real estate implosion) and unemployment is highest among young adults—an astounding 37 percent of people between the ages of 18 to 29 are unemployed or out of the workforce.

But we still manage to stay upbeat about our futures, an essential skill if we’re going to ride out these challenges. According to the Pew Research Center, only three in ten young people say they earn enough money to lead “the kind of life they want,” while nine in ten say they believe they will be able to do so in the future. Only 76 percent of Gen Xers and 46 percent of Baby Boomers say the same thing.

3. Myth: We waste our money on frivolous purchases. 

Truth: We care less, not more, about brand names and keeping up with the latest fashion compared to older generations. Surveys taken since the recession show that 20-somethings report caring less about following the latest trends and styles, preferring a newer, frugal mindset. A survey by TNS Retail Forward found that shoppers in their 20s and 30s were most likely to buy the least expensive versions of products. Part of that comes from the fact that we’re savvy consumers—we grew up knowing how to use the Internet to find the best deal, and we don’t hesitate to use it.

2. Myth: We earn less than our parents did at our age.

Truth: In many ways, we’re the richest generation to have existed. Yes, we face a relatively high unemployment rate, but the jobs we do have come with record benefits—largely health insurance-related. Studies by the Federal Reserve Bank of Minneapolis show that after you adjust for inflation and benefits, median compensation rates have increased 28 percent since 1975.

That helps explain why a Pew survey—taken after the recession—found that 60 percent of respondents under the age of 40 say their standard of living is better than that of their parents at the same age. Just 15 percent said it was worse.

1. Myth: We deserve the name “generation debt” because we have so much of it. 

Truth: Yes, many of us carry student loan debt. And some of us carry monster credit card debt. But we’re not defined by it, because there’s so much more on our minds. We want to own nice homes, feel financially successful, support our families, one day send our kids to college, and change the world at the same time. Although we may now have some money to invest, our goals involve far more than just becoming rich.

The financial crisis of 2008 dovetailed with a growing interest in sustainability, simplicity, and even frugality. Instead of living exclusively for our own pleasures, we have embraced a new level of social consciousness. We care about the environment, our cities, and social justice.

The bottom line? We don’t need to resign ourselves to lives defined by debt. We can earn more, save more, and live more richly—largely because we’ve redefined what “rich” means.

Source: http://money.usnews.com/