It’s always better to overestimate your expenses and have money in the bank than to underestimate, especially on a regular basis. You can always spend more money, but spending less, after the fact is not usually possible.
When going to the grocery store or going out to eat, my friend would expect to spend $30 and I would expect to spend $80. If we spent $60, then he would have spent $30 more than expected and I would have spent $20 less than expected.
When purchasing any item, I recommend overestimating the costs and underestimating the discounts. Large purchases are especially important since there is much more money at risk.
The largest two purchases for most people are cars and houses. Both of these are great examples of why you should overestimate the costs.
- AUTOMOBILES – When purchasing a vehicle, you will always pay more than the sticker price. There are numerous fees which are added to the price of the vehicle which may include sales tax, warranty, transportation fees, title fees and dealer fees. Furthermore, you will have additional fees after you purchase your vehicle such as registration fees and car insurance. If you purchase a vehicle from a dealer, most of the fees will be added before the sale has been finalized. If you purchase a vehicle from a private party, you will still need to pay sales tax and registration to your local department of motor vehicles. Add several hundred or even a few thousand dollars to the estimated cost of a vehicle before you go shopping.
- HOUSES – When purchasing a house, there are also numerous additional fees such as inspection fee, appraisal fee, mortgage insurance, closing costs and title fees. Additional costs when purchasing a home are usually between 2% and 5%. So go ahead and add 6% to the cost of the house and you will have enough money when it is time to sign those closing documents.
Don’t be afraid to have money left over after a transaction. You can save it or spend it on something else. It’s better to have money left over at the end of the month than to be short and unable to pay all the bills.
STORY 1 – DON’T CELEBRATE UNTIL YOU GET THE CHECK
I had a young friend who bought his first house. He lived in it for a few years and made some improvements. The value had gone up quite a bit and when he decided to sell it several years later. He estimated his profit to be $45,000. The housing market was strong and the realtor told him he could expect a quick sale. He was planning on moving to another state after the sale.
He had worked hard for this income, knew he deserved it and could not wait to celebrate. He was so excited about the imminent cash surge.that he went on a spending spree before the house closed. He took his friends out to dinner, purchased some personal items and even took out a loan on a new vehicle since he assumed he would quickly be able to pay off the car loan.
He didn’t pay attention to the closing fees and didn’t ask the realtor what he could expect as a final payout. After paying the standard 6% realtor fees ($15,000 on his $250,000 house), costs of some additional repairs identified by the inspection report and required to complete the sale, title transfer fees and the remainder of the seller’s fees, his final profit was just over $20,000. By the time everything was completed, he actually had to borrow money from a family member to complete the move and get set up in a new place.
Photo by Sharon McCutcheon on Unsplash