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Beware of Hidden Expenses

Think about your purchases carefully. It is one thing to save and buy something, but there are usually hidden (indirect) costs after the purchase that may not be immediately apparent.

Hidden Costs of Finance

Finance expenses are the most notable example. A vehicle lease of $400 a month might seem manageable a first glance, but do not forget the interest is a fee which is not adding to your equity. That same $400 could be invested in an asset that is going to return a profit, rather than depreciate.

 

Take note of the finance terms. The Rule of 78 may apply which means you have to pay off all the interest first before the loan balance goes down. Termination fees if you want to pay off the loan early or sell the car before the loan ends. Also look out for hidden surcharges which are payable with each loan repayment.

 

It is best to become familiar with the credit act that has been written by your government and multiple acts may apply in your jurisdiction, that is country / state / county / city rules may apply individually or in combination. These acts may be different for a consumer or for a business.

Hidden Running Costs

Add in long term running costs like maintenance, repairs, registration, insurance, fuel, tyres, servicing, etc. The monthly amount could double to $800. Warranty, pre-paid maintenance, and/or good insurance can minimise this impact.

Hidden Ongoing Taxes

Some assets can incur ongoing taxes on a regular basis. Property is a prime example, make sure you know what taxes are payable not only in your jurisdiction, but in the jurisdiction of the asset - in some scenarios you may pay twice. For example, you live in one country and pay taxes on cashflow, but your investment house is in another country and subject to local property and investment taxes.

The more expenses you have the more it impacts your cashflow - buy wisely to minimise expenses.

Beware the Potential Money Pit

Be aware that some items are money pits - that is they consume much more money than they return - a poor return on investment. They seem cheap at first but to fix them up, or maintain them constantly drains the budget. It can seem never ending. Many people have bought an 'investment' which has cost them dearly. The smart ones sell it off at a loss, that is a smaller loss than if they hung on to it.

 

Typically old houses and cars tend to be money pits. Bulldozing the house and rebuilding would usually be cheaper. Also beware heritage restrictions which means the building cannot be modified and any repairs have to be performed to return the building to an as new condition - very costly.

Overcapitalising Will Lose You Money

These are as obvious as spending more on a house and renovating it than it will ultimately be worth at the future sale time. Similarly spending a lot on a flashy car and then spending significant amounts customising it - it will still only be worth market value, or less if specifically customised to your tastes and not to broad market appeal. Don't get me wrong, I like customisation and I know there are practical limits.

 

This is simply adding value to something with the end product worth less than you have spent. e.g. a nice expensive house in a crappy street / suburb, or an overly modified or distastefully modified vehicle.

 

Broad market appeal means better resale - which of the cars below do you think has the broadest appeal?

 

CarCustom OKCustom Too PersonalJust Wrong

[Hint: The first one. ]