On this episode of How To Money, Joel and Matt talk about one of their favorite things: cycling. Recently, they were discussing purchasing mountain bikes, but came to realize that with all the other costs associated with mountain biking, like a carrier for the car, essential accessories and gear, maintenance, and potential injuries, the cost was just too high. So they decided to dedicate this episode to the “hard secondary costs” and “soft secondary costs” of every purchase, so we can make sure we’re looking beyond the sticker price to what something will really cost us in the long-term. When we factor these costs in, it can help us avoid emotional spending, or digging ourselves into a financial hole we can’t get out of.
“Hard secondary costs” are associated costs that we can’t avoid, they explain. Things like sales tax, monthly fees, maintenance, and so on are “hard costs” that we have to pay, whether we like it or not. For example, if you’re looking to purchase a house, you may set your budget at $150,000. But there are “hard costs” like closing costs, home inspections, potential repairs, insurance, and other possible costs like HOA fees, that should be factored into the overall price of the house before you decide you can afford it. And for purchases like homes or cars, depreciation is a huge cost that needs to be factored in; cars lose 20% of their value the second you drive them off the lot. “Do your due diligence and make sure you’re not going to sink your budget because of one thing you thought you could afford.”
Then there are “soft secondary costs” that you’ll need to think about too. These “soft costs” are optional, but sometimes very hard to avoid. For example, you buy a new house, and you invest in a bunch of new furniture for it. Or you decide to renovate the bathroom, and then find yourself thinking the kitchen looks pretty shabby by comparison – maybe you should renovate that, too. Sometimes our hobbies cost more than we realize: Photography, golf, or football fandom can all be cheap or very expensive hobbies, depending on how many “soft costs” you talk yourself into. It’s okay to spend as much or as little as you want on your leisure activities: “There’s a reason personal finance is personal – it comes down to you and your priorities in life,” Joel says. But “deciding whether something is a solid purchase can’t really be done without considering these costs.” Hear more about the extra costs associated with nearly every purchase, and how we can factor those in before we find ourselves in over our heads, on this episode of How To Money.
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