Many of us give ourselves a certain budget when we're planning to spend on something major, such as a vacation or a wedding. But often, despite our planning and best interests, we wind up going over that number.
Author and self-made millionaire Ramit Sethi sees this over and over with guests he's spoken to on his "I Will Teach You to be Rich" podcast.
There are four big purchases that "nobody ever knows the actual cost of," Sethi said on a recent episode:
- Homes
- Cars
- Weddings
- Vacations
It's not because these things come with price tags so big you can't comprehend them, but "because you don't want to know [how much they cost]," Sethi said.
You may buy a house thinking you can afford the mortgage, but then your interest rate changes or your property taxes go up. The car you thought you could comfortably finance may come with more maintenance costs that you anticipated. Maybe you get excited and keep adding on costs to your wedding because it's a special occasion.
"People pick some arbitrary number," Sethi said of people's budgets for weddings and other similarly large purchases. "Then as the costs start creeping up and it's too late to cancel, they simply shift those costs to some black hole where you'll never have to think about it again."
Here's why this money mistake is so common, and how Sethi recommends approaching major purchases.
We're all human
Sethi admitted he wound up overspending on his wedding several years ago, despite saving for "over a decade," before he even met his now wife.
"When it came to the wedding, I knew that we wanted to have a beautiful, big wedding with all of our family," he recently said on his podcast. "And accordingly, I gave myself a healthy margin of error because everybody told me, 'Take your wedding budget and double it.'"
By the time he actually had his dream wedding, Sethi said he'd gone well over that margin of error and had stopped looking at the costs adding up, despite being a money expert himself.
He told that anecdote to highlight the fact that we're all human — even financial experts can wind up overspending. "You and me and all of us are mostly the same," he said.
But for some people, the bigger financial picture makes it difficult to bounce back after an expensive miscalculation. A newlywed couple he recently spoke to on the podcast wound up with $44,000 in credit card debt from their wedding, as well as a mortgage they couldn't truly afford because they vastly underestimated the costs.
You need a system
When you're planning for a major purchase, whether it's your annual vacation or a once-in-a-lifetime wedding, Sethi said it's important to recognize that while you may not be able to accurately predict the total cost, you're not powerless.
Instead of avoiding the truth that you will probably overspend, "build a system to make sure that [you] can still function," when you inevitably make a mistake, Sethi recommended.
He encouraged his listeners to use his conscious spending plan, or another money tool that works for them, to get an idea of how much you can really afford when it comes to adding a mortgage or loan payment into your monthly expenses.
With Sethi's conscious spending plan, you categorize your current spending into four categories:
- Fixed costs: Rent, bills
- Important investments: Retirement, emergency savings
- Savings goals: Down payment or other major purchase
- Guilt-free spending: Dining out, entertainment
The point is not to restrict your spending, but rather to be more aware of where your money is going and be able to make adjustments to achieve the goals that are important to you.
Once you're used to managing your money like this, you will hopefully feel more confident planning for major purchases — even if they end up being more expensive than you estimate, Sethi said.
"I can save up ahead of time. I can add a healthy buffer, and then I can try as much as possible to stick to a number," he said. "But the trying part is the least of it. Building in the buffer and the systems, that is the real magic here."
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