Have you ever given much thought to the real cost of an item, compared to the listed retail price? A perfect example is if you chose to buy a new computer on credit. The real cost of the computer would be the purchase price and the interest that you have to pay. The true cost of an item can often go unnoticed and consumers end up paying much more than they bargained for. Here are four things that are more expensive than you might think.
In Pictures: 5 Simple Ways To Invest In Real Estate
- Active Trading
You might believe that it would be exciting to become a daytrader because you can get rich by aggressively buying and selling stocks. All you have to do is buy an investment and sell it for more than you paid. That sounds pretty easy! There are even television shows, software and blogs devoted to helping you with your daytrading. So, should you start actively trading your account in hopes of getting rich? Not if you want to hold onto your hard-earned money. (False signals can drown out underlying trends. Find out how to tone them down and tune them out, in Trading Without Noise.)
The only person who is guaranteed to get rich from your constant buying and selling is your stockbroker. Brokerage firms absolutely love customers that actively trade their account. The brokerage firm makes money regardless of whether a stock increases in value or decreases because they charge commissions on every buy and sell order. You could end up paying thousands of dollars a month in commissions, just for the privilege of trading stocks.
Once you see how quickly these commissions eat up your investment return, you won't be in such a rush to quit your day job. This is of course not to say that some don't realize significant profits through day trading, but commissions build up quickly.
Do you remember the refinancing boom of the 2000s? Lots of realtors and loan officers were advising clients to take money out of their homes by refinancing. The theory is that you can get some extra cash by taking the available equity out of your house by extending the years on your payments. Sounds great! Who couldn't use some extra cash to pay off credit card debt or refinish the basement?
Not so fast! Refinancing can cost you more than you think. Not only are you extending your mortgage obligation for more years; you are also draining the equity out of your home. As the recent financial crisis showed, housing prices are not guaranteed to increase. When housing prices drop precipitously as they have over the past few years, you could find yourself owing more money on your new loan than your house is even worth. There is nothing worse than paying a mortgage on a home that you are upside-down in. (Four major players slice and dice your mortgage in the secondary market, in Behind The Scenes Of Your Mortgage.)
- Late Fees
Late fees are like little pests that drain your finances and rob you of financial freedom. Creditors are famous for adding late fees to any bill paid after the due date. Late fees may be added to a bill that is one hour late, one day late or one week late. Credit card companies can charge fees up to $35 for late payments, in addition to the interest. Most utility companies charge late fees of $5-10. Cell phone providers, internet carriers, cable and satellite providers will all hit you with at least $5 late fees. Too many people ignore the detrimental effects of late fees by thinking it is only $5 or $10 bucks. Add these little late charges together, and you could be losing hundreds of dollars a year. Over a 30-year time period, you could easily be losing thousands of dollars to late fees. Imagine what that money could be doing for you if you had placed it in your 401(k). (Disorganization makes planning difficult, and that can cost you big time. Find out more, in 8 Steps To An Organized Financial Life.)
- Credit Card Purchases
Credit card purchases should come with the following cautionary warning: This purchase will cost you more than the price advertised! Most credit card users end up paying way more than the stated purchase price. The only exceptions are people that pay their bill in full each month.
Let's say you bought a cell phone for $200 on your credit card and your annual interest rate is 18%. If you don't pay the balance off immediately than you are going to be paying interest on your cell phone purchase. Your $200 cell phone purchase can cost you well over $300 if payments are delayed. Most likely you will not even have the same cell phone a few years later. You could end up owing hundreds of dollars on a $200 item that you don't even use anymore.
The Bottom Line
Small purchases may not appear to be a big deal initially, but over time these little items will end up costing you a whole lot more than you think.
Catch up on the latest financial news in Water Cooler Finance: Buffett Speaks Up, AIG Deal Collapses.