If you’re like most people, from time to time you’re going to make financial mistakes. While some of them will be outside your circle of control, others stem directly from your actions. As long as you can limit them and avoid buying money pits, then you’ll have a greater chance of achieving financial success!
What are Money Pits?
Unfortunately, many people purchase goods without realizing the full extent of their cost. Even though you consider the purchase price, you may not fully understand or be able to account for the ongoing costs.
The first time you encounter a repair, it’s common to think of it as a one-time cost or one-off situation. But as time goes on, and you sink more money into repairs and maintenance, these purchases turn into money pits!
Purchases turn into money pits when you encounter unexpected or unaccounted-for recurring costs. As you shell out money time and again, these additional hidden costs add up and turn these purchases into financial drains!
In general, items that turn into money pits seem like a good idea at the time they’re purchased. Upfront, they offer excitement or a better lifestyle which can make them emotional purchases that get bought on impulse. When you buy big-ticket items without thinking them through, you’re bound to make mistakes that can lead to major financial problems!
One reason that money pits are detrimental to your finances is that they increase your burn rate. When you’re spending more money than you allocated for them, it becomes harder to stay on budget. Not only that, but saving, investing, and achieving your financial goals is more difficult, too!
To make matters worse, money pits also wreak havoc on your emotions. Dealing with issue after issue is taxing and not to mention stressful. Over time, you may get so sick and tired of dealing with them that they steal all the joy you hoped to gain in the first place!
If all that wasn’t bad enough, there’s no limit to the impact that money pits can have on your finances either. Since they’re ongoing, they’ll continue to cause financial harm until you decide to cut your losses and get rid of them!
Even though you can’t always tell which purchases are going to turn into money pits upfront, some are more common than others. Here are 5 common money pits that can keep you from creating wealth!
Money Pit #1 – Your Home
In the real estate industry, it’s common for professionals to use marketing gimmicks to make you think that your home is your largest asset. But when you consider all the ongoing maintenance, repairs, and upgrades associated with homeownership, it can also be your biggest money pit!
When it comes to buying a home, its condition plays a large role in whether it becomes a money pit or not. For instance, if you buy a fixer-upper it will likely be an older home that’s been neglected and now needs extensive repairs!
Regardless of whether it’s your primary residence or an investment property, fixer-uppers have their challenges. Upfront, there’s no way to be certain of the quality of construction, what’s happening behind the walls, or how much the renovation will cost. Finding an old leaky pipe or a few rotten floor joists after closing can quickly turn any home into a financial drain! (Don’t ask me how I know)
Even if you don’t plan on buying a fixer-upper, a home can still turn into a money pit. Given that parts of it will wear out and break means that you’re going to have to spend additional money on repairs. But, you don’t know when this will happen or how much it’s going to cost!
Luckily, there are some steps you can take before you buy to reduce the risk of your home turning into a money pit. For starters, get a home inspection. It will give you a better idea of the home’s condition as well as potential problems. This way, you’ll have a better understanding of them upfront, instead of getting surprised by them later!
Also, if you plan on purchasing a home and doing renovations, it pays to get scopes of work and cost estimates before you buy. In addition, consider adding a larger cash buffer on top of your renovation budget. After all, additional surprises and repairs always have a way of surfacing once you start doing demo work!
Money Pit #2 – Your Vehicle
Unless you live in a city with reliable public transportation or is bike friendly, then you need a vehicle. If you didn’t have one, how else would you go to work and get around town?
Just because you need a vehicle doesn’t mean you have to spend a large amount of money on a new one. There are plenty of used low-cost vehicles that are reliable, fuel-efficient, and have minimal ongoing maintenance costs!
Owning a vehicle that has ongoing maintenance and repair costs can quickly turn it into a money pit. If it’s constantly breaking down, then you’re going to continue shelling out money to fix it and keep it running!
One way to prevent your vehicle from becoming a money pit is by doing research upfront. Check reviews, go over its maintenance records, and evaluate its Car Fax to get a better sense of its overall condition.
On top of that, also consider the vehicle’s long-term costs. Use a website like Edmonds to better understand your total cost of ownership. It gives you a better idea of the future maintenance and repairs that you’ll likely encounter. Not only can you use this information to evaluate your purchase upfront, but it can also help you plan for future repairs should you choose to buy!
Money Pit #3 – Keeping Up With the Joneses
Whether you realize it or not, people in certain neighborhoods and social circles compete. Although it’s not said, they’re constantly trying to outdo their family, friends, and neighbors by endlessly buying bigger, better, and more!
Unfortunately, many people fall into the trap of needless competition and comparison. While it’s most common in housing and transportation, it can also happen with clothing, status symbols, or even where their children attend school!
Regardless, trying to keep up with someone, especially when you don’t know their true financial position, will cause you to be less fiscally responsible. Rather than being frugal with money, you’re more prone to overspending. Not to mention, it will likely be on items you don’t need or want, either!
Truth be told, trying to keep up with the Joneses doesn’t end. Once you start striving for bigger and better, then you’re never going to have enough nor will you ever be satisfied!
Fortunately, there are many ways to limit the influence that the Joneses have on you. The first is realizing that the Joneses are like most Americans. They’re living beyond their means and drowning in debt. If you follow their spending and consumption habits, then you will be, too!
Also, when you focus on others you tend to ignore yourself. You’re more concerned with what they’re buying and doing, rather than the things that bring you joy and your happy expenses. But if you turn your attention inwards, not only will you care less about the Joneses, but you’ll find that your quality of life improves as well!
Money Pit #4 – Your Boat
Have you ever heard the saying, “The two best days of a boat owner’s life are the day they buy it and the day they sell it”? For many owners, this saying hits a little too close to home because boast can be major money pits!
At the moment, people who are shopping for a boat are excited. They can’t wait to be out on the water and to be spending time with their family and friends. But as the months pass their excitement fades and the days that are spent out on the water diminish!
However, even when you’re not using your boat you’re still paying for it. You’re incurring storage fees, insurance costs, and maybe even loan payments. Not to mention, when you get around to using it again, you may experience engine trouble, electrical issues, or mold – all of which cost you more money to fix!
For many people, it doesn’t make financial sense to own a boat. Rather than buying, consider renting one instead. This way, you’ll still get to enjoy going out on the water, but you won’t have to deal with the hassle or the extra cost. In addition to that, renting won’t make you feel forced to use it or like you’re wasting money if you can’t!
Truth be told, buying a boat is often the cheapest part of ownership. It’s the ongoing upkeep, maintenance, and repairs that turn them into money pits!
Money Pit #5 – Starting A Business
Oftentimes, people start businesses with the hopes of solving a problem or making a difference. But despite their best intentions, things don’t always work out or go according to their plans!
While owning and operating a business does have its perks, it’s not for everyone. After all, it requires a lot of hard work, time, and money!
To get a business up and running, you need to have a cash runway. This money allows you to cover overhead costs, like inventory, office space, and marketing expenses until the business is self-sustaining and profitable. On top of that, you need to have additional money set aside to cover your personal monthly expenses as well!
Even after incurring all these start-up costs, there are no guarantees that your business will be successful. You may need to try different strategies or create new products until you find one that works. Unfortunately, there’s no way to know upfront how long this is going to take. If you keep pouring money into your business without it generating a profit, then it will become a money pit!
Not to mention, the statistics for most businesses are grim. For one reason or another, the majority of them will fail sooner or later!
If you’re still interested in starting a business, consider going small and doing a trial run up front. By bootstrapping and producing a limited quantity, you’ll have less money at risk. Not only that, but you’ll gain valuable feedback, too. With this information, you can gauge demand and determine whether there is a market for your product before you invest a large amount of money into creating it!
For many people, investing in a business is a better option than owning one outright. When you invest, you’re not taking on the full risk. Instead, it’s getting shared. On top of that, it won’t be as time intensive either. In fact, you’ll earn financial gains and receive mailbox money with little to no time commitment at all!
If that wasn’t good enough, it’s easy to invest in businesses, too. Thanks to technology, you can make equity investments or buy into real estate syndications through a variety of platforms in minutes. Not only that, but when you invest in them you’re leveraging other people’s time and money, instead of just your own!
Having said that, before you invest any of your hard-earned money, be sure you get a complete financial education!
Even though some money pits can be avoided, not all of them will be known upfront. Despite being careful and doing your research, they can still take you by complete surprise!
Nevertheless, when you discover you have a money pit it’s important to take immediate action to limit its financial impact. Instead of sinking more money into it, you should consider stopping the financial drain and getting rid of it. This way, you’ll spend less, save more, and achieve financial freedom, faster!
What are your largest money pits? Comment below.
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