Budget Planning: The True Cost of an iPhone = $2,200

The iPhone will run you about $2,206. And if you live in Tennessee, where the sales tax is at a lovely 9.4%, it’ll cost you about $2,218.

Wait a minute, two thousand and two hundred dollars, for a cell phone? How did that happen?

Welcome to the concept of expenses tracking. Like with so many things in life, owning the iPhone doesn’t just end with a single purchase — it stretches on with service plans, taxes and more. By the end of the two years required contract, you’re talking real money. Let’s take a look at the math:

$599 iPhone x 8% sales tax ($47.92) = $646.92

$60 required cellular plan + $5 (taxes & fees) x 24 months = $1560

Total cost: $2,206.92.

Note: Engadget has a great compare and contrast on the iPhone vs. other smartphones.

Again, this is just for owning the phone for two years. What else can we dig up to show their true value? More than you know.

The Total Cost of Pet Ownership ~ $12,000

“All right,” you say, “what about this pet number you have going on here. Surely my dog won’t cost me $12,000?”

You may be right there, as your pet can easily cost more if you have a larger breed, or if you live in a costlier area.

Here are the budget planning numbers to owning a 50 pound dog (living in the Midwest)¹:

$1,977 first year cost

$807 yearly cost x 14 years

Total cost: $12,468.00

According to the Wall Street Journal², the average cost of ownership for a small dog that lives 15 years will cost almost $12,000 — and more than $23,000 for a larger breed that lives for 12 years. These are averages, mind you.

The Total Cost of Car Ownership ~ $42,000

Let’s take one of the best selling cars of 2007, a Toyota Camry LE (Automatic transmission, because who drives manual in America?), and punch some numbers³.

For a five year ownership, this is the cost break down:

Total depreciation cost: $11,482

Financing: $4,580

Insurance: $10,026

Taxes & Fees: $2,318

Fuel: $8,653

Maintenance: $4,310

Repairs: $689 (whew, thank goodness it’s a Toyota)

Total: $42,058

Once again, these are average numbers. They’re based on 15,000 miles per year, in a region that isn’t terribly expensive. Insurance can fluctuate from low prices to high prices depending on your situation. If you live in a costlier city, or drive more miles per year, many of these numbers can easily increase.

The Cost of Raising a Child Over 17 Years ~ $170,460

In this example, the numbers are based on a survey by the U.S. Department of Agriculture along with data from the U.S. Department of Labor⁴. They are numbers for a dual-parent family with medium household before-tax income of $39,100 to $65,800.

The cost of raising a child over 17 years:

Housing: $57,360

Food: $29,550

Transportation: $24,510

Clothing: $10,470

Health: $12,180

Child care/Education: $17,430

Miscellaneous (the occasional iPhone and pet): $12,720

Total cost: $170,460

Here’s a kicker. These numbers are updated with 2001 numbers using the Consumer Price Index. So yes, raising a child these days will most likely cost you more money.

The Costs of Buying a Home Over 30 Years ~ $1,073,000

Here are some numbers from a recent Wall Street Journal Article⁵, based on the average mortgage-interest rate in 2006. The national median home price was $222,000 during the time.

Purchase Price (typical single-family home): $290,000

Down payment: $58,000

Principal: $232,000

Interest @ 6.41%; total = $291,000 (after tax: 33% bracket): $195,000

Taxes & Insurance ($6,000 / year): $180,000

Maintenance ($300 / month): $108,000

Major Repairs & Improvements: $300,000

Total Cost: $1,073,000

Average numbers? You bet. If you live in a more expensive area and have subpar credit, expect to add quite a bit more to the price tag above.

Okay, So… Don’t Ever Buy or Do Anything?

Obviously, we can take any expenses we have, figure out its cost of ownership or its total opportunity cost in the long term, and make a big fuss.

When you see the numbers in a big picture, things will always seem a bit intimidating — and that’s kind of the point. In the world of personal finance (as in, your money), it’s common adage to focus on the long-term cost of your financial choices and expenses tracking so you can make better financial decisions today.

No one really sits down and breaks out the calculator before they buy a cup of coffee and donut (unless you happen to be a glasses-wearing blogger working at a start-up called Mint.com); most people also don’t input their night-out expenses into the spreadsheet before they pick up their date.

The point of seeing the numbers in a bigger picture is so that you understand the financial commitment you may face when you make a decision to buy an iPhone, Pet, or even a car.

Consider this: let’s say for whatever reason you have financial trouble in the future. You’re living paycheck to paycheck, and suddenly one month becomes extremely difficult.

Would you wish you’d had $2,200 so you can provide food for your family? Would you wish there’s an extra $12,000 laying around so you can take another step towards that down payment for a home? Would you wish you had an extra $42,000 so you wouldn’t have to worry about how you’ll pay your bill next month?

Wait, that’s not fair, you say.

“I love my dog and I don’t care how much he’ll cost me.”

You have a point there.

Whether you got to make your calls with a “frigging sweet iPhone,” let your child experience the joy of pet ownership, or just have a car so you can get to work — sometimes we just have to spend some extra money.

And that’s how it should be.

Money is for living. It’s a tool that we use to better our own lives and those of our loved ones.

It is, however, a tool you need to use wisely. You certainly don’t want to buy a gadget — or another financial responsibility such as a pet — if you’re between a rock and a hard place with the bank.

Even if you can afford the current monthly payment, if a purchase will hurt you financially in the long term, you may not be making a responsible financial decision.

Remember, reaching financial independence isn’t about spending all day long wondering how much money you could have or should have saved. A sensible financial lifestyle also isn’t about hoarding all your money for that rainy day.

Being smart with your money is about fully understanding the financial choices you make and seeing the entire picture – the true cost and total cost of ownership when you commit to a device, transportation, pet, or even a child.

In the end, it’s a careful balancing act — a pretty important one that you’ll need to think about occasionally, so that you can live well today and live even better tomorrow.

More to Read So You Can Make Smart Money Decisions

• 30 Free e-Books to Learn Everything You Want to Know About Your Money
• How To: Tackle Your Debt in Five Simple Steps
• How To: Stash Your Cash at the Right Places

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References:

1. Cost of Owning a Dog from PetEducation.com
2. Calculating the True Cost of a Pet from the Wall Street Journal
3. True Cost to Own Ratings at Edmunds.com
4. The cost of raising children at MSN Money Central
5. Why Your Home Isn’t the Investment You Think It Is from the Wall Street Journal

Further Reading on the Topic:

Expenses Tracking

Budget Planning

Personal Budget Plan

Personal expense tracking is something that we care about here at Mint. Learn more with great personal expense tracking tips in our blog article index.

Today’s train wreck is about payday loans. One great way to avoid payday loans is through personal expense tracking and solid budgeting.

I think the worst thing I ever did was purchase a car from “Ugly Duckling”, also known now as “Drive Time.” Basically, your down payment is the value of the vehicle, and then you’re hit with huge interest rates. The vehicle I got didn’t last a year before the engine blew, but I still owed 2 more years on it. Definitely teach your little ones to stay away from “buy here, pay here.”

The second worst mistake I’ve made involved “payday advance” places, which hold your check until the next payday, but charge huge rates. I’ve written a $350 check to get only $275 in cash; the rest was their profit. Then the next payday rolls around, and you have to do it all over again.

If you must use one, do it for my first reason, not my last. Initially I simply needed money to cover an electric bill, or my lights would be cut off. I had two choices: let the check bounce (and pay $35 for a bounced check fee while risking some nights by flashlight), or pay $25 for the fee on a check that was enough to cover the electric bill and make a cash deposit in my bank account.

The advance was $10 cheaper, didn’t hurt my credit or risk legal issues with bouncing a check, and kept my lights on.

If I had stuck to just this, everything would have been fine. But the bottom line is, it’s too easy to get caught up in this high interest “loan shark” deal, and soon end up paying a large part of your income in advance loan interest.

By the way, I still don’t blame these places for their high rates: a $35 or even higher fee on a bounced check for $5 is a much higher fee than $25 on $100 loan. What your bank does is a thousand times worse than any pay advance place.

Mint’s Take Away:

While it’s true that a bounced check fee from banks can be quite high, they’re usually an exceptional fee — unlike the fees from a payday loan, which are always imposed upon you for the service. We definitely agree with the poster, though, that it can be very easy to get caught up in the (extremely) high interest “loan shark” deal.

Payday loans often compare their annual percentage rate to that of rates imposed by banks and credit card companies on late fees. In reality, though, payday loans are incredibly costly compared to alternatives available.

Let’s compare the original poster’s cash advance from the payday loan to a cash advance from an average credit card.

Payday loan cash advance: $275 loaned, $75 in fee = 327% APR

Average credit card cash advance cost: 3% fee for amount advanced and 25% APR

Credit card cash advance: $275 loaned, $8.25 in fee and $5.75 in interest if paid off within a month. Total cost? $14.

$14 fee vs. $75 fee for the same $275 loan.

Quite a difference!

Although we will never suggest resorting to cash advance from a credit card, they are by far less costly in interest & fees when compared to a cash advance from a payday loan. In fact, if the credit card cash advance is paid off in two weeks (which is the normal duration of a payday loan), the fees you incur will be even less.

In situations like those described by original poster, an emergency fund will come in quite handy! Read more about the importance of an emergency fund and find out how to get one.

Remember, personal expense tracking is important. Without it, you might need to make some very difficult financial decisions.

Train Wreck Tuesdays are a weekly post of horrible financial mistakes. They are posted anonymously. Submit your story; if you’re selected, you get a free personal finance book. The best comment gets the same prize! Check out past Train Wreck stories here.

Further Reading on Personal Budget Management

Personal Budget Management
Create a Personal Budget Online
Household Budget Software
Debt Management Tools