Some financial decisions are not as straight forward as they may appear. That is because sometimes there are costs that are not easily observed. Let’s call them “hidden costs”. Because of hidden costs, we might make the wrong financial decision or at least be unaware of the ramifications later.
One example would be delivery services (such as Amazon Flex) that offer to pay you approximately $20 per hour to deliver packages for them in your own vehicle. At first that may seem like a great deal. Who wouldn’t want to make $20 per hour delivering packages with a flexible schedule?
However, the way it is constructed you are your own independent contractor and have to pay your own costs. That changes the entire dynamic! $20 per hour would be great if you were delivering in a company vehicle and the company was paying for the gas and maintenance. In this case, however, you are incurring the vehicle costs since you drive your own vehicle. The gas you pay is the obvious cost that will reduce the $20 hourly rate. However, you really need to add the full vehicle cost per mile. It costs over 50 cents per mile to operate most vehicles (the IRS has a higher mileage amount so this is conservative). The reality is that for every mile you drive you are one mile closer to your next oil change, next car repair, next set of tires, and a true loss of car value (depreciation) will occur with every mile added to the odometer.
If you estimate that you can drive, say 30 miles in an hour delivering packages, your true cost would be 30 miles x 50 cents per mile = $15 per hour. Now this is a rough estimate, but you get the picture. In that example you are really only making $5 per hour ($20/hour gross wage less $15/hour cost). If you need cash right now and you are willing to take $15 an hour out of your car’s value that may be the right decision, but understand that you are trading $20 per hour cash now for $15 per hour of expenses. It’s just that you don’t see the expenses except for the out of pocket gas portion. Understand that in this case you are really only making about $5 per hour due to the hidden costs.
Another example would be management fees for mutual fund and other investment accounts. If the investment firm is taking 1% or 2% out of your investment returns would you notice? Probably not because those fees are netted in the overall returns. They are invisible unless you are looking for them by reading the fee disclosures.
Light bulbs can also have a hidden cost. You can pay more for LED bulbs that might last for 10 years or more, or you could pay less for a standard or halogen bulb that you have to replace every year or so. In addition, the energy savings can be dramatic with LED bulbs saving you much more vs the other bulb types. In other orders, cheap bulbs don’t always save you money, they might cost you a lot more, you just might not notice it.
What about your diet and your health? You could pay less for groceries now and buy cheaper unhealthy processed food or you could pay more now for natural healthier food. In the short run you can say that you are saving lots of money. But are you really? Is the hidden cost of accrued medical bills due to a poor diet higher than the obvious immediate savings on groceries? It is known that a poor diet is a significant contributor to Type 2 diabetes and heart disease, for example. These types of hidden costs are hard to measure, but no one can argue that eating healthy would give you a higher probability of having lower medical bills vs a poor diet.
Another example would be owning a house in a rural area that has well water and a septic system instead of city water and sewer. Can you say that you are saving money because you don’t have a water and sewer bill? Is that accurate? Are you really saving money since you don’t have a monthly or quarterly city water and sewer bill? The hidden cost is the deteriorating well pump or septic system that will eventually need to be replaced. If you were a business you would be recording depreciation each month which is the loss in value of the asset as it is being used up. In the end it actually might be more expensive to have a well and septic, it’s just the timing of the purchase that makes it somewhat hidden unless one of them fails and needs to be replaced, and then it is anything but hidden! Someone with a well and septic might pay $20,000 every 20 years to replace the well pump and septic, or about $1,000 per year, or $250 per quarter. If your city water and sewer bill, in this example, was less than $250 per quarter it would be cheaper to be on city sewer and water.
Hidden costs are everywhere. Where do you see hidden costs?