The following is a guest post from Sarah Damon
who writes about financial topics for SavingAccounts.com.
Over the course of your life, you’ll
have some expenses that will consume the lion’s
share of your income. While some of these expenses
are easy to predict, people often fail to plan
for them, or don’t understand how spending
too much affects them in the long run.
In Get Financially Naked: How to Talk Money
with Your Honey, authors Manisha Thakor and
Sharon Kedar identify some key lifetime expenses
that are important for you and your partner
to discuss. “Addressing each of these
key areas as early on in your relationship as
possible will go a long way toward ensuring
financial and emotional harmony in your relationship
and your budget,” they write. (While their
book is primarily about talking to your partner
about finances, much of the advice is applicable
for singles, as well.)
The three expenses Thakor and Kedar list, along
with key points for each, are:
- Home. Delayed gratification can be hard,
but saving 20 percent for a down payment on
your home is the way to go. Once you’ve
reached that savings goal, and you’re
ready to buy a house, go for a simple 30-or
15-year fixed rate mortgage. Also, realize
that despite the prevalent “American
dream” of homeownership, buying a home
isn’t right for everyone. For example,
if it’s possible you might have to move
in a couple of years, it doesn’t make
sense to bear the cost of buying and selling
a home.
- Car. Figure out what a car means to you
(and your partner, if applicable). Does the
car make a statement about your image or is
it merely a way to get from one place to another?
If achieving future goals is more important
to you than the type of car you drive today,
consider buying preowned and paying cash for
your next car.
- Retirement. Sock away at least 10 percent
of your gross income for retirement, advise
Thakor and Kedar. Create a plan that includes
answers to questions like when you want to
retire, what your current retirement savings
looks like, and how your retirement savings
are invested.
Thakor and Kedar recommend keeping your essential
expenses (house, car, food, insurance, childcare,
etc.) at about 45 percent or less of your gross
income. They recognize that for most people,
mortgage, car and retirement will be more than
50 percent, which is why it’s important
to reconsider how much home and how much car
you really need.
While frugal behavior like clipping coupons
can add up to savings over time, they mean very
little if you’ve bought way too much house,
are driving a car you can’t afford, and
haven’t saved a thing for retirement.
Take care of your major life expenses first,
then look for smaller ways to shore up your
saving account.
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