Unless you have a degree in finance or took business classes during your college years, chances are that you read financial advice online and try to take your best guess. With so many sources and so much information, how is the average person supposed to make good decisions?
This is a tough area and for those who are just starting out, it can be oh so confusing. Let’s look at the areas of our lives that will consume most of our income and what choices we have in those areas.
Most people get suckered into buying a beautiful and huge starter home, only to find that they have trouble making the payments that go along with home ownership. There is more than just the mortgage to consider; utility payments, property taxes, insurance, and maintenance These average as much as 3% of the price of your home each and every year. The best rule here is to factor in that 3% into the price of your home. Total housing costs should be no more than 30% of your gross income
Higher Education Costs
We are talking about educations costs for yourself, not your kids here. If you are considering getting a loan for higher education, don’t borrow more than you think you will earn in your annual salary after your graduate. For example, if you think you will be making $65,000 after college, don’t take out more than $65,000 in student loans. You should plan on spending 10% of your income to pay back your student loans within 10 years after graduation.
American’s have had a love affair with their cars since the Model T. Everyone wants to drive an expensive, luxurious car and that’s a problem for those who really can’t afford it. Keep in mind that, unlike your house, a car is worth less every single mile and every single year. Spend a maximum of 1/3rd of your annual income buying a car and pay it off as quickly as possible. For those making $100K a year, this means buying a car worth $30,000. Yes, that seems cheap, which is why you see so many Americans eating Ramen noodles for dinner while their Mercedes sits in the driveway.
There is no way around it; kids are downright expensive. The US Department of Agriculture says it costs about $220,000 in 2008 to take your child from the hospital to their high school graduation at 18. And NO, this does not include college. It is impossible to give a set dollar amount on how much you should spend on your children, but a good rule of thumb is to not overindulge and buy them everything they want. Let your children learn that money must be earned.
Your Retirement Years
Don’t expect Social Security to be your only source of cash in your golden years. If your job does not have a pension plan, (and even if it does), plan on putting money away for your retirement. How much will you need? This varies tremendously, but a good measurement tool is to take your current income and multiply it by 25. Decide to start funding your 401K with your first real job and don’t wait. Starting early is far more profitable than waiting until your financial situation improves.