As you age, you go through different stages of life emotionally and physically. At the same time, you also go through different financial stages of life. When you first enter the real world after college, you face the tough tasks of putting a roof over your head and food on the table on what is, for many, often a limited budget. Hopefully over time your budget increases and you can properly address the expenses that come with life. It never hurts to have a little advice to follow along the way, from paying for a wedding to buying your first home, here’s a helpful guide to managing those expected expenses.
Tackle Debt First
As a fresh graduate from college or someone just out of trade school, the first decade of your adult life is best spent laying a solid financial foundation upon which you can build the rest of your life. Equifax suggests using this period of your life to focus on paying down, or paying off completely, any costs you incurred personally while attending university. Even if you don’t have the additional income to make a significant dent in those debts now, there are income-based repayment options from the federal government that help you manage those payments now while your take-home pay is lower.
Look Down the Road
While you’re still in that first decade of your adult life, it’s also advantageous to use your 20s to plan for the big purchases down the road. Most people spend their 20s planning for life’s major expenses, such as a first house or a wedding. In addition to paying down your debts, this is an ideal time to establish a budget and learn to stick to that budget.
USNews suggests starting by creating a budget that details every spending category or expense you need to cover, including everything from rent and utilities to daily expenses and entertainment. Before you set that budget in stone, you need to reconcile that budget against your actual income and decide where to trim the fat.
Managing the Big Changes
As you enter your 30s, life is bound to change. For most, these changes come in the form of marriage, a first home, children, and maybe even your first brand-new car. Of course, while all of this is happening, you’re experiencing change and growth in your career as well. When it comes to buying a house, planning is of the utmost importance.
The bank or lender you turn to for a mortgage is likely going to approve you for a much higher amount than you are going to realistically feel comfortable spending each month on a home. On top of that, failing to have a 20% down payment at the ready results in higher fees for the first few years because you have to carry private mortgage insurance.
When considering a new home, think wisely. Look at homes based upon how much money you can afford to spend each month to cover the mortgage rather than selecting homes near the top of the maximum loan amount the bank will give you. Determine how much extra money you can reasonably set aside each month to build up a 20% down payment, and target a high-yield savings account to bolster that savings as time goes by.
One other important factor to consider in your 30s is retirement. It may seem like a far-off concept, but retirement will sneak up on you before you know it, and the sooner you start saving, the more likely you are to reach your goal.
Preparing for the Expected and Unexpected
Much of your 40s will be spent planning for expenses you can see, and trying to read what might be in the cards for your future. For example, as your children reach driving age, you will face the inevitable decision on whether or not you should purchase them a car to support their job search or just lighten your load as a chauffeur.
You will likely find your income stretched in multiple directions during your 40s. While you spend your time online searching www.car-buying-strategies.com figuring out how to pay for your new driver’s car, you’ll also be examining whether or not you can afford to do that in the face of future college expenses, setting aside an emergency fund to cover home repairs and maintenance, and saving enough to secure your approaching retirement.
Tips for Each Stage of Life
Although it’s wise to be saving at all stages of life, this approach requires tweaking over time. It’s a good idea to establish an emergency fund and open retirement accounts in your 20s to help cover expenses (expected and unexpected) in your 40s, but don’t overdo it. Wait until your 30s when your income hopefully has grown to really start pouring money into those accounts.
Avoid using credit cards as an open tap of money flowing into your accounts each month. Carrying a balance from month to month results in interest charges that average 20%, and will drain your money. Whenever possible, use cash or long-term lines of credit instead of credit cards to cover major purchases.
As you enter your 40s and beyond, begin to look more carefully at how and where you are saving your money. The risky accounts you could afford to contribute to in your 20s could sabotage your retirement if you continue to do so in your 40s when you have less time to rebuild your savings if the market crashes.
Burl Taylor is a financial consultant who works with individuals to find ways they can pull off a large purchases and lifestyle changes without landing in debt they cannot get out of.