The following is a post by staff writer Crystal at Budgeting in the Fun Stuff. Her blog covers living expenses, saving for your future, and the fun stuff in between.
I thought this article at Yahoo was just perfect for Sweating the Big Stuff. According to it, these are the five things that will consume 50% of your total lifetime earnings:
1. House
2. Car
3. Kids
4. Higher Education
5. Retirement
I’m not terribly surprised at the list, but I thought it would be fun to come up with ways of saving as much as you can in these areas so you don’t have to sweat the small stuff so much.
1. House – I personally think that you should only buy a home you can EASILY afford. I thought of how Mr. BFS and I would need to live if we only had one income and we bought a house with a mortgage to match that hypothetical scenario. It would be tight, but we could even keep the house if we had to live off of my $35k a year.
My rule of thumb for home buying is to save up at least 20% down plus a small emergency fund (at least a month or two of living expenses). Also, I wouldn’t suggest taking on a mortgage payment that would use up more than 25% of your total take home pay for the payment and property taxes. Our house falls in at 19.8% with taxes.
Yes, I understand that homes on the coasts are insanely priced and may take up a much bigger percentage. This is why I called it “my” rule of thumb. I don’t think we’d personally ever break that rule, so I guess we’d need to make more if we lived in a pricier area or rent a tiny place that could fit into our budget. I rather rent than risk a foreclosure.
2. Car – Yes, the big, pretty, shiny car may be calling your name, but your wallet is going to take a beating if you indulge that whim too often.
Our rule of thumb on vehicles is to buy the least expensive new or used car that also matches our criteria. In my case, I needed a commuter vehicle that was 100% ready to go and wouldn’t have any issues right off the bat while we were broke college kids. That’s how I ended up with my Chevy Aveo. I hate this car now, but it did technically fulfill it’s purpose.
Mr. BFS needed a car that could be driven ALOT cheaply since he has a longer commute and is a sports official after work. It also needed storage space for all of his ref gear and teaching stuff. The Prius actually matched all of that perfectly. It was also much more affordable than the small SUV we were looking at to start with. We saved even more by simply buying a Certified Preowned one-year old model – it had the warranty like the new car and a price we could cough up.
In general, I’d say don’t buy a vehicle that you’d have to spend more than 8% of your take home pay on every month. We are aiming to never finance a car again. Every huge outgoing expense like a mortgage payment or car loan sucks up money better than a cat with a bowl of cream.
3. Kids – According to the article, a child could cost $220,000 to raise and that doesn’t include college. They suggest to avoid overindulging your bundles of joy. I’d suggest making them work off their cost, but that’s just me being evil, hehehe.
Honestly, just don’t go crazy on the stuff that doesn’t matter – no baby cares whether its clothes are from a thrift store or garage sale. I promise. Quality time and love are really the best things you will ever give a child. That will be what they remember. That’s what I remember the most from my parents.
4. Higher Education – Yes, college is expensive. Try to rack up as little debt as possible and take your future job opportunities into account. If future jobs are expected to be low paying, like a volunteer doctor in Africa, a person will be better off taking on less debt than if that same doctor was immediately going to be part of his/her family’s practice.
I think the article was right when saying “Rough rule of thumb, don’t take on more in total education debt than you think you are going to earn on average annually during your first 10 years after graduating (from college or grad school). In plain English, if you think you’ll make $50,000 a year, don’t take out more than $50,000 in loans.”
One year of future salary in loans does sound much more manageable than most scenarios I seem to hear about. To keep your debt lowered, first apply for every grant and scholarship you can possibly get your hands on. Then if there is still a shortfall, I’d suggest looking into part-time work. Lastly, once you are out of college, continue to live like a broke college kid. The more you can hammer away at the loans, the faster you will be debt free.
The 2-3 part-time jobs I held throughout college minimized my costs, so I ended up graduating debt free after my parents forgave $8000 in family loans. Even $8000 would not have been a threat to my financial future.
5. Retirement – The general rule of thumb as the article states it is to save 25 times your current income. That would give you enough that withdrawing 4% a year would be the same as your current annual salary.
Even though I do not think we will need to even use 4% a year since we currently live very nicely off of only 60% of our salaries, we are still shooting for $2,000,000 in our retirement accounts by age 60. This will help supplement my husband’s pension.
In order to reach whatever retirement goals you set, I’d suggest automatically putting away the money. Not only does this keep you from blowing off your goals, but don’t you already have enough on your plate? I know I do. Automation just makes my financial life easier, which is a welcome relief. :-)
Do you think they hit the nail on the head? Are these the 5 things that take up 50% of your money? Do you have any suggestions on saving in these areas?
