How small expenses add up
You might have your budget dialed in but somehow keep exceeding what you expected to spend. This is a good sign that you are ignoring your small purchases. Micro purchases that will add up include: daily Starbucks coffee, cigarettes, eating out for lunch, buying a digital song or movie, etc. For example, your company or school might have a food court where you can easily choose between a variety of delicious food for lunch every day. That lunch might cost $15 per day. Your total cost for the month is $300 and $3,600 for the year! Even cutting this back to every other day would be a huge step to achieving your goals. Checkout out our daily expense tool to see some other expenses that might be sneaking up on you.
You want to go shopping; what is the first thing you do? Check your bank account to find how much money you have to spend. What is the second thing? Find the "deals" at the stores you want to go to of course. This mentality is destroying you financially!
What is the most valuable thing that you own? No, it is not your house, your car in the garage, or even your rare collection of Pokemon cards. You share your most valuable asset with everyone around you, are always spending it, and can never get it back. Our time is an extremely scarce resource that we take for granted! The company that you work for knows this and is willing to trade you a paycheck for the hours that you give them. The concept of "dollars per hour" is taught to us on the first day of our very first job. You need to start viewing your spending habits in the same way. Instead of seeing those hot new shoes by their price tag, consider how many hours of your life you are willing to trade for those shoes. Are they those Nikes worth the five hours of your worst shift last week?
Knowing that time is your most precious resource, how do you get more of it? First, you have to understand the difference between liabilities and assets. A liability is anything that costs you money with no chance of it earning any money. Liabilities can also have the negative side effect of costing you money over time to maintain them. Assets on the other hand pay you to own them! Buying a house is usually seen as an asset, however, with these definitions, a house can easily be considered a liability. Owning a home over 20 years will incur yearly taxes, maintenance, and repairs that cost you more and more money over time. In this case, your house is a liability. A house is an asset when it pays you to own it. This can be as simple as getting a roommate that rents a room from you, listing an extra room on Airbnb, or keeping your house when you buy another to turn the first into rental real estate.
Plan to pay for tuition
Continued education is pricey and continues to get more expensive every year. Tuition is just the start of what you will be paying for your degree. Room and board, meal plan, textbooks, parking passes, and much much more. Universities have taken on the pricing model of airlines where hidden expenses will nickel and dime their way through your pocketbook.
The first and best way to avoid excessive spending for a degree is to decide if it makes financial sense to obtain a degree for the field you want to go into. Many professions do not require a degree for new hires and if they do, might not require an expensive university. If you do find that a degree is necessary, you can save a significant amount by getting all of your general classes accomplished at a community college and transfer the credits to the university you want to attend later. This can be tricky though, you will need to confirm with the university that all of the credits you take will be accepted and will apply toward your requirements.
Saving up and acquiring scholarships seems like an obvious next step. These do not need to cover all of your tuition, even covering your textbooks can save you thousands throughout your college journey. This also extends into while you are attending school. Avoid taking out loans to pay for living expenses if you can maintain a job along with your studies. Paying interest on rent is a bad idea. Also, starting to pay toward your unsubsidized loans as soon as possible can avoid the interest trap so many students find themselves in after they graduate. What is an unsubsidized loan? These begin to accrue interest immediately upon being issued but can be put off until the end of your education. Not keeping up with the interest as it accumulates will be absolutely devastating in the long run due to the interest compounding. The next highest priority will be to pay toward your highest interest loans subsidized (do not accrue interest until education is finished). Taking advantage of the 0% interest is extremely useful. See how taking advantage of these interest strategies can play out over the long term.
Plan to buy a car
There is a lot of consideration that often goes overlooked when we are excited to get that new car smell. In the first year, you will lose 20-30% of the initial price of the car if you decide to sell it. That means that a $20,000 car will be worth between $14,000 and $16,000 twelve months after you drive it off of the lot. In that time, you will have invested ~$4000 on car payments. For this reason, it is a good idea to look at last year's model that is used. Someone else has already lost that initial depreciation so you do not have to!
Saving up to either purchase your car in cash or putting up a significant amount of the total price for the down payment can reduce your monthly payment and save you a ton of money in interest payments.
Another point to keep in mind is insurance. A new car will be more expensive to insure and can easily add a few hundred dollars to the monthly expense! When initially planning to buy a car, it is very common to overlook additional expenses and underestimate the true cost. Budgeting for a $300/month car payment, getting the car, and being stuck with $600/month for the loan, insurance, maintenance, and fuel can overwhelm your budget. You might be surprised at all of the additional long term car expenses to consider before buying that new shiny car!
Plan to buy real estate
Buying your first house can be a huge life achievement! Hunting down the perfect location with an ideal layout while staying under budget is both exhilarating and exhausting. However, many people do not consider any farther than these things.
The most important point to think about before buying a house is how long you plan to live there. With all of the fees paid to real estate agents to both buy and sell, the property tax, and depreciation; you have several years before you break even on the purchase. If you sell anytime before this break-even point, you are losing money. While there are a variety of variables that go into determining what the break-even point is on a house, a general ballpark estimate is somewhere around seven years. An alternative, as mentioned above, is to rent out your house after you live in it for a few years. This provides an income while spreading out those fees so you do not lose out by selling too early.
How much should my down payment be? If this is going to be a house you plan to live in for decades, while not advisable, can get away with as low as 3.5% (580+ credit score) for the down payment. However, lenders reward higher down payments with better odds of approval for the loan, better interest rates, and avoid mortgage insurance (20% down payment minimum). If you plan to immediately turn this house into a rental property, you will need a minimum down payment of 15-25%.