When you have all your current expenses, needs and wants comfortably in your budget, you may be tempted to stop there. You may even have an emergency fund in place. And that’s all great! But don’t stop there. When you have your needs covered and your emergency funds (both your $1000 in cash and your 3-12 months income backup) in place, start focusing on saving.
Buying a house is a great move for many people (but not all). If you don’t anticipate moving often, buying a house will help you build equity, inflation proof a large part of your budget, and set you up for much lower living costs once your mortgage is paid off. And all this for not too much more than the cost of rent.
However, while you can buy a house with 0% down on your mortgage, these loans usually come with extra costs- most significantly PMI, an insurance product that protects lenders in the case of default. It is also harder qualifying for a mortgage in these cases. You’ll also be stuck with a higher mortgage payment and paying more interest over the life of the loan. Instead, try to wait until you’ve saved at least 20% down. And if you can put more down, do it!
While buying a house is prudent in many or most cases, you can still have stable finances while renting. Retirement savings, on the other hand, are non-negotiable. Don’t bank on Social Security. Even if it still exists when you retire, consider that a small supplement to your overall retirement plan. Also, don’t plan on working until your dying breath. Even if you love your job, in all likelihood, health issues and aging in general will eventually keep you from working full time. Regardless of your expectations for old age, it will be much easier to plan for the worst and end up with more than you need than running out of money when your earning potential is gone.
Unfortunately, retirement is another area where Americans are critically unprepared. If you do fall in the 1 in 3 that don’t have anything saved for retirement, or the many more that have under-saved, start today! Start contributing to a 401k at work, or if that’s not an option, Betterment makes saving for retirement extremely easy. And there’s no minimum initial deposit. $10 will take you out of the 1 in 3 that hasn’t started saving for retirement. The sooner you start saving and investing those savings, the more you can make compounding investment returns work for you, and the less you need to set aside each month. Don’t wait til the future to start planning for the future.
Cars depreciate and age, and your current car will eventually need to be replaced. Plan ahead for that and save for your next car rather than taking out a loan each time. Over the years, this will save you thousands of dollars in interest payments on car loans. Being able to buy a car with cash also puts you in a much better negotiating position at the dealership. Another benefit is not having a car payment, meaning your budget is much more resilient to income drops such as a job change or loss.
Saving Is the Antidote to Debt and Gives You a Stronger Future
I’ve mentioned 3 important areas to save for, but there are other smaller areas. In some of the areas, you may not have a clear goal of how much to save, in which case, I’d suggest simply saving as much as possible. Of course, don’t neglect to enjoy today. But enjoying today doesn’t mean you have to spend every spare dime today. The future is unknown, but you’ll almost never regret saving too much in the future. Saving keeps you from having to depend on debt and opens up countless options. So constantly be on the lookout for places and ways to save more.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.