Good Money Blog

Saving is about common sense, resistance to temptation, and personal priorities. Have you done the right things?

1. Consumer Debt: It’s hard to find a good reason to support that it’s brilliant idea to carry any kinds of consumer debt with an APR of 10% or more. If you have one, you should ask yourself why there is one. Kill it ASAP or you will find yourself stuck in a debt hole that will only get deeper and deeper.
2. Emergency Fund: Do you have an emergency fund handy? It should total at least 3-6 months of your average monthly expense. It will address emergencies such as major car repair, home repair, medical expense not covered by health insurance, etc.
3. Retirement Fund: If you are in the 20’s, can you afford to contribute at least 10% of your income to tax-advantaged plans such as IRA or 401(k)? Here is a quick example to demonstrate the power of compounding: With an annualized return of 7%, one single contribution of $1,000 invested at the age of 25 with become $7,612 at the age of 55 (30 years later).
4. Being a Homeowner: Have you saved enough down payment for a home? If you’re living with your parents, do you think your parents’ home is big enough for your own family? Likely not. You know you’re ready to buy a home when you can afford a traditional 20% down payment.
5. Investing: What have you done to the money you don’t anticipate to use in the next 5 years? Your best bet is investing in the stock market. Over time, the average stock market return is 10% annually.
6. Saving: What have you done to your short-term cash and emergency fund? Checking accounts earn you next to no interest. Consider certificate of deposit (CD), money market accounts (MMA), or saving bonds (I Bonds) for higher interests. Don’t forget to shop around for online savings accounts.
7. Car: Don’t drive a car you can’t afford. You probably can’t afford a car that requires you to take a car loan or lease.
8. Simple Living: How much are you paying for rent/mortgage alone? You’re probably paying too much house if your home costs more than 30% of your before-tax income.
9. Spending: As a general guideline, your monthly spending should not exceed 50% of your before-tax monthly income. Review your bills, you can probably cut down at least 10-20% spending by dining out less often, buying less junk, downgrading the TV/Internet packages, etc.
10. Budgeting: Have you kept track of your money with software such as Quicken or Money. My take: If you know where the money goes, you can easily figure out how to recapture it. Remember: “Money is good when it is well spent.“

Here are some rough estimates:

• A fine used car costs between $7-15K while a new car can cost as much as $20-50K. Typically, highly-priced cars also mean higher auto insurance and depreciation cost.
• On average, people spend $25K on a wedding and around $2-4K on an engagement ring.
• A single-family home costs approximately $150-500K across the US. A traditional 20% down amounts to $30-100K.
• A 4-year degree at a private college costs $160k today. College tuition rises faster than the nation’s inflation rate at 6% or more per year.
• For a 25-year-old man making $50K/year who plans to retire at 60 and lives for 25 additional years, he will need at least $800k in today’s dollar to maintain the same quality of living during his retirement (assumption: 3% inflation).
• If the same man contributes just $1K/year to his retirement account for the next 35 years, he will only have $200K when he retires (assumption: 8% annualized return).