7 life events you need to start saving for
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Nobody has their entire future mapped out. You might not have set plans to buy a house or to go back to school, but these events could become realities down the road. By the time you warm up to being a homeowner or pursuing a graduate degree, you might not have the necessary funds if you don’t start putting the pieces in place now.
That’s why you need to start budgeting and saving for the following seven life events. Even if some of these events don’t come to fruition, it’s better to be prepared and have options than be stuck with a lofty, unaffordable price tag.
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Covering the unexpected
Life is unpredictable. “Expect the unexpected” is an admirable principle to live by, but the reality is you can’t foresee the future. However, you can be financially prepared for it.
An emergency fund protects your pockets from life’s biggest cost curveballs, such as losing your job, totaling your car or incurring a significant medical bill. If you live without an emergency fund, you’re one bad day away from a financial hole.
How much you put in your emergency fund is up to you, but the standard is between three and six months’ worth of expenses. Think of it from this perspective: If you lost your job (and primary source of income), how long would you need to get another? That should help you determine the right amount of savings that’ll make you comfortable.
Last but not least, put this money in a high-yield savings account so that you’re still earning some passive income in the process.
Buying a house or car
The two most common assets people buy in their lifetimes are vehicles and houses.
The average car lasts about 12 years. Assuming you rely on a vehicle to get around, you’re bound to make some form of car purchase. Depending on your vehicle preferences, new cars cost anywhere from $20,000 to $55,000. While used options are typically cheaper, they can still cost thousands of dollars.
But a car’s price tag pales in comparison to that of a house.
Houses aren’t cheap — and neither are mortgages. Closing fees alone can run around 3%-5% of your loan. On top of that, it’s not uncommon for borrowers to pay tens of thousands of dollars in interest over their mortgage terms, which are typically 15 or 30 years.
One way to combat loan interest is to save for a higher down payment. The average down payment for a mortgage is about 6% of the loan, but 20% is the standard recommendation if you can afford to do so. You’ll put yourself in a better position to receive better loan terms, a lower rate and a lower total loan cost.
You’ll also have to account for moving your stuff. Moving is a hefty expense and chore. If you want to avoid some of the headaches (and backaches) associated with moving, you may want to consider allocating some savings to moving expenses, such as movers and cleaning services.
Starting a family
Starting a family is a major financial commitment. From diapers, toys and strollers to sports equipment, cellphones and clothing, children cost a small fortune. According to the U.S. Department of Agriculture, the average cost of raising a child is $233,610 — which doesn’t include paying for college.
There are a lot of decisions that go into starting a family and raising children, but one way to prepare is to open and contribute to a 529 plan on a regular basis. This investment vehicle not only offers tax advantages but also can help your child afford higher education later on.
Related: Best credit cards for families
Going back to school
Speaking of tuition, you may want or need to go back to school someday. Maybe you want to get a law degree and become a practicing attorney — or maybe you decide to pursue your lifelong dream of teaching, so you return for a master’s degree in education. Whatever the reason, you’ll have to account for rising tuition costs. Depending on the degree, your annual tuition bill could be tens of thousands of dollars.
Changing careers can be a lucrative endeavor — but it can also shake up your income stability. While it’s usually best to have a job lined up before you leave your current role, that’s not always the case. A bad work environment or unfulfilling position may push you out of a role before you’ve found another one. Or maybe you experienced the misfortune of being laid off.
Regardless, you can help bridge the gap between jobs by setting aside money ahead of time. If you anticipate changing careers soon, it would be prudent to set aside more runway in your emergency fund.
The concept of retirement continues to shift over time, but whether you elect to stop working altogether or shift to a part-time schedule, it’s still important to save, invest and grow your wealth so that you have the option later on.
Related: The best apps for money management
The younger you are, the more time you have to take advantage of compound interest. Unfortunately, the younger you are, the harder it is to prioritize something that’s presumably decades away. But look at it this way: If you start saving now, you’ll be far better off down the road. You’ll maximize the power of compound interest, alleviating future financial stress in the process.
You may want to relocate to an area with a higher cost of living. You may want to buy a summer or winter home. You may want to make frequent trips to visit your family. The financial decisions you make today will determine if you can afford these things later on.
Needless to say, it’s a subjective and non-exhaustive list. Some of these events may never apply to you. That said, it’s still prudent to prepare for the unexpected and save for retirement and other future life needs — even if you’re unsure what they are right now.
Consider applying a waterfall method to your savings allocation. Organize and prioritize the events you anticipate happening. You could set aside more for more pressing needs. For instance, let’s say you’re saving for a house, your child’s education, a future trip and retirement. You could assign a percentage of your monthly savings to each event:
A house (40%)
Child’s education (25%)
International travel (10%)
While these are arbitrary percentages, it gives you an idea of how you can divide funds according to timelines, priority and needs.
Photo by fizkes/Shutterstock.
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