Happy September! I don’t know about you, but here in the Northeast it became cold September 1st – like 40’s. I dug out my winter-wear and have been wearing sweatshirts non-stop! Am I the only one that Fall snuck up on?!?!?!
Anyway, today’s post is all about 5 BIG spending habits that can make or break you. Sure, those lattes and snacks at the coffee shop do add up at the end of the month and it can be quite a substantial amount (I’m a huge sucker for cute cafes and coffee shops!). We can all add some cushion to our budgets by rolling back those expenses. However, I’m talking about the big ticket expense items that may have us bursting at the seams for the entire time that we have them!
Housing
This was our biggest expense that really started our intentional living journey. When we moved states to be closer to family we were starting to budget for a down payment. We wanted a nice house. We worked hard to get through school and the careers we chose. A nice house is part of the American dream and the signature of success right!?!?! We thought we were being responsible with the amount we could spend on a house, but we still ended up over-leveraging ourselves. We didn’t consider all the costs of owning a home, just like many other Americans don’t.
Down Payment
In 2018, a report from the National Association of Realtors stated that 55% of home buyers made a downpayment of 6% or less. For first time home buyers, that number is even higher, at 72% with a downpayment of 6% or less. With less than 20% of your own money invested in your home, you will have to pay private mortgage insurance which insures the mortgage company’s investment in your property in the event you default on your loan.
Because the mortgage holder has so much money invested in your house, they will also want to manage your other home related expenses such as property taxes and homeowner’s insurance. While your taxes and insurance will be rolled into your monthly mortgage payment, your mortgage payment will also include monthly escrow fees to cover the cost of managing your escrow account, which makes sure your taxes and insurance are paid on time in full.
With less than 20% invested in your home, you are also more likely to have higher interest rates – paying more interest over the life of the loan than an identical you with more money put as a down payment upfront.
Property Taxes
Location is everything when it comes to property taxes. You will shell out quite a bit of money if your home is in a prime location with a good school district. No matter where you live, property taxes will most likely continue to increase year to year. They change as new schools and infrastructure are built, so make sure you create enough buffer to account for increasing taxes. If you have a home with an escrow account, you will see your mortgage payment increase as property taxes increase.
Homeowner’s Insurance
As a homeowner you also have to pay for homeowner’s insurance. The average cost of homeowner’s insurance in the United States according to the National Association of Insurance Commissioners is $1,192 per year. Not all homeowner policies are similar, so before choosing the cheapest option to save a buck, make sure you are comparing coverages. It could be astronomically more expensive to pay out of pocket for a claim that was not covered in the first place. If you are having a hard time enrolling in decent coverage due to the cost, you most likely will not be able to pay out of pocket for something that isn’t covered either, and you should probably reexamine the amount you can afford to spend on a home.
Maintenance
Home maintenance can be quite expensive as well. No matter how old your home is there is always going to be the routine home maintenance like lawn care, snow removal, pressure washing, gutter cleaning, furnace cleaning, replacing HVAC filters, replacing water filters, pumping the septic, servicing your appliances, etc., that will help keep your home running well. For some older homes (and not so older homes) there might also be some additional costly expenses like replacing windows, roofing, electrical, plumbing, septic, siding, rotted wood, and painting that you might have to do keep your home safe and habitable.
In summary, all of these expenses can add up quite quickly and make one “house poor”. If such a significant portion of your income is going towards housing, then there will be even less for other living expenses, investments, and an emergency fund. Make sure you are realistically accounting for all expenditures before purchasing a home to save you a lot of time, money, and headache.
Transportation
The average monthly payment for a new car in the United States is $530, while the average monthly lease on a new car is $430, and continues to increase each year. That’s expensive considering a vehicle depreciates at least 10% the moment you drive it off the lot and can depreciate by more than 20% in the first year of ownership. The value only continues to drop by 10% annually for the next four years. If you tend to put a ton of miles on your vehicle, your car will depreciate even faster. If you have to finance your car, you could end up owing more than the car is worth before you pay it off.
While buying a car seems to be a money pit, not everyone is fortunate and able to utilize public transportation or cycling to commute to work and other places. There are certain things you can consider doing to get the most bang for your buck, however. You all know not to buy a new car, but you don’t want to buy a car at the end of its life either or you’ll end up spending all of your money on its upkeep. The “sweet” spot tends to be a vehicle that is between one and four years old that has already experienced its initial drop in value but hasn’t yet experienced its second significant drop. You also want to buy vehicles that tend to hold value longer than others on the market.
Ideally, it would be best if you could pay for your car in cash, but again it’s not always doable for everyone. If you have to take out a car loan, you should make sure your credit score is the best it can be, as those with better credit will get better interest rates. You also want to keep your loan term as short as possible, limiting the time you are paying on a depreciating asset.
I remember when my first car failed me not long before I was to start commuting one hour each way during my grad-school clinical. What made sense for me at the time was to get a reliable vehicle at a decent price. I ended up leasing a vehicle known to retain value and was able to receive student discounts to lower my monthly payment. I ended up trading that car in for a mid-size SUV not long after graduating. By ditching the house that made us “house poor”, the hubs and I were able to pay off both of our cars, ones we still own and hope to for quite some time.
Career
I know most parents want their kids to go to school and get good grades so they can get into a good college and get a good career. However, you are merely more than a child when you decide what you are going to do with the rest of your life. Or maybe you take time off to figure out what you want to do, but continue working dead-end jobs and never truly discover your true passion. I fell into the former category and wracked up a whole bunch of student loan debt in the process.
The last thing you want to do is work a job with poor prospects, where you are underpaid and the environment is less than inspiring. Unfortunately this can happen whether you committed early to your career path or you are still working on finding your passion. You don’t have to work the same job for 40 years, and no matter how old you are, there’s always an option to change your trajectory.
No matter what you choose, you should find a career and environment you enjoy working in and remain aware of current trends in the job market (salaries, advancement opportunities, etc.). Continue to work toward your ideal career and financial goals. If, for whatever reason, you aren’t able to make the necessary adjustments you want to in your career or at the pace you’d like to, a side hustle is the perfect opportunity to explore different career paths and passions while generating some additional income.
Investments
If you’ve made good choices in the above categories, you should be able to save a decent amount of money to invest. The reasons most people don’t invest is that they feel they don’t have enough money or time, they don’t trust the stock market, they are afraid to lose money, or they don’t know how to invest.
While you don’t need to max out your investment accounts when you are just starting out, getting started is better late than never. A little research can help you start asking the right questions. What are your retirement goals? What is your risk tolerance level? What are you investing in and why? What are the fees associated with your investments? Fees can kill your bottom line so you’ll want to look for low-fee high-performing investments that fit your financial goals.
If you accept that the stock market goes through cycles and don’t panic when the market is in a downturn you will be much better off than those who panic and pull their money out.
Emergency Fund
Did you know that 78% of people live paycheck to paycheck? The percentage of people with less than $1000 continues to climb as well – which was up to 58% in 2017. One mistake, mishap, or disaster could impact your family’s life and financial burden for many years to come. If you are continuously playing catch-up, it’ll be incredibly harder to get ahead.
Emergency funds do not happen overnight, and we all know that unexpected expenses pop up. However, having an emergency fund helps minimize the impact the unfortunate event could have on your life and finances. Work on trying to save $1000. Once you’ve saved $1000, ideally your next goal should be 3-6 months in expenses in the event you were out of a work for a short period of time.
Bonus: Interest
I briefly talked about this above. Every time you take out a loan you generate interest. As I’ve discussed before, I have a significant amount of student loans. My goal is to pay those off sooner rather than later to decrease the amount of interest I’m paying over the life of the loan. Currently I have two loans left that started out with similar balances. The loan I’ve been paying extra towards has a significantly reduced principal balance from when it started. The student loan I’ve been paying the minimum amount on – most of my payment goes towards interest and the principal has barely declined.
Interest applies to mortgages, auto loans, student loans, credit cards, and any other financing you may use for furniture, appliances, or home improvement projects, etc. Yes, you may be able to afford the minimum monthly payments, but you might be quite shocked as to how much money you actually spend over the life of the loan. In some instances you may pay double what the original item cost! Was the item worth taking 4 years to pay off? Did that item already break and have to be replaced? Imagine what you could afford if you weren’t paying interest.
Being mindful of how much you are spending in interest can help you prioritize your purchases and save for the less emergent, nice-to-have-but-not-necessary items.
