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Mortgage News 5-5-2011
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3 Major Life Expenses You Need to Save For

The following is a guest post from Sarah Damon who writes about financial topics for

Over the course of your life, you’ll have some expenses that will consume the lion’s share of your income. While some of these expenses are easy to predict, people often fail to plan for them, or don’t understand how spending too much affects them in the long run.

In Get Financially Naked: How to Talk Money with Your Honey, authors Manisha Thakor and Sharon Kedar identify some key lifetime expenses that are important for you and your partner to discuss. “Addressing each of these key areas as early on in your relationship as possible will go a long way toward ensuring financial and emotional harmony in your relationship and your budget,” they write. (While their book is primarily about talking to your partner about finances, much of the advice is applicable for singles, as well.)

The three expenses Thakor and Kedar list, along with key points for each, are:

  1. Home. Delayed gratification can be hard, but saving 20 percent for a down payment on your home is the way to go. Once you’ve reached that savings goal, and you’re ready to buy a house, go for a simple 30-or 15-year fixed rate mortgage. Also, realize that despite the prevalent “American dream” of homeownership, buying a home isn’t right for everyone. For example, if it’s possible you might have to move in a couple of years, it doesn’t make sense to bear the cost of buying and selling a home.
  2. Car. Figure out what a car means to you (and your partner, if applicable). Does the car make a statement about your image or is it merely a way to get from one place to another? If achieving future goals is more important to you than the type of car you drive today, consider buying preowned and paying cash for your next car.
  3. Retirement. Sock away at least 10 percent of your gross income for retirement, advise Thakor and Kedar. Create a plan that includes answers to questions like when you want to retire, what your current retirement savings looks like, and how your retirement savings are invested.

Thakor and Kedar recommend keeping your essential expenses (house, car, food, insurance, childcare, etc.) at about 45 percent or less of your gross income. They recognize that for most people, mortgage, car and retirement will be more than 50 percent, which is why it’s important to reconsider how much home and how much car you really need.

While frugal behavior like clipping coupons can add up to savings over time, they mean very little if you’ve bought way too much house, are driving a car you can’t afford, and haven’t saved a thing for retirement. Take care of your major life expenses first, then look for smaller ways to shore up your saving account.

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