Big Money Moves for 2008
How to get ahead with a money strategy that won't leave you broke in 2009.
List Your Spending to Come
Start tallying things you need to save for: Uncle John's wedding (October), Paris vacation (April), and then total up how much you'll need to have in the bank for each. From this figure, plan out a monthly savings goal so these treats don't bring you into debt.
If all of this combined takes you over your monthly salary, cut back on those incidentals and prioritize your fun stuff (can Paris wait a year?). Then think about where you can find the money. Go back to your cash flow and figure out where you can cut spending or ways to increase your income. Do you need a phone plan with overseas calling? Switch to a cheaper package. Can you bring lunch twice a week? Stop buying overpriced panini in the cafeteria. Is it possible to take on a second job or work overtime to bring in some extra dough? What about reviewing your investments and looking into more aggressive growth funds?
List Your Goals
1. Buying a House
We know a good percentage of Nesties who bought a home and put 0 to 5 percent down. We're not saying that's a good thing, but it's possible to own and build equity without going all in with a 20 percent down payment. Just remember that your mortgage payment shouldn't be more than 28 percent of your salary -- and that you probably won't spend your golden years in your first house. If you can stand to live in a place that's not your "dream home" for a little while, you might build up enough money to upgrade after a few years.- Consult a realtor about up-and-coming neighborhoods in the general area you want to be.
- Search the web for a livable place in those areas. Keep in mind that you're just getting a feel for what the homes in those spots look like and cost.
- Play around with the mortgage calculator and learn how much you'd need to put down for specific houses. Add 2 to 5 percent of the home's cost for closing fees. This total number is your 2008 cash goal (for a similar house, of course). Break this up and see how much you'd have to save each month to reach it -- even if it does take more than a year. (One way to save is to force both of you to live off of one salary, as long as it covers your necessities.)
- Put your home savings in a separate account so one of you won't suddenly feel rich enough to buy a new plasma TV. If you've got a large chunk, you can earn even more money by putting it in a six-month CD (check out bankrate.com for comparisons).
- Remember that mortgage lenders can work with you to help pay the deposit and closing fees, but this could mean a higher monthly payment. The government has also been known to cut first-time home buyers a break (gasp!). Check into FHA loans and the lender Neighborhood Gold.
2. Paying off Bad Debt
While it's true that if you make your monthly payments on time your credit score can still be good, having debt unfortunately inhibits most big future plans. However, creating a budget to get you out of debt can help keep you out forever. The rule of thumb? Your overall (good and bad) debt shouldn't be more than 36 percent of your total income. Here's how to get started:- Figure out what's good and what's bad when it comes to debt. Mortgages and tuition loans are good-ish. Credit cards and car payments you really can't afford are bad. We know we're oversimplifying, but you get the idea. If you can't afford it (house, car, clothes), think about downsizing.
- Reorganize the bad debt. Trade the car in for a less expensive model (we know it hurts, but you have to make sacrifices to get out of this situation). Combine credit card balances to the card with the lowest interest rate, and then pay as much as possible to get rid of what's left on the card with the highest interest rate. Can't combine? Negotiate the interest payments with your current cards by calling and telling them you have a lower offer from a competitor. Threaten to leave their service if they can't match or do better.
3. Starting a Family
Those little bundles of joy aren't cheap! According to a survey by the U.S. Department of Agriculture, it costs between $172,370 to $344,250 to raise a child to age 17 (depending on household income). Plus, if you're planning to take an extended leave from work or become a stay-at-home mom, you'll need to save more than someone who's returning to work in six weeks.
4. Saving for Retirement
There are no loans for getting old. Here's your chance to sock away for your 70s (and beyond). We know it's difficult to think about retiring when the work milestone currently on your mind is free donuts in the conference room.- It's a major mistake if youre not participating in a 401(k), especially if your company has a matching program. Contribute at least the minimum to get the match, then re-evaluate every six months and see if you can up your contribution by one percentage point. This is also the time to review how the money is invested and make sure your current strategy is still right for you. Money doesn't grow on trees, but time grows money.
- Yup, that good old 401(k) again. It's worth two mentions. Nearly half of all Americans don't contribute enough money to get the company match. Do we need to sign the papers for you? It's free money, people!
- Start an Individual Retirement Account (IRA) that allows you to set aside and invest money each year; the earnings are tax-deferred until the money is withdrawn at retirement. The maximum contribution for 2006 and 2007 is $4,000 (it'll jump to $5,000 in 2008). You can open the account with your bank or a brokerage firm, and like a 401(k), you need to re-evaluate every 6 to 12 months how much money you invest and where.
- Start a Roth IRA -- if you're eligible. With Roth IRAs, you don't get a tax break for contributing, but all earnings are tax-free. But there's a catch: A married couple can't earn more than $156,000 a year.
- Sock away any unexpected cash. We're not talking about skipping the movies and putting $20 into your IRA. We mean if you come into some money, like the year-end bonus many of us are expecting or just received, why not pretend you never got it (as long as you don't desperately need it)? Before you prespend it three times over, create a wise agenda for the funds. Perhaps half will go to pay down debt, and the other half will go to your 401(k) if you haven't already maxed it out. Another way to divide your bonus (or tax return or any extra cash you're lucky enough to earn) is in thirds: 1/3 to debt, 1/3 to retirement, and 1/3 to save for something fun like a vacation or new granite countertops in the bathroom. Or use half to pay off some student loans with mega interest rates and put the other half toward a Parisian vacation. Adieu!
Michelle Maton, a CFP at Aequus Wealth Management Resources in Chicago, IL
Brette Sember, author of Your Practical Pregnancy Planner
Mari Adam, a CFP at Adam Financial Associates in Boca Raton, FL
Jessica Smith, a CFP at Catalyst Financial Planning & Investment Management Corp in Oakland, CA