Our current economic environment is a little scary—and depending on your unique situation, it may seem downright terrifying. Unfortunately, these tumultuous times have driven many consumers into a frenzied panic, but it’s important to stay calm and keep sight of your overall financial goals.
With the proper planning, it is possible to save for your financial goals even in today’s harsh economy. Here’s some advice when it comes to saving up for three of the most daunting money challenges:
Buying your dream home
If you’re looking to save up for and buy a home, you have your homework cut out for you. First and foremost, you need to take a close look at your current finances. Do you earn enough to pay a mortgage payment? How much can you afford to spend? Will buying a home detract from your other financial goals, like saving for retirement or your child’s college education?
Experts say you should spend no more than 28% of your gross income on home costs, including your mortgage, property taxes and homeowner's insurance. If the expenses of buying and owning a home add up to more than 28% of your annual earnings, the time may not be right for you.
If you’re currently carrying around a hefty load of debt, you should focus on paying that down before you buy a home. Your total debt expenditures, including credit card debt, student loans, car loans and home debts should add up to no more than 36% of your gross income.
Before you even start home shopping, order a credit report. Most lenders require a credit score of at least 720 before they’ll offer you a loan on even the cheapest mortgages.
If your credit score is high enough to qualify you for a mortgage, the next step is choosing the right mortgage. While adjustable-rate mortgages (ARMs) typically include lower payments than fixed-rate mortgages, fixed-rate mortgages offer the peace of mind of an unchanging mortgage payment. While your monthly mortgage amount can change with an ARM, it will always remain the same with a fixed-rate mortgage. Plus, in recent months, fixed-rate mortgages have become more affordable. Therefore, experts are strongly encouraging homebuyers to go with a lower risk fixed-rate mortgage.
Saving for college
College costs are sky-rocketing, and the price tag increases almost every year. While a select few receive scholarships to pay their way, most students end up taking out student loans, which eventually have to be repaid. If you don’t want your child to be stuck paying back loans for years to come, it’s up to you save up for the hefty price of tuition.
You'll want to consider a Coverdell and/or a 529 college savings plan. Earnings in these plans grow tax-free, and withdrawals are not taxed as long as they are used for legitimate education expenses. You can put as much as $2,000 into a Coverdell each year, but you can contribute far more to 529 plans—sometimes up to $300,000 per person.
If you can’t save enough to cover the college tab in full, you may want to explore government loans. These loans are typically cheaper and offer fixed interest rates. However, every unique family’s situation is different. Talk with a financial professional about the most effective way to save up for your child’s higher education.
Building a nest egg
When it comes to planning for retirement, it’s never too early to start saving. Far too many consumers wait until a year or two before retirement before they come up with a retirement plan. According to the 2007 Retirement Confidence Survey, only 60% of workers say they are currently saving for retirement. Unfortunately, those who wait are often the people who outlive their money.
If you want to ensure a comfortable retirement, you need to start saving right away. Diversification is key—if you put all your eggs into one basket, and that basket takes a fall, your retirement savings could be gone in a blink of an eye. Experts say you should have no more than 5% of your net worth in any one position.
If your employer offers a 401(k) or another employer-sponsored retirement plan, by all means take advantage of it. If you put a certain amount into these funds, employers will generally match you contributions.
If you don’t have a retirement plan at work, open an individual retirement account (IRA). In 2009, you can contribute as much as $5,000 to a traditional or Roth IRA and up too $6,000 if you’re 50 or older.
Of course, every person will have unique financial needs after retirement. Meet with a financial advisor to come up with a winning retirement game plan. A professional can help you set realistic retirement goals, recommend the best investments and keep you on track.
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