All of us are bombarded constantly with advertising that screams at us to buy a new flat screen television, get a mortgage on a bigger house, get that new car you’ve always dreamed of, and on and on. None of us are immune from this constant blast of commercialism, and I have to admit that I too, have succumbed, to this myself, namely by purchasing a car that I thought would confer prestige, but only wound up conferring a large monthly payment. I was thankful when I finally sent in that last payment!
There’s nothing wrong with dreaming big, if none of us did, we’d probably all still be living in caves roasting meat over an open fire, but dreaming has to be combined with reality, too. When you are considering a large purchase, after asking yourself whether you can actually afford it or not, you have to decide how much of your monthly income you will be able to spend.
Whether or not you’ve ever been bitten by the spending bug, I’ll list some guidelines that might help you avoid the hassle I had in paying for that car.
Purchasing a Home
For nearly all of us, buying a home will be the biggest and most important purchase we will ever make. We’ve all read and heard about the horror stories that people have had with trying to keep up with their mortgage payments, so a bit of wisdom and caution are called for. In order to pay your mortgage comfortably, your monthly payment should not be higher than about 1/3 of your monthly take home pay. Watch out for variable rate mortgages, too, your monthly payment can skyrocket if interest rates rise.
You should always keep in mind that owning a home involves more than just making loan payments; you will have to pay for insurance, unexpected repairs, and normal maintenance. All utilities will be your responsibility as well, and you will also have to pay property taxes. Even if your previous rent is equal to your mortgage payment, there will be more out-of-pocket costs for you now; you won’t have a landlord to pick up the tab for repairs.
If you have figured out how much of your monthly income can reasonably go for paying for your mortgage, you can then start to look for a home. Several online sites, including Zillow.com has a handy calculator to help you find a house you will be able to afford.
Banks or mortgage companies will base their willingness to lend to you on a number of factors:
- Your income.
- Your credit rating.
- The amount of your down payment.
Not surprisingly, the bigger the down payment, the more eager the lender will be to give you a mortgage or a deed of trust. You should probably hope to be able to put 20% of the home’s price as the down payment, although many lenders will give you a loan for less of a down payment than that. Keep in mind that the better your credit rating and the larger your down payment, the rate of interest will be lower and your debt will be easier to pay off.
I didn’t really need a new car when I took on my ball and chain, my old car was perfectly fine, I just allowed myself to be snookered in my slick advertising and my own ego. Don’t let this happen to you, and avoiding this spider web might be easier than you think. To start with, if you’re buying a new car, you don’t want your car payments to be more than about 15% of your monthly after tax income. You still have rent or mortgage payments to make, remember?
Besides the car payments themselves, you also have insurance, gas, and scheduled maintenance to take care of. Because the price of new cars is so high in many cases, loans are actually given for up to 7 years! However, the longer your loan lasts, the more you are going to be paying in interest, so getting a less expensive car that you can pay off more quickly is a good idea.
For those of you who may have a somewhat strained budget already, why not consider buying a used car? I know, I know, you’re already saying “But, I’m just buying someone else’s headache!”, and that can be true. You can avoid some of those problems if you purchase a CPO, Certified Previously Owned, vehicle which offers you a guarantee that it won’t die within a week. A CPO will cost a bit more than a regular used car, but you will be able to depend upon it to get you where you need to go.
If you really turn your nose up at a used car, even a CPO, and insist on a new one, then try waiting until the sale that will be held at year’s end. Not only will the dealer have to make room for the new model cars, but he will have to pay tax on any leftover inventory. You can sometimes cut a really good deal at this time, but don’t think that offering cash is going to lower the price any further; the dealer will want to sign you up for a loan. If you play your cards right, though, you can probably get a loan with a very low rate of interest, and if you want, just pay if all off after a payment or two (make sure there are no penalties attached to early payment).
Adding a Bit of Luxury to Your Life
There are times when something ‘sparkly’ adds a bit of joy to our existence; when a bit of bling just picks up a long, dull week. You might see a piece of jewelry or designer handbag that just cries out to you, and who would not be tempted by some of the items you might see on Amazon or other sources that might persuade you to buy. Remember, these sites are designed to get you to spend your money. However, going into debt to buy a new necklace or high end shoes is simply not the best idea in the world. When you are thinking of buying something special for yourself, pay cash. If necessary, save up for a couple of months and then buy it.
You can often find great savings on luxury items if you don’t mind buying previously owned goods. These often have little or no wear and will usually be indistinguishable from brand new. You might want to check out sites such as Poshmark, Tradesy, and The RealReal.
Getting Away from It All
While a change is as good as a rest, you don’t want your vacation or getaway to impact your household budget. To keep vacation costs in line, it’s helpful to assign no more than 5% of your after tax income to travel.
Planning ahead for your travel also makes good dollar sense – the farther in the future that you secure your airline tickets, car rental, and hotel reservations, the lower in cost they will be. I want to take a trip to Spain next year, so right now I’m putting some money aside every week in my PayPal account and will soon have enough to get my tickets. I secured by room in Madrid with a credit card, but will pay cash for it as soon as I arrive. Buying tickets on Tuesday can also be a good way to save money.
Easy Ways to Save
Now that I’ve gotten that automotive millstone paid off, I actually have some money left after my monthly bills are paid. If you want to start putting away a nest egg, but find temptation too tempting at times, here are a few ways to save painlessly:
- Digit moves money from your checking account to a savings account after watching your spending patterns for several days. Sign up and withdrawing money from your account is free.
- SmartyPig works something like Digit, but this service pays you interest on your balance, and like Digit, there are no fees for withdrawing your money.
- Qapital is another savings plan that withdraws small sums of money based on your spending to squirrel away until you need it.
All of these above savings services have overdraft protection built right in, and all are insured with the FDIC, so you know that your money is safe.