This is a list of what I want my kids to know about finances before they move out on their own. I wish I would’ve had a list from someone who’d made a bunch of financial mistakes and learned from them. Here’s to hoping my kids learn something from me. A mom can dream right?
1. Make a budget and spend less than you make! Know how much it costs for you to “live” each month. What’s that number?
I was helping a friend a few weeks ago, with some financial stuff. This was one of my questions (How much does it cost for you to live each month). Then I realized, I didn’t know the answer for my own household! I came home and figured it out. It makes a difference when you know that number and know how much extra you have left over. It keeps your daily spending in check.
2. Save at least 10% of your income.
3. Don’t buy a timeshare from the company. Buy second hand and save 50-75%. Timeshares will ALWAYS cost you $ even after they are paid off. There’s a thing called maintenance dues, that you get billed quarterly whether you use your weeks or not. Then if you’ve used up your few cleaning tokens for the year, you have to pay $90 cleaning fee on top of using your credits.
Usually it’s a better deal to rent the week you want from another owner and skip the dues. We pay over $1200/ year in dues. But since my husband is a fireman with lots of days off, we actually use our timeshare and it’s worth it to us in the end.
4. Don’t roll your debt (car, credit card debt, etc.) into your home loan. You lose your freedom to leave, sell, refinance, etc. Plus who wants to pay more for something than you have to. There’s a reason car loans are 5-6 years vs. a 30 yr loan. Cars don’t last that long, you don’t want to still be paying for it long after it’s gone.
5. Never let a bank tell you how much you can afford to spend on a house. You should be spending WAY less than what they qualify you for. Housing should be about 25% of your income.
6. ALWAYS pay attention to the price NOT the payment. Everyone thinks they can afford another $140/month payment, and that gets to be a slippery slope.
When I was 6 months pregnant with our first baby, we went to a timeshare presentation for the “free trip to Vegas”, We had no intention of buying…but guess what? $140/month we can do that! ok lets buy and make memories with our new little family! What were we thinking? $11,000 of debt! I was going back to work only part time after the baby, and we were already tight with my full time income.
7. Never get a 30 yr mortgage! Ideally get a 15 yr, 20 yr max. If you get a 30 yr mortgage, you will pay 2.5 times what your house is worth. How is that an investment?
We got a 30 year mortgage when we built our first house in the middle of nowhere when we were just kids back in 1999. We didn’t know any different. That was the standard. No one gave us a different option. I didn’t know enough to ask for anything different. Play with mortgage calculators online and see what the difference would be to get a 20 yr instead. You would be shocked by the small amount.
8. Quickest way to get ahead if you have a dual income household, is to live off one income and either save the other or apply the other to your debt until it’s gone. That’s what we did, and by the time I turned 34 our house, cars, and basement were paid for.
9. Pay off your credit card EVERY month. NEVER pay interest.
When we first got married, we kept our accounts separate and one time I happened to open Heber’s credit card bill, 28% interest!!! He had no idea it was that high. There wasn’t a huge balance on the card, but there was a balance, and I don’t like to throw money away.
10. Don’t get sucked into the idea that paying off your house isn’t a good idea because you need a write off. Way more $ stays in your pocket after your house is paid off than any write off you’d get.
11. If you pay an extra payment on your mortgage every year, you will cut 7 years off the life of the loan.
12. When you get your mortgage statement each month. LOOK at it. Realize how much is going to interest. On our first mortgage our payment was $1,035. $900 of that went to interest. HOLY CRAP! Once I understood what a crappy deal that was, I started putting any extra $ I had to pay it off faster. In the end we paid off our primary residence in 10 years. I was 34 years old.
13. Whole life insurance isn’t an investment/retirement strategy. Buy term instead. We just cashed out a policy we had been paying into for 9 years ($675/month). Guess how much we earned in 9 years…$0. Actually we lost about $4,500 once it was all said and done. Granted some of that paid our premiums for life insurance ($110/month premium). Which is great if our intent was to have coverage, but our goal was retirement. We already had some other term insurance through Heber’s work, so this was wasting our $.
I decided to take the $65,000 and pay it toward our investment condo. Which means I’ll only have $12,000 left till it’s paid for! Once it’s paid for we will cashflow about $700/month after expenses EACH month. That’s $8,400/yr profit compared to $0. I didn’t feel bad cashing it out. Yes, we had to pay a $1,500 surrender charge–but with saving $200/month on the interest on the condo it made sense not to hold out another year for $0 surrender charge. These policies always have a HUGE surrender charges which can be $7- $10,000 in the early years.
14. If your car isn’t paid for, that’s debt. If your house isn’t paid for, that’s debt. You aren’t debt free if you owe on your car or house. Those are the only things that you should go into debt for.
15. Don’t finance your toys. These are wants, not needs. If you want these things, then save up and pay cash. If you choose to afford these things, pay for them outright. The more you finance, the less freedom you have to make choices later.
16. Don’t finance trips. IF you can’t afford a trip, then get creative. Use reward cards for sky miles, car rentals, hotels, etc. but be disciplined enough to make sure you don’t pay interest on these cards.
17. Don’t eat out regularly. This gets expensive. If you are leaving the house and know you’ll be gone for 3-4 hours, pack a lunch, pack some snacks. No reason to waste all your hard earned money on something that is consumable.
Every time I do appointments out for work, I pack a lunch. It saves time and $. I don’t have to drive around for 10-15 min in some neighborhood I’m not familiar with trying to find something to eat.
18. When you refinance a house, you are starting over and adding $3-$5,000 to the principal for closing costs. So unless rates have dropped a significant amount at least 1.5%, it’s not worth it. Never get an ARM (adjustable rate mortgage), always get a fixed rate. If you do refinance to a lower rate keep paying your old payment to pay the house off quicker.
The first time we refinanced, we did so because we were told we’d save $100/month. Great! Then we went to closing to sign all the documents after the appraisal was already paid for ($500), and I noticed the balance we owed was about $3,500 more and we were at 30 years again instead of 29 years. I didn’t know there were such huge fees associated with a refi.
19. Use mint.com. It’s a free online service were you can upload all your accounts. Banking, investments, credit cards, retirement accounts, etc. You can create budgets for different categories (gas, groceries, shopping, home), and you can see how much you’ve spent through out the month at any point in time with a simple few clicks of the mouse. This way both spouses can login at any time and be in the know.
Ignorance isn’t bliss forever. It’s your responsibility to know what’s going on with your money.
Making correct choices with your finances is like making correct choices in life. I know it feels more restricting, but in the end you actually have more freedom. The freedom to take a trip last minute, the freedom to switch jobs, the freedom to buy a second property, the freedom to become an entrepreneur, the freedom to choose to work less hours. You’ll have less stress when your car breaks down, less stress when you are waiting 3 weeks for a client to mail a check. It frees up your headspace to think about life instead of $.
Here are some other financial posts I’ve written in the past.
Christmas isn’t an excuse for a free for all
Lots of good advice! I am a single woman and the only debt I have is the house. My rate is 2.875% and I pay an extra $100.98 a month on the 15 year mortgage. I will be paying more once a family situation is resolved and I don’t have to save all my extra money to pay an attorney. I’m with you on paying off the credit card every month! I dump 23% of my gross into a 401(k) and my car – a 2002 Mitsubishi Eclipse that runs like a clock – has been paid off for years. I have been thru hard times so not having a lot of debt and having great credit helps so much! I think it is also good to set up an emergency fund in a separate account that could cover all your expenses for two to three months. I also have a separate account that I put money in on a monthly basis to cover taxes and insurance.
That is such a great rate on your house! Good job paying extra and getting a 15 yr loan. Being proactive instead of reactive with finances makes me feel much more in control.