How to not wake up in the middle of the night stressed over your big money goals
P.S. there is a gift at the end so read all the way
Do you ever get up in the middle of the night stuck on some financial thought? That was me this morning at 3 am realizing that compound interest works against me if I am a borrower. Most of my friends between the ages of 30 and 40 are in this really intense life phase where everything seems to be happening for us at the same time.
- Finishing graduate school
- Moving to new jobs or looking for jobs
- Buying the first decent car because you have a new job in a place that requires driving
- Paying more rent because you are no longer living with roommates for a variety of reasons
- Paying student loans
- Buying the home
- Planning to go to graduate school which may mean leaving full-time employment
- Getting married
- Paying for weddings
- Starting a family however you do it
- Budgeting for the first year of childcare- the average in the U.S. is about $1,500/mo
- Planning for kid’s education for some of you- you have to pay tuition for the first 18 years, you want to send the kid to private school, and a lucky few are already looking at college costs phew
- Something that I may be missing
These are all BIG things. These are all things that cost a lot of money. These are possibly things that you can’t escape, so how do we make good financial decisions when faced with all these things?
This morning I was thinking about our five-year goal to buy a home and playing around with different scenarios. I really hate commuting. If we decide to buy a home in Wellesley or pretty close by and put down 20% to avoid PMI, then we need to save between $50,000 and $100 000 -could be more. Greater Boston is where dreams of homeownership go to die.
Keeping with this example or whatever goal you have, I think there are a few things you can do to reduce anxiety and extend your sleep hours. Ignoring the future is an attractive choice, but I would not recommend it.
FIRST STEP: Write down the goal: buy a home in five years or buy a car in two years
SECOND STEP: Figure out how much you need – if you want a $500, 000 house you need a 20% down payment of $100 000
THIRD STEP: What are all the hidden costs (down payment + closing costs+ taxes + any immediate needs so about $136,000 when you sign)
FOURTH STEP: Calculate how much do you need to save each month to get $136,000 in 5 years assuming an interest rate of 2% in a high yield savings account or money market – so to get that amount you will need to set aside $2,157/mo or $500/week or $71/day.
If you are looking to buy a car in a few years and want to save $6,000 for a down payment/cash payment you will need to save $245.20/mo or $57/wk or $8/day (you can achieve this by taking lunch to work instead of buying or cutting down on a your fav daily snack).
FIFTH STEP: Figure out if this fits in your budget. If saving for the down payment is straining you the actual monthly costs such as a mortgage or car payment might be too high. You can then decide to aim for a smaller home or cheaper car. Your monthly expenses will increase by the number in step 4, so do keep that in mind.
WALKING THROUGH SOME EXAMPLES
*For almost anything you can calculate how much of that item you can afford. There are plenty of good online calculators, and these are some of my favs
- How much house can I afford?
- From Dave Ramsey, Bank Rate(I love their calculators for a bunch of reasons) and nerd wallet. They all do the same thing, but I know some people love having options. Experts say you should not spend more than 25% to 30% of your gross pay on housing (mortgage and all associated fees or rent).
- Mortgage cost – If the house you’ve fallen in love with is $500 000 this is what you need
- $100 000 down payment to avoid PMI (you can always pay less, but it is good to know)
- Decide on a loan length either 15 years (usually lower interest rate but you are paying a lot more per month) or 30 years (slightly higher interest but overall lower payments over a super long time)
- Closing costs – so many costs to think consider. Closing costs can be about 5% of the total value of your home. In less competitive markets, you can negotiate for the owner to pay the closing costs for you. In greater Boston, NYC I have read that sellers do not feel motivated to negotiate this way
- Does your city/ state offer any first-time homebuyer benefits?
- How many cars can I afford? Maybe you are still far from owning a home, but you are looking to get some new wheels. I also love the calculators and posts from moneyunder30. But the internet has a million options
- Cash or financing- most money people encourage you to buy cash, but sometimes you don’t have the money, or you are tired of the used cars that break down. I am not a fan of leasing because it is often the wrong choice for several reasons. – If you are financing you, need to know how much interest you qualify for and save for a down payment. If your credit score is excellent, you might not need to put any money down, but that just means you will owe more. For a new car with good credit, you can get 0% APR. Anything above 3% is a bad deal.
- You want a brand new $30,000 car ulallala – Everyone on earth probably has better taste in a car than I do. We bought a Nissan kicks. It is a basic car – if you want something fancy for say $30 000, assuming you have fantastic credit and get 3% APR you are looking at a monthly payment of at least $500.
- Hidden costs: buying a car as with a house and almost anything comes with hidden costs–
- They might push extended warrant (If you buy a used car; this is a huge issue because the manufacturer’s warranty might be running out. A new car usually comes with a 7-year warranty or for 60 000 miles whichever comes first. If you buy a 3-year-old car, you have four years left on the warranty. If you buy a car with 40,000 miles, you only have 20,000 more miles of warranty. Most people drive an average of 10,000 miles a year just to give you an idea
- Registration and emissions fees – these vary from state to state and tend to be higher for a newer car. Everything is costlier in Massachusetts because our roads are paved in ice cream L
- State sales tax
- Floor holding fee- seriously some dealers will charge you for the time they held the car on their floor – What The Fork (do you watch The Happy Place- you should)
- Documentation preparation fees- you should not have to pay for this, but some dealers are cray cray
- Delivery fees – usually you can tell if there is a fee for this online –with all of these fees you can ask in advance
- Post buying expenses
- Insurance – a financed car comes with a higher cost for auto insurance – you can always call your provider beforehand to get an estimate
- Your town might charge additional taxes (Massachusetts I swear- we had to pay an additional $300 to the town Amherst because we bought our car from a dealership half a mile outside city lines)
Some music suggestions for this week
1. Taylor Swift is on my mind because her new album is out. London Boy is unrealistic, and yet it is a fun song
- Sho Madjozi has a new song. I love that she mixes Swahili and Zulu – amazing stuff also check out the #johncena challenge
- Ishan has a new remix for Kure Kure– he may be trying to compete with the Old Town remixes for the most remixes of a single song