One of the keys to getting ahead financially is learning how to predict how much money you will need in the future and for what. If you’re in a state where you make money but it’s constantly going out the door immediately and you have no idea where it’s all going or when, odds are you will not get ahead until you commit to making a change. If that is you, the first key to changing your situation and making it better is to set up a regular budget and following it as strictly as possible. My first blog post goes through this in detail for that very reason. If you cannot get ahead of your recurring expenses first, you’ll have an even tougher time getting ahead of your big expenses as well.
What do I mean by “big expenses”? I am referring to the larger purchases that are not necessarily recurring monthly like many of your regular bills but will still eat at a huge chunk of your income. These can refer to almost anything, depending on your individual circumstances, but today I’ll highlight 5 key areas that most of your big expenses are likely to stem from.
1. Housing
This is usually the largest expense for most people, both in terms of recurring monthly cost (ex: rent) and also future costs as well. The cost of housing, especially if you choose to buy instead of rent, has skyrocketed in recent years and the average insurance rate on mortgage loans has more than doubled in the past few years. Knowing when to buy versus rent is one of the biggest decisions of your financial journey and a house is usually by far the largest purchase people will ever make. So, it’s not one to rush into quickly and I’ll cover the differences in much greater detail in a future post.
For now, look at your own housing expenses. If you’re renting, the monthly rate and any utility expenses that come out of your pocket are the only costs you should be worried about. If you are planning to relocate, consider the cost of where you want to move to compared with your current situation. If it’s more expensive, can you afford it within your budget? Consider the cost of application fees, security deposits, and moving expenses as part of this as well. It can easily cost you thousands outside of just the monthly rental rate, so plan it out in advance, if you can.
If you own your property, you must not only look at your current mortgage payments and utility bills, but any maintenance costs as well. Are there any repairs your house needs or soon will need? If so, how soon do you need them? Get multiple estimates in advance and compare and contrast your options. Home repairs or any form of refurbishment can also be quite expensive, so sit down and identify which costs you expect to run into in the next six months, if not the next year.
2. Education
Education is a massive expense for many households as well, especially at the college level. If you’re in school right now or you’re planning to attend it in the near future, consider what you’re paying right now (yes, this includes loans) or what you expect you will be paying. If you are currently enrolled in a program and you are borrowing money to pay for it, always review each new semester carefully. How much have you borrowed in total? Can you afford to pay anything out of pocket now? I can tell you as a current graduate student myself that making out-of-pocket payments for tuition is not extremely difficult, but it is better than racking up a higher student loan debt. Your future self will thank you. Get eyes on the current balance for every loan you have borrowed until now. How much is interest adding to it month-over-month? Is there any way you can make payments early? Even small ones will make a difference in the long run.
Maybe you are not in school yourself, but you have children that soon will be. I don’t even have any kids of my own and I’m already worried about how expensive college will be by the time they graduate high school. 529 investment accounts can be a great option for building a college tuition fund, especially if your kids are still years out from that point. I’ll eventually discuss some of the good 529 options eventually in a post of my own, but I certainly encourage you to do your own research in the meantime.
3. Healthcare
There’s no doubt that healthcare is a massive expense both for countries as a whole and at the individual and household level. This is especially true in the United States, where our endlessly confusing model of private-public healthcare blending ends up making expenses much higher for individuals (more on that later). In fact, after losing a job, medical expenses are the second-most common reason people file for bankruptcy.
This is a tricky one and I am far from an expert in offering the best available advice in terms of healthcare costs. It certainly goes without saying that having a good health insurance plan will counter most of the risk of incurring high levels of medical debt, though that is definitely easier said that done for many. If you already are covered by some form of health insurance and you do not currently owe any medical bills, one of the best things you can do to reduce the chances of high medical expenses in the future is to simply learn more about healthy living and doing what you can to incorporate those principles into your own life. Certain things such as social involvement, exercise, and a balanced diet are all universal needs to maintaining a healthy lifestyle. Yes, what those needs look like for you may be different than for others depending on your own personal circumstances, so I do highly encourage you do as much research as you can.
Many financial experts recommend keeping 3-6 months’ worth of living expenses in an emergency fund and I will absolutely echo that for the rest of my life. While the primary reason for this fund is to prevent you from going into further debt if you ever do experience a job loss, I would argue that the strongest secondary reason is to have some money set aside for medical-related emergencies. There’s no concrete way to predict how much you will need when those emergencies do come up, but at some point, they will. Set aside some money with that in mind as soon as you are able to. Your future self will thank you.
4. Cars
One of the most important things to remember about cars is that they are a depreciating asset. It is common knowledge that a new vehicle’s value drops considerably once it is driven off the lot and is now owned by someone. The older a car gets and the more miles and scratches it accrues along the way, the less it is valued at. This is quite the opposite of a house, which typically increases in value over time. I point all of this out to make it clear that an unwise car decision is likely to make you poorer. And, if you keep making those decisions repeatedly over time, they can keep you poor.
The past few years have seen a historical anomaly in that used cars have risen in price faster than newer cars. This is partially driven by a shortage of parts produced during the pandemic. Although car prices have started to drop in the past few months, they are still well above the level they were at prior to the pandemic onset in 2020.
If your current car is functioning well and is safe to operate, try your best to see if you can hold onto it. If for whatever reason you do see yourself needing to buy another car, either new or used, within the next year, review your budget carefully and get a realistic idea of what you can afford. Try to save up a bit more for a larger down payment if you can. The average monthly car payment for new vehicles is $726 and $533 for used vehicles. Maybe you can afford that. If not, be cautious about your money habits and try to plan for a more reasonable option that works for you. If you are lucky enough to have the money to pay for a reliable car in cash, I would recommend it, even if it’s not your “dream car.” Monthly car payments may be necessary, but they won’t make you any wealthier. I will go into much greater detail on the cost of not only buying but owning a car as well in a future post.
5. Vacations
I will eventually dedicate an entire post to examining the differences between a “want” and a “need.” It’s a very important distinction to keep in mind in general, especially when it comes to handling your money. Although it might sound harsh, the reality is that in almost all circumstances, a vacation is a want, not a need. Yes, taking time away from your normal obligations is important, but that doesn’t automatically justify whatever you or someone else has in mind for where to go on vacation and how much you can spend.
Be wise when planning for a vacation, if you do decide it’s important enough and you can afford it. If you can, plan it out well in advance and research the best options in terms of lodging, travel, and any other expenses you expect to incur. Even though a vacation is supposed to be a time to relax, that does not mean your budget can go out the window. Be realistic about what you can afford and stick to it, even if that voice inside of you starts saying that you “deserve” more. It is my simple opinion that many people continue to be stagnant in their financial journey because they persistently live above their means and, unfortunately, spending an excessive amount on a vacation is one of the common ways of perpetuating that.
That’s all for now. Peace!
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