Eliminating your morning Starbucks coffee and cutting coupons are perfectly legitimate ways to cut costs and rein in your finances. But you’ll never get rich playing so-called small ball.
To reach financial success, you need big wins. You need to address the areas of your financial life that will save you not $5 here or $10 there, but tens of thousands of dollars. Successfully navigating some of the following financial expenses will put you on the true path to wealth creation.
Automobiles
We love our automobiles, but our cars are driving us straight to the poor house. According to a recent Experian report, the average automobile loan has reached an all-time high of $30,032 with the average monthly new car payment also setting records at $503 a month.
Our car payments are literally suffocating our finances. Worst yet, we’re spending more and more on an asset that does nothing but depreciate. In his book, The Total Money Makeover, financial expert Dave Ramsey is quick to point out that, “Staying away from car payments by driving reliable used cars is what the average millionaire does; that is how he or she became a millionaire.”
So what should you do to keep your transportation costs under control? Follow the 20/4/10 formula. When purchasing a vehicle, your down payment should be at least 20 percent of the purchase price. Never finance a car for more than four years. Finally, make sure no more than 10 percent of your gross income is spent on transportation expenses, including car payments and insurance.
Student Loans
Unfortunately, too many of us are suffocated with debt right out of the starting gate. According to a Citizens Bank Millennial Graduates in Debt study, most recent graduates expect to be making loan payments into their 40s. Worst yet, 57% of the survey respondents regret taking out as much debt as they did to complete their education.
As a general rule of thumb, your total student loan debt should be less than the expected annual salary of your first job. For instance, spending $40,000 a year on tuition to earn a degree that will earn you only $16,000 a year just doesn’t make sense.
To help ease the student loan bite, also explore the state university option or spend two years at a community college before transferring to a four-year university.
Most importantly, do your best to graduate in four years. Remember, the longer you’re in school, the more debt you’re going to pile up. Plain and simple. Yet, according to the Department of Education, fewer than 40 percent of students who enter college finish within four years. Get in, get out and you’ll save a nice chunk of change.
Weddings
According to the The Knot 2015 Real Weddings study, couples spent, on average, $32,641 for a wedding in 2015. This represents an all-time high for wedding spending. Add a couple thousand dollars for a honeymoon, and you’re talking about some serious money. Yet, you don’t have to let one day of extravagance handcuff your financial well-being.
You can still create the wedding of your dreams without busting the bank. First and foremost, set a budget and stick to it. This will force you to prioritize and identify what is most important to you as a couple. You may decide to cut corners on the open bar while allocating your precious dollars to obtaining a great wedding photographer.
Housing
Owning a home is the American dream. Unfortunately, for many of us, it has turned into an American nightmare. The problem is that too many of us have bought more home than we can afford, overextending ourselves to pay for our real estate dreams. Remember, the mortgage is only but one part of home ownership. Add in property insurance, property taxes, utilities and maintenance, and the costs quickly escalate.
In fact, financial experts estimate that home ownership will cost you 40 percent to 45 percent more in addition to the mortgage. If your mortgage runs $1,000 a month, then expect to spend $1,400 to $1,450 a month on total ownership costs.
To avoid the home ownership trap, do not spend more than 35 percent of your pretax income on mortgage, property tax and home insurance payments. In addition, homeowners should budget between 1 percent to 2 percent of the purchase price of their home to cover yearly maintenance and repair costs. Follow these rules, and you can ensure that your home becomes an investment, not a wealth trap.
BMWK, what are some major purchases where you’ve learned to save money.