Whether you realize it or not, you are constantly making decisions that impact your future financial wellbeing. It may not cost you today, but these “cents-less” mistakes will certainly cost you tomorrow.
Here is a list of four financial decisions which do not cost you a cent today, but can have a huge effect on your financial future.
Buying a Car
They say the average person owns twelve cars in a lifetime. So why are we not saving for this upcoming expense? Let’s all be a little more frugal and save for our next automobile. Here’s why: If you borrow $40,000 from a bank to buy a car at 7% interest for 5 years, you end up paying over $56,000 for a $40,000 car. If you decide to save $555 per month for 5 years in anticipation of this expense, and receive a 7% return on your investment, you only spend a little over $33,000 for a $40,000 car. By saving for this short-term goal, you end up saving yourself $23,000 in only 5 years. Think of that times twelve! Don’t let compounding interest work against you. As Albert Einstein once said, “Compounding interest is the most powerful force in the universe”.
College Education
College education inflation averages around 6% every year. In other words, every twelve years college education costs double. By not saving today for these future expenses, large sums of student loan debt will be your child’s only option. The first ten years of your child’s professional career can be the most important time period for saving for their own retirement, which is something that may be tough to do while paying off school loans. Try not to put your child behind the eight-ball. Start a new family tradition by saving for your child’s college education. Our recommendation is an Indiana 529 College Savings Plan. You receive a 20% state income tax credit, up to $1,000, just for contributing. Sign up at www.collegechoicedirect.com.
Buying a Home
Owning a home is not for everyone. When a family is not financially ready to own a home, they can become “house poor”. Just because a bank says you are approved to buy a certain priced home, does not mean you are financially ready for the upcoming expenses. Any homeowner will tell you, the mortgage is not the only cost in owning property. If you can not save for a down payment equal to 20% of the home’s value, you should not own the home.
Social Security
If you believe Social Security benefits will pay for all your retirement expenses, you will be sorely mistaken. By not saving for your own retirement, your future financial goals, i.e. vacations and gifting, may be in jeopardy. The younger you are, the more you should save for your own retirement. “Full Retirement Age” for your Social Security benefits may be much older than it is for today’s retirees. If you are eligible, our recommendation would be to save into a Roth IRA. Once contributions are made to a Roth IRA, all future growth and earnings are tax-free forever.
Summary
By setting proper financial goals today, you can avoid significant financial costs and disappointments in the future. Many goals require you to be “cents-wise” today, in order to meet your goals for tomorrow. The “cents-wise” advice is to save early, save often, and keep track of your goal progress. Be very specific and clear when establishing your goals and determine the actions required to achieve them. A goal without an action plan is only a dream.
