SPOTLIGHT ON FINANCE
By Ruth Mahoney, President, Capital Region, Keybank.
CAPITAL DISTRICT –When it comes to financial planning and budgeting, both individuals and planners assume most people have the same values, needs and wants. To an extent, this is true. We all pass through similar life stages—childhood, young adult, early career, midcareer and retirement. However, our respective paths through these life stages vary greatly.
The fact is, the lives we lead are very different, and our needs are diverse. This makes our relationship with money unique. Financial plans and budgets should account for this.
Your lifestyle shapes your needs
A sound financial plan will account for your lifestyle as much as your life stage. Do you want to buy a house? Launch a business? Start a family? Travel the world? Retire early?
Understanding your goals and values will help you prioritize how you spend and save. It will also help you determine what matters most to you so you can set a budget that is realistic. For example, many people dream of retiring early. But what happens if you value recharging your batteries by taking a nice vacation with your family, the average cost of which is $4,700?1 Is it in the budget?
Life stages can define your lifestyle
One of the first “life stage” decisions a person makes is deciding what they will do after high school. Whether graduates decide to enlist in the armed services, get a job or enroll in a two- or four-year college, this is a major decision, and there is much to consider. For starters, according to a 2014 Pew Research Center study, today’s workers with only a high school diploma earn 62 percent of what a college graduate earns.2 For those who do go to college, the decision to attend a two- or four-year, public versus private college will deeply influence the cost of their education. Then there is financial aid, as well as grants and scholarships. The earlier parents talk with their children about the future, the better they can plan to save for it.
If you’re a recent college graduate, career choice will largely shape your lifestyle. Engineering and computer science careers are higher earning than social work. So it is important to consider how your earning power will influence your ability to repay student loan debt, save money and meet your monthly expenses. It is also important to remember that retirement planning is a marathon, not a sprint. Anyone, regardless of career path, can meet their retirement goals, provided their goals are grounded in realism, they start investing early and they commit to executing a plan.
Another common life stage milestone is marriage. A recent study found the average wedding in 2015 cost $31,213.3 Today, some couples are deciding they don’t want to spend that amount—or even a portion of that amount. Instead, they are putting that money into savings or retirement accounts.
Another consideration is housing. According to a May 2015 study by Trulia, homeownership is cheaper than renting in all 100 of the largest U.S. metro areas. In fact, buying is 35 percent cheaper, assuming a traditional 30-year fixed mortgage with a 20 percent down payment. Here are some things to consider if you’re thinking about buying a house:
- saving for a down payment;
- closing costs and taxes;
- repairs and maintenance;
- reputation of the community and school district; and
- building equity.
If you’re renting you don’t have the worries of repairs and maintenance, but you’re also not building equity and gaining value from your payments. You are also limited by the types of home improvements you can make.
The final major life stage to plan for is retirement. The earlier you invest, the more your money will earn. For example, assuming a five percent rate of return, $10,000 invested by a 20-year old will grow to over $70,000 by age 60. That same amount invested by a 40-year old will only grow to $36,000.4
If you’re closer to retirement age, it’s not too late to get your retirement plan on track. You can do this by maximizing your savings opportunities (tax laws are now in your favor), avoiding new debt, creating sustainable income and considering long-term care insurance and other risk management strategies.
Budget for lifestyle
Executing your financial plan is about following a budget. But your budget needs to reflect your reality, or you won’t be able to stick with it. So track all of your expenses and income for a month. More important, honestly assess your spending. Then think about your lifestyle, as well as your short- and long-term goals. Does your current spending support these goals? If not, it’s time to reevaluate your priorities and build a better plan. And remember, it’s your plan. The more it reflects who you are and what you value, the more successful it will be.
Ruth Mahoney is president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected]
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice.
© KeyCorp 2016. KeyBank is Member FDIC.
1“U.S. Workers Explain Why They Don’t Vacation,” Rebecca Webber, Forbes, Sept. 21, 2015.
2“Trends in Education,” College Board, 2014.
3“$3M Question: Dream Wedding or Dream Retirement?”, Blackrock Investopedia, June 13, 2015.
4“The Rising Cost of Not Going to College,” Pew Research Center, Feb. 11, 2014.
8 signs you are living beyond your means
Keeping up with the Joneses? Many of us try, and some of us can. But the truth is, most of us can’t because the Joneses are fictitious and, in our estimation, always live better than we do. So the real measuring stick should be ourselves, and the question we should be asking is:
- Can I really afford the lifestyle I’m living? Here are some signs that may suggest you can’t:Your credit score is below 600. Your score is a reflection of whether you pay your bills on time, the age of your accounts and your outstanding debt compared to total credit. This will influence your purchasing power, as well as your cost to borrow money.
- You save less than 5 percent of your income. You should aim to save 10 to 15 percent of your earnings.
- You don’t have an emergency fund. Unexpected and expensive are near inevitabilities in life. You can’t afford to put these emergency costs on your credit card and pay interest on them. It’s a hole that is difficult to dig your way out of.