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When you set out on the road to financial success, nobody told you that it was full of potholes. But that’s exactly what taking big financial steps is all about — avoiding the obstructions.
From buying your first home to starting a family, there are a lot of chances to spend way too much, owe more than you can imagine, and lose money along the way. Setbacks are inevitable sometimes, but here’s how you can make them less likely.
Credit Cards
Here’s a financial pitfall that is easy to slip into and hard to get out of. Most young adults get their first credit cards as early as age 18, and with the education costs that most of them incur, it can become difficult not to pile up debt. However, there’s one major incentive to avoid using a credit card like a magical money fairy: your credit score.
While other kinds of debt, such as a mortgage or student loan debt, are viewed as investments in your future self (and yes, you do have a “future self”), credit card debt is viewed more like a sinking weight. It’s hard to untie yourself from because of interest charges, so it’s best to keep it from getting out of control in the first place. To do this, you should consider transacting in cash only for your everyday purchases; this will help you avoid the trap of “buying now, paying later” which often leads consumers to think that they have spent less money than they actually have.
Having Kids
Children are a gift. At least, that’s what you think before you actually have any of your own. While starting and growing a family is one of life’s greatest fulfillments, it is also very expensive. The United States Department of Agriculture has calculated that raising a child from birth to age 18 costs an average of $227,000 (USD). That might be a bit more than you bargained for.
Luckily, there are ways to reduce this figure that don’t involve indentured servitude. Most of the cost for raising children comes from ordinary expenses such as childcare, transportation, and food. You can work with your family to come up with a plan that saves your household money, such as asking a grandparent to care for children while you are at work instead of paying thousands of dollars a year in day-care. And you can reduce your food bill by couponing, buying items in bulk, and shopping at the local farmer’s market to find cheaper (and healthier) produce.
Buying a Home
And because once you start a family, you’ll want a place to call your own, you may also have to grapple with real estate jargon to find the best mortgage rates. Surprisingly, most of the steps you can take to make buying a home more financially feasible for you should happen well before you even check out the housing market. Things like maintaining good credit (see “Avoiding Credit Card Debt”) and saving up money are common sense behaviors, but their importance makes them worth reiterating.
Also, when you strike out on the housing market, you should play it savvy. Remember to shop around for a lender who is willing to help you finance your home; don’t just take the first offer you receive. This will boost your negotiating power, which could lead to you paying fewer administrative costs when you sign the contract. You can approach pricing negotiations in the same way. Sellers set a price for their homes, but that doesn’t necessarily mean that’s what you should pay for it. Try to get the seller to pay for a few mortgage points upfront for you instead of knocking ten thousand dollars off the asking price, for example.
This isn’t a complete guide to not going broke in life. Those don’t actually exist, which means that you’ll just have to learn the rules (or make them up) as you go along. However, the more prepared you are for those potential setbacks, the better chance you’ll have at avoiding them when you take a big financial step.
What are the biggest financial potholes you’ve encountered so far in life? How did you deal with them? Or has it been miraculously smooth sailing?
The biggest things for us was buying our home near the top of the bubble. We are now renting it out until the housing market comes back to life.
Smart move to just rent it out rather than sell it while the housing prices are super lower. Hopefully you don’t have to wait too long.
Mortgage brokers have gotten a bad name in recent years but when it comes to getting the best mortgage rate they can be invaluable! Most people will go to the bank and take what they’re offered but could save $100′s a month by going through a broker. Find one that doesn’t charge a fee though!
Money Bulldog recently posted..To Rent or Buy A Home? The Argument for renting!
I don’t know why someone wouldn’t use a mortgage broker. It just seems to make so much sense to have someone search around for the best rate for you, especially with the brokers who don’t charge you a fee. The mortgage broker who helped me with my pre-approval found me an awesome rate and got me approved for far more than I expected, despite a tricky employment situation at the time.
Your outlook on having kids is quite encouraging. LOL.
My biggest pothole was being ignorant when I first went off to college. The first mistake was going to an out-of-state school and the second mistake was taking on as many student loans as possible (some of them to cover living expenses, food, etc).
Jason @ WorkSaveLive recently posted..First Time Selling Your Home? Here’s 7 Things You Should Know
Yeah not a very positive spin on parenthood lol. I was the same way when I went off to college. Having some student loans meant I had extra money to spend on beer and partying. My thinking was that since I was going to college I would quickly make it back with my first job after college.
I think the biggest thing for us will be having kids. We have done well so far but having kids will be a huge adjustment and not just financially. Our entire routine and lifestyle will change. It will be worth it though.
Miss T @ Prairie Eco-Thrifter recently posted..Reader Question: How Much Money Do I Need To Buy My First Home?
For sure, it is so much more than just a financial adjustment. Your entire world would be turned on its head. That price is pretty significant though, especially if you have more than one child.
We haven’t had too many potholes, but then we’ve made pretty good financial decisions in order to avoid them. We did buy a house in 2008 that we’re underwater on now, which stinks because we’d like to move to a neighboring city for their schools. So, we’re working on this.
Also, having children isn’t as bad as you make it sound, provided that you plan ahead and have realistic expectations.
Justin @ The Family Finances recently posted..The Grass Isn’t Always Greener (Part 3)
Yes some people do manage to avoid those kinds of potholes if they have a sound financial understanding. I suspect that your profession had a lot to do with that.
Jeremy, very true! Being an accountant definitely has its advantages when it comes to personal finance. Though my wife jokes and says that sometimes being married to an accountant isn’t much fun, lol.
Justin @ The Family Finances recently posted..The Grass Isn’t Always Greener (Part 3)
My biggest mistake was going to an out-of-state school as well. I could have spent two years at my local state university and then transferred to the college I graduated from at that point for in-state tuition. I would simply have had to taken all my core classes at the bigger university. Since the classes for my major were the ones I really loved at my university, this wouldn’t have impacted my college experience that much and it would have saved me a ton of money. When you’re fresh out of high school though, it’s just hard to think that far into the future. I hope high school graduates now are smarter than I was then!
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I doubt it Shannon. People at that just generally aren’t ready to make such big decisions. When you’re young you just tend to be a dreamer and ignorant about some things. You just seem to assume that the most expensive education is always going to be the best option long term.
You’re probably right. I guess it’s really up to parents and educators to help graduates consider all their options before jumping into a decision.
Shannon-ReadyForZero recently posted..The Story of Our Logo
I don’t have any problem with credit cards as long as you can follow the rule of paying it off in full every month. A lot of people say you spend more on credit but I grew up with it and actually spend more when I have cash burning a hole in my pocket.
Lance@MoneyLife&More recently posted..Pay Yourself First
I’m the same way with cash and credit. Cash in my pocket is just begging to be spent. I do admit that when I charge something bigger to my credit card I don’t really appreciate the high price until I go to pay my balance and it’s higher than I expected.
Pretty smooth sailing so far, haven’t experienced any large potholes yet but I can see some major ones coming up in the future like marriage, children, moving, taking care of my parents, retirement, and possibly disability or critical illnesses. Most of these financial potholes can be carefully planned and even insured
, but like you mentioned there’s no perfect guide to follow so we’ll just have to do our best.
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Luckily you are still quite young and haven’t had to deal with these kinds of challenges yet. I’m the same way, but as someone over 30 years old, I feel a bit more pressure to get going on that kind of stuff.
Good post. My biggest financial pothole was getting a credit card in college. I decided to stop working for a while and lived off a couple credit cards. I accumulated a decent amount of debt. After college I thought I would never be able to get out from under the debt. When I got married I still had almost $18,000 in debt. My wife was very supportive and after one year we buckled down and were able to pay off that debt. We no longer carry credit card balances and it is great.
Matthew Doyle recently posted..Children Are Expensive
Credit card debt must be especially tough to get out from under. With those massive interest rates, it is bound to be an uphill battle. When it’s a significant amount owing, that’s bound to be a ton of interest charged each month.
Oh my goodness!! I still think my children are a blessing every single day! Yes, they’re expensive little monsters, but they’re still a gift! You do have to make some sacrifices as a parent and expect the unexpected. Our biggest pothole was not the kids, but not saving up more before buying a house. We had hardly any money to put down on a house…we should have saved longer. Also, we should have budgeted and lived as if we were paying the mortgage before we had to. That way, we could get an idea of what it would be like and wouldn’t have bought a bunch of things to fill our house right off the bat either. It’s so hard to do it the right way, but if you don’t have the money for something…don’t buy it. Save up for it and buy it when you have the money. So simple….yet so difficult all at the same time.
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When I read this guest post I had a feeling that some people may not like having kids being classified as a pothole. It is a rather bleak perception, but they certainly would cost a lot of money.
As for the mortgage, yes it is a good idea to make sure you have plenty of money saved up for the downpayment. It’s the kind of mistake that you don’t really appreciate until after the fact though. The dream of your own home can be quite blinding.
I’m only 21 so I haven’t thought about having kids or buying a house at all yet, so credit cards are the only bad choice I’ve made- and they suck. I’m still digging out from under this one, and will be for a while.
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Sorry to hear that you fell into the credit card debt trap Meghan. It does seem like a very large percentage of the people falling into that problem are young people. At least you have plenty of time to get your finances back in order before approaching these other financial steps.
My biggest financial pothole is not having health insurance. We owed like $52,000 in medical bills from this year, they did get reduced a little bit but they are still insanely ridiculous. I try not to let them get me down though. It’s not like we intentionally went out and racked up medical bills.
Wow that is just a scary amount to owe for medical bills. I’m glad I wouldn’t have to deal with something like that here in Canada.
I’ve always had a problem with that Department of Agriculture number. For a family with three children, that works out to over $37,000 per year. I’m pretty sure that was more than my parent’s after-tax income.
I would think the actual number would come down a lot for each subsequent child. Then a lot of things can be reused and things are cheaper in bulk. Plus since it’s an average, it doesn’t mean everyone is in that situation.
Cash only saves TONS of money. Definitely leave your CCs at home. I now make it a habit to withdraw cash for a whole week ahead of time.
I completely disagree. If you use a credit card responsibly first of all you pay zero interest until the billing date. Then if you pay off the entire balance you pay no interest at all. That way you’re also earning either cash back rebates or some other type of reward.