Posted on: 31-08-2015 in Financial Planning
Everyone says you should spend less and save more, but maintaining the discipline to put money aside is hard, unless you know what you will eventually buy with the savings. The following are 7 reasons, or 7 things everyone should be saving for.
It would seem that retirement should come last, but it really should be your first priority. For most people it will be by far the biggest item on this list, requiring an amount which you won’t be able to save within just a few years. You should be putting money aside for retirement from the very beginning of your career. Although there is no particular amount or percentage that would fit all people’s diverse situations, 15-20% of your income is the approximate portion most financial advisers recommend. Don’t forget to take advantage of all the different bonuses and tax incentives which governments use to motivate people to save for retirement – at least you should have a pension plan and (if you are resident in the UK) an ISA. Talk to your adviser if you need some guidance.
“Getting on the property ladder” has always been the big thing and unfortunately it has become increasingly hard, as house prices keep rising and incomes struggle to keep up. While the record low interest rates make attractive mortgage deals widely available, you still need a considerable amount of cash to start with. Don’t forget that buying the property itself is only the beginning. Many first time owners are surprised by the cost of furnishing and turning a “property” into a “home”.
A vehicle is another necessity in the modern world and some families in some locations need one for each partner. Like with real estate, various forms of debt financing are available on the market, but that does not mean that you should always get into debt when buying a car. The more cash you will have saved, the wider your options. Try to resist the temptation to buy a bigger or more expensive car than you really need.
Not all people choose to have children these days, but if you do, prepare for spending a lot of money from the moment the first baby is born (actually, even before that). Some people automatically think of nappies, pushchairs and car seats, but the spending does not end after the first few years. Indeed, the bigger the kids, the higher the costs. Clothes, toys, school, after school activities, travel – and the list goes on. You may also need a bigger house and a bigger car in the end. Finally there comes the biggest item – college (start saving for it as soon as the baby is born, if possible).
Besides your children, your parents may also need your help as they get older. How much help and what kind is not entirely clear, as there are many factors (like health) can’t easily be predicted or controlled. While some people are lucky and remain self-sufficient (financially and otherwise) until their last days, others may need costly care for long periods of time. As with anything else, the greater financial reserve you have when the time comes, the wider your options and the more you will be able to help.
This group is very diverse. It could easily be split into several different sub-items, which all share two common characteristics. Firstly, they are unpredictable and may come at any time. Secondly, if and when they come, they might put a strain on your budget by reducing your income, increasing your expenses, or a combination of both. Examples include unemployment, illness, injuries, accidents (all the items listed so far apply not only to yourself, but also to your spouse, children, parents and possibly other relatives), things (e.g. car, computer) breaking down, natural disasters and many other scenarios which you can’t even imagine at the moment. Keep in mind that you may be able to reduce the impact of some of these risks by getting proper insurance. Nevertheless, even with insurance you still need to build a financial reserve for the unthinkable – the bigger the better.
Remember all those things you said you wanted to do “one day”? Travel around the world, see the Grand Canyon or the Colosseum, learn to sail or fly a plane, get a cottage in the mountains or start that business venture? Perhaps you won’t be able to do them all, but make sure you don’t forget your dreams when living your life. In fact, the particular big things you really want can be among the most effective motivators for saving money.