So now you’ve figured out how to afford the basic necessities, established an emergency fund, and developed a plan to pay off that credit card debt in three years or less. Now, what? As part 1 of the Financial Priorities for Millennials has detailed, there is not a shortage of things you can spend your money on. So far we’ve only addressed expenses that you MUST pay off. But are you thinking about buying a new home or having a baby? If so, that is going to take money and lots of it!
1. Pay off Your Student Loans
Hopefully you’ve developed a plan to pay off your debt within three years, but that did not include your outstanding student loan obligations. If you ever want to buy a home that is remotely close to your dreams, then you need to tackle this debt next. The average student loan payment is $400 a month, with repayment amounts topping a whopping $900 a month! Again, this is before you’ve even put food in your mouth or a roof over your head. At that rate, the only house you will be able to afford is that abandoned one on Elm Street. Call the loan servicer and ask for a reduced monthly payment (in most cases, they just want you to pay SOMETHING) and develop a plan that will see you out of student loan debt in five years or less.
2. If you’re dreaming of home ownership
I know what you’re thinking…how are you supposed to afford the basics, save for emergencies, pay off toxic debt and student loans, save for retirement. AND save for a house? The answer is tough, but simple…one at a time. Most often people find themselves in debt by trying to manage too many financial priorities at once. It may not be fun purchasing your first house eight years later, but at least you’re putting yourself in the best possible position to afford your dreams.
Now that we’re done with the pep talk, here are the facts: the average lender would prefer you put 20% of the home’s value forward as a down payment. There are some programs that will let you put down as little as 3%, so shop around. In addition to the down payment, be prepared to pay for Private Mortgage Insurance (PMI) if you put down less than 20%, and save money for closing costs (usually 3-6% of the home’s value in Washington Metro area) and other fees. Other fees include a home inspection and any quotes you’ve received to fix anything you’ve identified as needing improvement before moving into the home.
Plan to save for your house for at least two years before entering into the market. So if your 20% is $10,000, then plan on saving approximately $417 a month. If that seems like too much then stretch it out. Don’t let historically low interest rates lure you into a financial situation you can’t afford. You should have good credit at this point because you would have paid off a lot of your debt and been making payments on time.
3. First comes love, then comes marriage, then comes baby…
You know the rest. If you’re thinking about having a baby…congrats! I have news for you…babies are expensive as HELL! Before starting a family, consider childcare expenses, hospital bills, nursery furniture, clothes, formula (if you can’t or don’t want to breastfeed), and other expenses that come along with having a baby. Depending on where you live, you can expect to pay anywhere from $10,000 to $30,000 the first year of baby’s life!
I would suggest planning to save some money once you become pregnant of approximately $800 a month. The main reason for saving this money is for your medical expenses and supplies. If you plan on investing in genetic testing and counseling, you can expect a hefty co-payment, so be prepared. In addition, stuff that won’t go on your baby registry like a breast pump and supplies will cost you some money as well. The pump itself is free (well, not free…someone is paying for it), but all the extra supplies like bags to store your milk and breast pads can set you back at least $150! If I’m being honest with you, you will need far more than $800 a month in the future, but this is a good figure to start with to get you use to the financial responsibilities of having a child.
Ok…I’ve given you even more to consider this time around. Stay tuned for part 3 where I discuss the all-important (albeit boring) topic of retirement!