“My fiancé and I have been together for almost four years and both have really good jobs that pay us very well. We both contribute to our 401(k)s. Our student loans will be paid off in four months. Up to this point we really haven’t needed to have a budget. We spend what we want, pay our credit cards off each month, and always have a little left over.
Now, things are changing. We hope to buy a home and have a family in a few years. We need to start getting smarter about our spending.
How do we go about setting up a budget so we don’t get ourselves in financial trouble?”
Congratulations! You are already smarter about money than the vast majority of Americans who have never asked themselves these questions. As a result, they end up with lots of financial challenges and very little financial success. You and your future husband will be among the exceptions!
First, as quickly as you can, begin living on just your fiancé’s income. Save as much of your income (hopefully, all of your income) as you can between now and the start of your family. This (obviously) will get you in excellent position to live comfortably on one income after children arrive. If you decide to return to work after having your children you can continue the same pattern and direct your income to college savings or other financial goals.
Second, put as much into your 401(k) as you possibly can. Bulking up your retirement funds while you can will give you the maximum capital to compound until you need them.
Third, keep the balance of your net income in the bank. You do not want to invest these dollars. You want to save these dollars. You will need a down payment on your home. And that’s just the start of what you will need – furniture, etc. While the bank may not pay you much income, your money is safe and secure. You will be investing the funds in your 401(k)s, but you should be saving the funds for your home.
A final thought about budgeting. Once you’ve taken these steps you might find it fun to look at all the things you do spend money on and make it a challenge to find ways to doeverything you want for far less money.
There are numerous web sites and books to guide you in creative ways to spend less and get more. Buying cars that are gently used (off-lease for example) rather than new will save you tens of thousands of dollars over your lifetime – perhaps even enough to pay for a child’s college. College that starts with two years at a wonderful community college might save $50,000 or more off a college education. And you’d be amazed what wonderfully useful and practical things you can find at yard sales!
Some of the wealthiest people I know are also the most creative about how to stretch their dollars. Even after they’ve accumulated wonderful levels of financial success they continue these habits because they’re fun. Make saving money a game and have fun!
If you have questions or comments, please send them to Gene@AskMtM.com