Are Your Finances on Track?
The game, in the non-fun and non-interactive text; we call it “The Financial Game of Life Unexpected Financial costs by Age.”
The Financial Game of Life Unexpected Financial Costs by Age
Financial Stage 1 (10-16 years old)
It’s crucial to encourage your children to start saving at an early age. Whether it’s birthday money, weekly allowance or a gift from the tooth fairy; make sure your children are putting away a percentage of that into a piggy bank or, even better, a savings account that will earn interest.
Financial Stage 2 (16-18 years old)
With 16 comes many newfound freedoms and opportunities. You’re now able to get a job, which will give you some extra cash (without going to Mom and Dad) and will look great on a college resume. Of course, you’re also able to start driving, which means you’ll need to save some of that money for gas.
Remember to put some of your paychecks into savings. You can continue to contribute to the savings account that was opened for you in Stage 1, but a CD will yield higher interest rates. You can also open a Roth IRA with your parents and start saving for the unthinkable – retirement. With compound interest, you can put in a thousand dollars, and that will turn into hundreds of thousands when it’s time to retire, meaning you won’t need to save as much in the future.
Finally, it’s time to think about something a little more imminent, going to college. With student loans becoming the number one debt in America, you want to do everything you can to avoid them. Luckily, there are millions of dollars out there to help you pay for school so start applying for as many grants and scholarships as you can during your senior year.
Financial Stage 3 (18-22 years old)
If you are responsible when it comes to spending and paying bills, you may want to get a joint credit card with your parents. This will help to build your credit score, which will come in handy when you’re looking to buy or rent a house or purchase a car. Be careful though; a credit card is not free money. Don’t spend more than you have and make sure you’re only buying what you truly need.
If you have a part-time job during college, make sure you are automatically putting a percentage of your paycheck into savings – even if it’s only an extra $50. Small contributions are better than nothing, and you’ll just need to eat in a couple of times.
Speaking of eating in, living the college life is the perfect time to learn how to be frugal. Don’t eat out as often and shop at discounts stores for clothes and furniture. Also, look into living off-campus (if your college allows it) with some friends. This will often be cheaper than the dorms and you will have roommates to split the rent, utilities and Internet bills with.
Unexpected Financial Cost!
Getting in a car accident is never fun, but it’s even worse if you don’t have the funds to repair the damage. Luckily, you’ve been saving for nearly two decades now and have enough money to cover this unexpected cost without too much stress.
Financial Stage 4 (22-25 years old)
Now that you’ve finished up college, it’s time to head off to work. Make sure to sign up for your employer’s 401k as soon as you start and contribute at least 5% of your salary (or the maximum contribution if you can). Many employers will match this contribution, which means free cash for you later! You can even set up automatic deductions from your paycheck that will go directly into your 401k or Roth IRA. This way, you won’t even know it’s gone and learn to budget without it.
With a steady income come steady expenses. It’s not easy figuring out how to pay rent, eat, save and still have fun but creating a budget will help you do so. There are many free budget tools out there to help you maximize your income.
Finally, you have two more “expenses” that you’ll have to factor in. For one, it’s time to get rid of that debt once and for all. Be aggressive about paying off any high-interest loans or “bad debt” you may have and then move to all other debt such as student loans. You also need to start an emergency savings fund to prepare for the unexpected. If you lose your job or get in an accident, you’ll be thankful for the 3-6 months of living expenses that you set aside.
Financial Stage 5 (30 years old)
At this point in your life, you should be well on your way towards a well-funded retirement. Some benchmarks are that you should have 3-6 months of living expenses saved in your emergency fund and your 401k should have one year’s salary in it. Keep working towards these goals if you’re not quite there yet.
It’s a good idea to start looking at some other investments outside of retirement. A house can be a great investment but make sure you’re shopping within your means. Your first house doesn’t need to be your dream house; it can just be a temporary investment that will prevent you from throwing away money by renting. Stocks are another great way to invest. Company stock options can often a strong investment but make sure to branch out, so all your eggs aren’t in one basket. Try investing in a range of different industries and watch your money grow in the long run.
If you have a significant other, make sure to talk with them about finances before you move in with them or tie the knot. It’s important to share how you feel about money and work out a budget that works for both of you. You’ll also need to decide how you’re going to split costs and share incomes. If you have a baby on the way, it’s best to start planning for college now. Open a 529 and start saving some extra money for the future.
With all these new expenses, it can be hard to budget everything. Consider renting out a room in your new house to help you pay your mortgage or other bills.
Unexpected Financial Cost!
Your family may love to play a rousing game of soccer together, but sometimes it can get a little too intense. Your son broke his wrist while blocking a goal causing you to deduct a couple thousand from the emergency fund to pay for hospital bills. Luckily, he’ll be back on the field in no time.
Financial Stage 6 (45 years old)
You are now in your peak earning years and still have 15 years before retirement! Though that may be quite a ways away, it’s time to seriously take a look at your finances to make sure you’re prepared. If you’re not already, start putting the maximum amount into your 401k (which was $16,500 in 2010). You should also start to decrease the riskiness of your portfolio over the next 15 years. Stocks should make up a smaller percentage as you move closer to retirement since you’ll have less time to make up the lost returns if an economic crisis hits.
Your kid(s) may also be only a few years away from college. No matter how much the cost, do not stop saving for retirement to help pay for school. There are numerous scholarships, grants and loans available to your kids to help them pay for college but none for you once you hit retirement.
Finally, take a look at your net worth and portfolio (if you’re not already) to make sure that you are on track with your goals. Some experts claim that your net worth should equal 3.7 times your income at 45 but this is not a strict rule to go by. Make sure your finances are in a place that’s comfortable for you.
Unexpected Financial Cost
Your daughter is in love and just got engaged! Friends and family are flying in from all over to attend the wedding on your tab. This is a pretty awesome reason to spend some of your savings.
Retirement (60-67 years old)
After all these years, it’s finally time to retire. If you followed our advice, you should have well over a million dollars saved to live it up. Whether your dream is a cabin in the woods or a cabana on the beach, don’t be afraid to give it a try.
If the idea of giving up work is not for you, see if a company will hire you to do some consulting or part-time work for them. They may even extend 401k benefits so you can continue to save.
Finally, it’s time to create a new budget for retirement. Figure out everything you want to do, how much you want to save for your family, and when you want or need to start collecting social security. Keep in mind that the bulk of your spending will happen in the earlier years of retirement when it’s easier to travel.