The financial future of most people is dictated by the way they start out as independent adults. If you are going to set up house on your own or with a partner (or know someone who is), then you may find some good advice here.
Establish good financial habits early. They can save you lots of grief and money down the road. More couples break up over financial issues than for any other reason. Good financial habits will go a long way toward providing peace and harmony in your home. The key to developing good financial habits is a sound lifestyle financial plan that will help you achieve your lifestyle goals. Over time, your goals will change—that's okay. A good financial plan will allow you to change your goals as you go along. But remember, they're your goals. Many persons become discontented because they try to achieve someone else's goals. You've heard the expression "keeping up with the Joneses." This refers to trying to achieve someone else's goals. Even if you succeed, you most likely won't be happy. You will only be happy if you achieve your own goals.
You may not be able to achieve all your goals in the first week out on your own. Not even in the first year, five, or even longer. The trick is to be realistic about your goals by setting a time frame in which to achieve them. In order to achieve your goals, you need time to accumulate the required resources. You will find that you can classify your goals as short-term (one year or less), intermediate-term (two to five years out), and long-term (more than five years out). You can also group your goals by order of importance. Some are "must have," while others would be "nice to have." No one can tell you which goals are more important than other goals—let others keep up with their own Joneses. Make a list of your short-, intermediate-, and long-range "must haves" and "nice to haves." It's important to write this down. Goals that are not written down are nothing more than wishes. Goals are achieved; wishes may or may not come true.
It will be easier to achieve your intermediate- and long-term "must haves" if you can economize and save on your short-term "must haves" and "nice to haves." You do this by making some short-term financial decisions regarding your current lifestyle. All too often young adults fall into the credit trap they waste years getting out of. This happens when they mistake short-term "nice to haves" for "must haves." Rule of thumb: if you don't have the money to pay cash now, it's not a "short-term must have." Avoid living beyond your means. You will need to save and invest in order to achieve your future goals.
To achieve your goals, you will need sufficient financial resources. These come in the form of income, savings, and investments. Whatever income you do not spend on short-term goals can be saved for future goals. If invested properly, your savings can generate more income and resources to achieve your future goals and more.
An important part of living within your means is choosing the right place to live. Housing will be your largest expense, consuming about 25–40% of your income (ouch!). Whether you buy or rent depends upon your lifestyle goals and the current local housing economy. While it is generally considered better to buy a home than to rent, in some localities you may find it cheaper to pay rent than to pay large mortgage payments, taxes, and other homeowner expenses. Cash flow and savings need to be an overriding consideration.
Should you decide to buy a house rather than rent, there are some income tax benefits of which to be aware. Interest paid on your mortgage as well as points paid to acquire the mortgage may be deducted from your income. Any property taxes you pay are also deductible. Costs for making any improvement to the house such as putting on a new roof, replacing plumbing or electric wiring, or adding wallpaper (not painting) can be added to your cost of the house to reduce potential capital gains taxes when you sell the house. You should keep careful records of these kinds of expenses.
While some very creative financing arrangements appear to make home ownership very affordable, they might have unforeseen consequences on the other end that can be devastating. On average, a family owns about three homes over its lifespan. This is possible because equity from one home is used to upgrade to another. A home is only a good investment if the mortgage terms and economy allow equity to build up as the mortgage balance declines. It's not true that housing prices always go up any more than it's true that stocks always go up.
There are many ways to keep housing costs down. One example is to share housing expenses with others, or opt for smaller and more economical housing. Choose your neighborhood wisely, keeping in mind how much it is going to cost to commute to work, transportation costs, and safety. Housing is a short-term "must have," but it shouldn't be allowed to break you financially.
Choosing your housing wisely will go a long way toward helping you realize your other lifestyle goals. After making a written list of your goals, attach estimated current costs to achieve them. Use these figures to start your financial plan. Make a short-term budget that allows you to save and invest for your intermediate- and long-term goals.
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