When saving to buy a home, look beyond the money you’ll need to pay for a down payment and consider moving, inspection and closing costs, too. (Getty Images)
With interest rates going up, the cost of borrowing money to pay for major life expenses is also going up. The Federal Reserve has already raised the interest rate three times this year and will most likely raise rates again before the year is out. After years of relatively unchanging rates, it’s become more important for consumers to plan for major expenses. Planning can include researching prices, creating a budget and – most importantly – saving as much as possible to put toward the goal.
The key to preparing for any major expense is knowing how much to save. While everyone’s financial situation is different, there are some rules of thumb to keep in mind for most major expenses.
Before you start. Before you start saving for a major expense, it is a good idea to make sure you have a savings plan in place for emergencies. An emergency fund is an important first step toward financial security. Emergency funds are key to surviving an unexpected car repair or medical bill and even the loss of employment. Depending on your situation and the size of your family, you should plan on building an emergency fund that can cover between three and six months of your bills.
Saving to buy a home. Buying a home is one of the largest investments you will make. It is also one of the most complex. When it comes to saving for a home, many people think of saving for the down payment. Most lenders are looking for a down payment of 20 percent of the home’s purchase price to avoid extra fees and mortgage insurance. For a $200,000 home, a 20 percent down payment would be $40,000.Unfortunately, there are more fees and expenses to buying a home than just the down payment. After the down payment, the next figure to add to your savings goal is closing costs. Closing costs are fees and taxes you must pay to complete the purchase of the home. These fees vary by area. According to the real estate site Zillow, you can expect to pay an additional 2 to 5 percent in closing costs. On a $200,000 property, that could be up to $10,000. Other common home-buying expenses include paying for the home inspection and moving costs. Make sure to research the average home cost and fees for your location to get an idea of how much you need to save.
Saving for college. With the cost of a college education increasing every year, saving for a child’s education has become a priority for parents. According to Sallie Mae, 57 percent of parents who believe their child will attend a college have started saving, with the average savings goal being $55,342. If you want to reach that goal within 10 years, you would have to set aside $461 per month for each child (not including potential interest on the amount saved).
The key, again, is to start early. But even an early start doesn’t change the fact that paying the full amount for college can be unreasonable for many families, so you will need to determine what percentage you are able to contribute. One tool to help you with your savings goal is a 529 plan. This tool is a savings account specifically designed to pay for education, offering federal or state tax breaks with minimal impact on financial aid.
While you may not have the answer to these questions, you can remove some of the guesswork. Create a budget of your current monthly living expenses. This will give you realistic numbers for your retirement. Next, add the cost for hobbies and travel you want to start doing once you retire. While you can’t know how long you will live in retirement, you can talk to your doctor to get statistics for people in your demographic.
Saving to buy a car. Unlike a home or retirement savings account, a car is a consumer product. The final cost is largely determined by your price range. Other factors that can influence the final cost include the car model, if you’re buying new or used and where you’re buying the car. Unlike buying a house, it is possible to save to buy a car outright. Many car buyers will focus on saving for the down payment rather than the full price of a car, financing the rest with an auto loan. A higher down payment can lower the monthly payments on your auto loan and could even result in you paying less interest with a shorter-term loan. A savings goal of 20 percent of the purchase price should cover a new car’s first-year depreciation and allow you to avoid paying extra fees such as gap insurance.
Keep in mind that your new car savings goal will need to include more than just the down payment. Make sure to research how much taxes, title and license cost in your area as well as the impact the car will have on your insurance.