cost more. In fact, higher-priced products and services are sometimes inferior to lower-cost alternatives.
Finally, buy in bulk. Most items are cheaper per unit when you buy them in larger sizes or volumes. Wholesale superstores such as Costco and Sam’s Club and chain discount stores like Target offer family sizes and competitive pricing. Also watch for sales at local grocery and discount stores.
Financial software packages, such as Quicken, can help with the task of tracking and analyzing your spending, but old-fashioned paper and pencil work fine, too. What you need to do is assemble information that shows what you typically spend your money on. Access your checking account records, credit- and charge-card bills and transactions, online bill payment and banking summary, job pay stub, and your most recent tax return.
Whether you use our handy-dandy table or your own software isn’t important. What does matter is that you capture the bulk of your spending. But you don’t need to account for 100 percent of your spending and track every last penny (or even every last dollar). You’re not designing an airplane or performing a financial audit for a major accounting firm here!
Analyzing your spending numbers
Tabulating your spending is only half the battle on the path to fiscal fitness and a financially successful home purchase. You must do something with and about the personal spending information that you collect.
Here, in order of likelihood, are the possible outcomes of your spending analysis:
You spend too much. When most people examine their spending for the first time, they’re somewhat horrified at how much they spend overall and for what specific things. Perhaps you had no idea that your café latte addiction is setting you back $100 per month or that you spend $400 per month on eating out. Your challenge is to decide where to make reductions or cutbacks. (Check out the nearby sidebar, “Trimming the fat from your budget.”) Everybody who has enough discretionary income to buy this book has fat in her budget (some have much more than others). For most people to reach their financial goals, they must save at least 10 percent of their pretax income. But how much you should be saving depends on what your goals are and how aggressive and successful an investor you are. If, for example, you want to retire early and don’t have much put away yet, you may need to save much more than 10 percent per year to reach your goal.
You save just right. You may be one of those people who has mapped out a financial path and is right on track. Great! However, just as a cue ball sends a neatly racked set of billiard balls into disarray, buying a home can disrupt even the most organized and on-track budgets. Reviewing what your budget may look like with a home in the picture is important. So if you haven’t already done so, complete Table 2-1 to analyze your current spending and project how it may look after a home purchase.
You save a lot. Perhaps you’re one of those rare sorts who save more than necessary. If so, you not only may be able to skip doing a budget but also may be able to stretch the amount you spend and borrow when buying a home. But even if you’ve made your financial plans and are saving more than enough, you still may want to complete Table 2-1 to ensure that your financial train doesn’t get derailed.
Reckoning Your Savings Requirements
Not only do most people not know how much they’re currently saving; even more people don’t know how much they should be saving. You should know these amounts before you buy a home.
How much you should be saving likely differs from how much your neighbors and co-workers should be saving, because each person has a different situation, different resources, and different goals. Focus on your own situation.
Setting some goals
Most people find it enlightening to see how much they need to save to accomplish particular goals. Wanting to retire someday is a common goal. The challenge is that in your 20s and 30s, it’s difficult to have more clearly defined goals — such as knowing that you want to retire at age 58 and move to New Mexico, where you’ll join a shared-housing community and buy a home that currently costs $200,000. Not to worry — you don’t need to know exactly when, where, and how you want to retire.
But you do want to avoid nasty surprises. When Peter and Nancy hit their 40s, they came to the painful realization that retirement was a long way off because they were still working off consumer debts and trying to initiate a regular savings program. Now they’re confronted with a choice: having to work into their 70s to achieve their retirement goals or settling for a much less comfortable lifestyle in retirement.
THE WISE USE OF CREDIT
Just because borrowing on credit cards bears a high cost doesn’t mean that all credit is bad for you. Borrowing money for long-term purposes can make sense if you borrow for sound, wealth-building investments. Borrowing money for a real estate purchase, for a small business, or for education can pay dividends down the road. Note: The amount that you borrow should be reasonable in comparison to your income and ability to repay.
When you borrow for investment purposes, you may earn tax benefits as well. With a home purchase, for example, home mortgage interest and property taxes are generally tax-deductible (as we discuss in Chapter 3).
If you own a business, you may deduct the interest expenses on loans that you take out for business purposes. Interest incurred through borrowing against your securities (stock and bond) investments (through so-called margin loans) is deductible against your investment income for the year.
In fact, you can even make wise use of short-term credit on your credit cards to make your money work harder for you. For example, you can use your credit cards for the convenience that they offer, not for their credit feature. When you pay your bill in full and on time during each monthly billing cycle, you’ve had free use of the money that you owed from the credit-card charges that you made during the previous month. (See Chapter 5 for details on how to use your positive credit experiences to obtain the best possible mortgage.)
If retirement isn’t one of your goals, terrific! Should you want (and be able) to continue working throughout your 60s, 70s, and 80s, you don’t need to accumulate the significant savings that others must in order to be loafing during those golden years. But counting on being able to keep working throughout your lifetime is risky — you don’t know what the job market or your personal health may be like later in life.
Retirement-savings accounts and a dilemma
Prior tax reforms have taken away some previously available tax write-offs, except for one of the best and most accessible write-offs: funding a retirement-savings
