Today, Mr Credit Card from www.askmrcreditcard.com is going to talk about how long term fixed expenses and obligations can affect our ability to save. Hope you enjoy his thoughts on this. For those searching for new credit cards he has a best credit cards section. If you are interested in submitting a guest post you can learn more now.
In my opinion, the biggest obstacle to “saving” is long term and fixed obligations.
At first glance, it looks relatively simple. Just simply set aside an amount every month and do not touch it. But as we grow older, certain “long term expense” start to creep into our lifestyles. When you graduate from college, we rent. Rent is not a long term liability because you can always move to a cheaper place or go back and live with your parents. You might spend more of your money of discretionary stuff when you are younger (and single – shopping anyone). Also, younger folks do not care so much about health insurance (we all think we are superman or superwomen).
But as we get older, we incur more “long term obligations” and if are not careful, it will make it more difficult to save. Let’s look at some of these.
Housing – Housing is perhaps one of the biggest long term expenses in one’s personal finance. Whether you are paying rent or mortgage, it still represents a huge chunk of most budgets. Conventional wisdom is that you take a mortgage no more than 30% of your gross income. When you make the calculations after-tax, that percentage goes up a lot depending on your tax bracket. This huge expense weighs a lot on many folks.
Then there is the other consideration of whether a couples’ mortgage is based on one or two incomes. If it is based on one income, then there is a bit of a safety net should one lose his or her job. But if a couple took out a mortgage based on double income, then it could pose a problem should one income disappear. Obviously, having a mortgage need not be a huge burden if it is a small percentage of your income. Alternatively, one can also downgrade and move to a smaller place.
Health Insurance – Depending on whether you work for a company that provides health insurance or you are a sole proprietor, health insurance premiums are another long term expense that you simply cannot live without (although there are millions of people currently without health insurance). Even worse, if you have to foot the whole bill yourself, a health insurance premium is extremely expensive. Just as an example, we pay over $800 a month for family coverage! And I bet it goes up next year!!
Long Term Illness – Having a long term illness can also result in higher monthly expenses – like higher insurance premiums, medicine, medical bills and treatment costs. Maintenance even after a long term illness can cost quite a bit, so even if you’re cured, you aren’t entirely out of the woods.
Kids – It is almost politically incorrect to say this – but kids do cost money. The more you have, the more they cost. The biggest cost is probably saving for their college expenses (unless you decide that they are going to take on debt and foot the bills themselves). You obviously do not have to spoil your kids by buying them an X-box or Wii and getting them a fancy cell phone when they go to middle school. But if you really added up the cost of raising your kids, they add up to quite a bit.
Parent Support – As the average age of life increases, so does the responsibility of more and more children to care for their parents. It is fairly common for a household to include not only children but parents as well and the costs to care for both are just about equal.
But It’s Not Just Us – The Federal Government Has Lots of Long Term Obligations As Well
But it’s not just us that faces this problem. Our Federal and State Government faces this issues as well. Here are some long term liabilities that is going to seriously affect us going forward.
Social Security – Social Security is already in the “red” this year (ie it is paying out more than it receives in tax revenues). But because of the aging of the baby boomers and the fact that it is a pay as you go system, social security is going to be one of the biggest long term obligations that the US Federal government has to face in the coming decades. Which means not only the government, but us as well if we want it to be around when we need it and our children need it.
Medicare – Our medical obligations to senior citizens will only grow larger as baby boomers retire and our population ages. Longer life spans (although a good thing) impact not only parent support in the household as a long term financial obligation, but affects Social Security and Medicare as well. This is compounded by the Bush’s Administrative passing of the Medicare prescription bill that is set to cost a heck of a lot of taxpayers’ money.
Under Funded Public Pensions – While the private sector has realized that a full defined benefit pension plan is potentially unsustainable, the public sector has continued to offer generous plans. Best of all, very few are fully funded. This issue is going to come back and bite us (if it hasn’t already). Lots of states have to cut staff because of decreases in revenue and also because of large expenses like pension obligations.
How Do We Not Let Long Term Financial Obligations Ruin Our Finances?
Since the 2008 financial crisis, many folks have realized that they are carrying too big a liability and are in serious financial trouble. After losing one’s income all of a sudden, servicing that mortgage when the value of your home is upside down is daunting. Many have their houses foreclosed. Some have short sold their homes. Some have downsized and downgraded. How could we have prevented it in the first place? Here are some of my thoughts.
Do not make long term obligations a huge portion of your budget – For example, when you are considering taking on a mortgage, take out an amount that is a small percentage (maybe 15% of gross income) on just one income. That way, if one person in a relationship loses their job, it would not be a disaster. Consider what the real estate taxes are as well. This may affect where you decide to put down your roots. Remember, even after you pay off mortgage, you still have to pay real estate taxes. And that amount may be significant.
Consider trade offs – Unless you are a billionaire, every money decision you make is a trade off. Let’s take saving for your kids college education as an example. Whether you decide to save up and fully fund their college education depends on your financial means, it often involves some trade offs. For example, you decide that there is no way you can fully fund your kids college even if you wanted to. Then it is a compromise of partially funding it and letting your kids take care of the rest.
Remember: More Long Term Obligations means a lower standard of living – The more long term obligations we have, the lower our standard will be. It means we have less to save, less to spend on luxury items. It means we have less to tithe! It also means your kids may have a mortgage like debt after college (talk about running on a threadmill!). And if we do not reign in federal spending, it means our taxes will go up! More taxes means less money in our pockets and less discretionary income. So before you decide to pull the trigger on the house or car or any long term obligations, think twice. Ask yourself if you really need to spend so much? Do you really need such a big house? Do we really need such a big SUV? Should you save up and pay cash for the car instead of taking out a loan? The less fixed long term expenses we have, the more we have to spend on other things.