Michelle asked: My husband and I were just recently married. We already have a great savings account and almost zero debt. We don't have student loans or anything. We have an $8,000 car loan to pay off and only $70 on one credit card. We are hoping to start a family in about 6 months or so and we really want to start setting aside money for babies and their future. What is the best way to do this? We keep a minimum of in savings for emergencies.
There are a couple topics I would like to discuss today that were triggered by Michelle's question.
First of all, I don't really know how much babies cost. So it's hard for me to tell you how much to save and how long it will take, etc. I know they do cost a pretty penny and in my personal opinion, it would be wise to prepare financially for a child. It is up to the couple to discuss how involved you want to be in your child's financial obligations. If you decide that you want to pay for your child's education, I would say start saving for that when they are born. Don't wait five years to start a college fund. Time is on your side. You also need to discuss if you want to buy them a car when they are sixteen, if you're going to encourage them to get a part-time job during high school to pay for their extracurricular activities, etc. A lot of that depends on how you and your spouse want to raise your children. If you decide to pay for their education, I would recommend mutual funds or some kind of educational IRA. They have many tax benefits which you should discuss with an accountant or tax adviser. (I'm not an expert on taxes. :) ) But there are many options out there that are tax-free if the funds are used for education purposes. Ask your credit union or bank for options too!
Secondly, I applaud you for having an emergency savings! I can't stress how important this type of savings account is. Experts have advised to save at least 3 months of your expenses in case of unforeseen events, such as job loss. Since the current economic crisis and unemployment rate, the number of months they advise has changed to 6. Yes, it is taking people that long (or longer) to find another job. An emergency savings is there so you can still make your payments on your loans, buy food, etc. without completely ruining your credit score. (I'll talk about credit another week.) It is also there to help pay for other emergencies such as your car breaking down, an appliance kicking the can, etc. Depending on your obligations, an emergency savings can be quite a large chunk of change.
For example, if i have a
mortgage payment: $900
utilities: $250 (electric, gas, internet, water, garbage, etc.)
car payment: $200
food: $400 (2 kids, 2 adults)
health insurance: $100
(obviously there are more expenses every month, but you get the idea.)
If I were to build up an emergency savings to sustain my family for 3 months with these types of payments it would need to be around $5,800!
In my opinion, I feel like a lot of people today live pay check to pay check without preparing for emergencies. Then when they lose their job they don't have any money to pay their bills, their house is in default, and their credit goes down the drain. Or they use credit cards (yikes!!). Don't let that happen to you.
I barely feel like I have enough saved for an emergency savings and it took a while to save. It's hard to not want to spend that money on something else. I get that.
My point is, you can't predict what could happen. Start an emergency savings today! It may take a little time to build up, but can you see how important it is?
I will tell you in a few weeks about different savings accounts where you can put your emergency savings and where you can earn the highest interest rate in this market.
Thanks for your question, Michelle! Hope it helped.
-how to pay down your debts faster!
-what is a credit score?
-what is the best budgeting method?
I'm begging you to ask me questions!
I know you have them.
Or maybe you are all experts!
Come out of hiding and email me already.
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