The 5 Things That Take up 50% of Your Earnings

The beginning of the year is always a good time to do a major review of your financial health. In reviewing my budget, I came across this helpful article that I had filed away last year - Five Expenses That Will Consume 50 Percent of Your Lifetime Earnings.

According to Manisha Thakor, there are 5 areas of spending that will consume half of your lifetime income. Keep these five areas under control and you have a chance of staying financially afloat.

1. Education – the common wisdom is to attend the best college you gain admission to. But can you afford it? Consider your choice of major, your prospects for employment after graduation and your likely annual earnings. How much is too much? Thakor says that “the amount of your student loan should not be more than what you expect to make annually during your first 10 years”. Suddenly, that expensive education does not look like a good financial investment any more.

2. Car – Thakor suggests that you should spend no more than 10% of your income on a car. Fine, but make sure it’s a cash payment and not a car note. A car starts to lose value as soon as you drive it off the lot. A car note means that you are funding a diminishing asset. Better to save and save until you can pay cash for a car. For most of us that means that we may never buy a brand new car but financially that is the better decision.

3. Home – for most people this is their most important purchase. The days of the easy no-doc mortgages are gone and most banks are back to responsible lending practices. This means that you are unlikely to get approved for a mortgage that is more than 3 times your annual income. Try and spend less and if anyone tries to convince you to spend more, run!

4. Kids – according to the US Department of Agriculture, it costs $220,000 on average to raise a child up to the age of 18, excluding college costs. Being a parent can have many rewards, and the little darlings may be adorable, but remember you also have a retirement to fund. Plan accordingly.

5. Retirement – regular saving is hard enough. Regular saving for a far-away goal is even more difficult. Thakor says that “a simple rule of thumb is to multiply your current income by 25. So if you make $50,000 a year and want to maintain that standard of living in retirement, you’ll need a nest egg of at least $1,250,000”. See number 4 – that’s equivalent to the cost of 5.6 kids. Do the math.