Financial Milestones: Keeping Your Emotions in Check

This post really hits home for me right now. My wife is due any day with our first child and we’re currently balancing our New York City apartment with a new home which we bought and are renovating in the suburbs. At the same time, my wife has left work for a few months, cutting out a chunk of our income. We find ourselves at a point where we have lots to buy but we need to be more cautious than ever not to fall into the trap of getting everything we want now and leaving ourselves financially vulnerable later on. This inspires today’s post about how to get through life’s major financial events including weddings, home buying, children, etc, without letting your emotion force you into decisions which you may regret down the road.

Let’s start with the wedding. Prior to throwing this grand party, being a couple often saves people money. Joining together two financial lives can often improve people’s financial condition because of reduced spending on housing, food, and transportation, among other things. The wedding, however, is a spot where people often throw caution to the wind and spend, on average, $27,000 (according to The Knot). While many people get help from family members to pay for it, most people dig deep into their savings and even take on debt to finance a great party for their friends – one which is often forgotten a few days later when people go back to work and move on with their own lives. I can’t emphasize enough that a wedding day should be remembered for the warm emotion shared by family and friends and not for how many lobster tails get passed around. Talk to your partner and figure out a budget that won’t stress you out and won’t impact any other financial decisions you’ll be making shortly thereafter.

Moving down the road from the wedding, people often buy homes. This could obviously be done at anytime and not just by a couple, but I like the couple example as they often are buying a home to live in and its longer term investment value is a secondary consideration. To buy a home just because interest rates are low is not necessarily the right move. Taking on debt in the form of a mortgage or anything else is a big decision that shouldn’t be taken lightly. When buying a home, I often tell my clients to limit monthly payments including mortgage and taxes to 1/3rd of their after-tax income. That means if your household takes home $6,000 after taxes each month, you should look to spend no more than $2,000 each month on mortgage and taxes. You’ll inevitably have many other things to dedicate money to including your personal savings, food, transportation, utility bills, travel, etc, so spending 1/2 your monthly income on housing is simply too much. You may end up ‘house poor’ and that can be very stressing on individuals and relationships.

Starting a family is another expensive task that usually starts to bite in one’s 30′s. Studies show living expenses can rise up to 20% with the added food, clothing, education costs, etc. Making the decision to start a family should imply a willingness to demonstrate even more financial discipline – you’ll want to be saving at least 10% of your income to cover the many thousands of dollars of costs that will come up as your kids get older. Needless to say college is expensive, but figuring out the right equation to pay for higher education is a whole other blog post.

Finally we have the looming issue of funding retirement, something many people don’t give much thought to before age 45 or so because well, retirement is so far out in their thoughts that focusing on it in their 20′s doesn’t seem necessary. As with many personal finance decisions, the earlier you start thinking about it, the better. Why? Because time is your friend in your financial life and a few thousand extra dollars put away earlier on can make a huge difference when you’re in your 60′s. So, after your wedding when you’re thinking about buying that house and starting a family, also think about budgeting money for your 401k/403b contributions, IRA contributions, after-tax accounts, and wherever else you are stashing away money to compliment the fading Social Security system.
This post certainly wasn’t meant to scare you, just to rein in those temptations to live above one’s means, something many people – including many high income earners – tend to do. I encourage you to live a life rich in not just material things, but in meaningful relationships and hobbies which ultimately are more fulfilling than all the stuff we tend to fill our lives with.

As always, feel free to e-mail me with any questions or comments.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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