How much should you be spending for a car?

Question How much should you be spending for a car?

Answer 15% of your take-home pay.

Complete Answer To clarify the question, “How much should you be spending for transportation?” The answer is the same – 15% of your take-home pay. It is important to understand that transportation is an expense – it is not an investment nor a way of saving. A car is a depreciating asset.

Each month, set aside 15% of your take-home pay into your Transportation Account. Take money out of that account to pay for your transportation expenses. Walk or use public transportation to get where you need to go. If your Transportation Account never grows in value, that is a good indication that you cannot afford a car.

On the other hand, if the money in your Transportation Account continues to grow in value, you can start considering different options for getting around. For most of us, a car is our transportation. “How to” buy a used car or new car, should I lease or buy a car, how to negotiate the price of a car, et cetera, are beyond the scope of this blog. The focus of this blog is how to plan and pay for a car you have selected.

Generally speaking;

  • You should save 15% of your take-home pay until you have enough to pay cash for your first car. It will probably be used car. This will give you the experience of realizing how costly it is to own a car.
  • You should not put yourself in a position of making car payments and car repairs at the same time.
  • In addition to carrying liability insurance, most lenders will require you to carry comprehensive insurance on a car that you finance.
  • Car maintenance is required for all cars – new or used.

I actually know two people who do not nor do they want to own a car. They walk or use public transportation to get around. For road trips, they rent a car. For each, their respective Transportation Expenses are considerably lower than 15% of their take-home pay. Conversely, I know someone who buys a new car every year. He can afford it, that is important to him, and that is how he has decided to spend the money he has earned.

Financial Literacy Knowledge/Skill

Your Transportation Expenses should not be greater than 15% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you get out of  debt?

How much should you be spending for housing expenses?

Question How much should you be spending for housing expenses?

Answer 25% – 35% of your take-home pay.

Complete Answer “How to” rent an apartment or buy a house is beyond the scope of this blog. This post is intended to help you determine if you can afford the rent and/or mortgage for a place to live.

From the post of July 25, 2016, the recommended amount for monthly housing expenses is 30%, it may vary between 25% and 35%, of your take-home pay. Housing Expenses include all the expenses for a place to live. In addition to the amount you pay for rent or a mortgage each month, it includes the monthly cost for utilities, cable/satellite/Internet service, cell phone, insurance, repairs/maintenance, parking, et cetera.

Please Note: Being “homeless” is just as bad as it sounds. In times of financial crisis, your home should be the very last thing that you give up. If you have to live with a friend or family member until you are back on your feet and can find a place of your own, you should offer to pay them 25% of your take-home pay. Most likely, your friend/family member will refuse. If they accept your offer or not, you should keep them informed of your progress of saving money and finding a place of your own and when you plan to move out.

Long-term Goal: If you decide that you want to be a home owner, your long-term goal should be to pay off your mortgage before you retire. Please note, that even if you have a home that is paid off, you will still have property taxes, insurance, and maintenance and repair expenses.

Financial Literacy Knowledge/Skill

Your total Housing Expenses should be between 25% and 35% of your monthly take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much should you be spending for a car?

What banking services do you need?

Question What banking services do you need?

Answer A checking account, savings account, debit card, and a credit card.

Complete Answer  As with the purchase of any good or service, shop around for cost, features, and convenience.

Your checking account is your operating capital account. Deposit all monies received into this account. Use this account to pay all monthly bills on time and withdraw spending money, cash, as you need it. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals.

The first expense to be paid each month is to you. Deposit 10% of your take-home pay (Pay Yourself First) into a savings account. If you have money left over at the end of the month, put that amount into your savings account. Use your savings account if you must as explained in the posts of October 10, 2016, but always pay yourself back. You will be pleasantly surprised how quickly the amount grows and how much will be in your savings account at the end of the year.

Helpful Hint  Through no fault of your own, you could be the victim of identity theft and or bank fraud – unexpected financial emergencies. Because of the threats of identity theft and bank fraud, use two completely different banks (not affiliated with one another) for your checking account and your PYF Savings Account. If an account is compromised, you will still have access to some money from the second bank until the problem is resolved.

With a debit card you do not have to carry a lot of cash. It is an option you have with most checking accounts. A debit card, also known as a check card, may be used to make purchases, pay bills, and make cash withdrawals from an ATM. A debit card is especially handy for making purchases when you don’t know the amount of the purchase in advance, weekly groceries or a tank of gas for example.

In reality, a credit card is a short-term loan to make a purchase. As such, interest is charged for credit card balances that are carried for more than the one month billing cycle. A credit card is ideal for Internet purchases and a must when traveling. In most cases, you will also need a credit card to rent a car. I personally use my credit card for automatic payments, and pay off the balance each month. It gives me a record of the date of the payment and I have more control over the automatic payment process.

Financial Literacy Knowledge/Skill

A checking account, savings account, debit card, and a credit card are the basic banking services you will need to manage your money effectively.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much should you be spending for housing expenses?

Is a credit score important?

Question Is a credit score important?

Answer Yes.

Complete Answer  A credit score is a numerical value based on the information contained in your credit report which is a detailed report of your credit activities. Your credit score, also known as your FICO score, tells a potential lender your credit worthiness, the likelihood that you will pay back a loan. The higher your credit score, the more likely you will pay back the loan, less risk for the lender. Conversely, the lower your credit score, the less likely you will pay back the loan, more risk for the lender.

Credit scores are important because they are used:

  1. To determine if you will be granted credit for a mortgage, car loan, credit cards, et cetera and the interest rate that will be charged. Generally, the higher your credit score the lower the interest rate.
  2. To determine if and the amount of a down payment and/or security deposit will be required for an apartment rental, cell phone purchase, et cetera.
  3. To determine the cost of insurance; car, renter’s, or home owner’s. The higher your credit score, the lower cost of certain types of insurance.
  4. By potential employers who may view a poor credit score as an indication that a person is living beyond their means which could negatively impact your ability to get a new job.

If you follow the three most critical elements of Financial Literacy, knowing your income and expenses, living below your means, and saving, you will have a respectable credit score.

Please Note: You should get a credit report at least once a year and review it for accuracy. The three major credit reporting agencies are Experian, TransUnion, and Equifax. You are entitled to receive a free credit report once a year from each agency.
Contact Information:  Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281; www.annualcreditreport.com; (877) 322-5281.

Financial Literacy Knowledge/Skill

A credit score is important not only because it is an indication of your credit worthiness, but is used to give some indication of your ability to manage your finances in a responsible manner.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic:  What banking services do you need?