Give the Gift of Education: College 529 Plans

The holidays are upon us. I’ve always thought Christmas was mostly about the kids. There is nothing better than seeing a little face light up at the decorations or the absolute glee in your child when she receives that one thing she wanted most of all. But all the gifts can get out of hand.

With grandparents and aunts and uncles all giving to your children, your kids could be on overload before breakfast Christmas morning. If your kids’ eyes are glazed over before they’re done opening all their presents, consider a different tactic that can cut down on the volume of gifts and help with your children’s future. Ask your relatives to make a contribution to a College 529 plan instead of buying the usual gifts that may be forgotten in a corner before long.

A College 529 plan is a tax advantaged savings program for post high school educational expenses. Investment earnings grow tax free and withdrawals for educational purposes are tax exempt.

An AARP survey found that 36 percent of grandparents believe it is their job to spoil their grandchildren by buying them lots of stuff, mostly at the holidays. Of grandparents surveyed, 25 percent will spend more than $1,000 in a year on their grandchildren, and 40 percent will spend more than $500.

Those amounts can add up to substantial college savings by the time your children are ready for school. If your children were to receive a total of $500 in gifts each holiday season from their relatives beginning when they are babies, a 529 plan could grow to well over $14,000 by the time they are 18, assuming a 5.0 percent annual return. Smaller amounts also help. Some 529 plans accept deposits on existing accounts as low as $15.

The gift giver benefits as well. Contributions to a 529 plan in 34 states are state tax deductible, and in two thirds of those states, you don’t need to be the owner of the account to get the deduction. In Oregon, for example, a single person can deduct up to $2,300 of their contribution, and a married couple can deduct up to $4,600. If a larger gift is made, the extra over the deductible limit can be deducted in future years.

For the states where you do need to be the owner to get a deduction, the gifter would open their own account and simply name the child as the beneficiary. There is no limit to the number of accounts that can be opened for a single beneficiary.

For the 16 states that don’t offer a 529 plan, an account can be opened in any other state’s plan. While contributions are not deductible, the investment earnings will still grow tax free. There is no obligation to attend school in the state where the account is opened. Savings in 529 plans can be used for educational expenses at a wide variety of schools nationwide.

There are no limits to annual contributions for 529 plans. Gifts greater than $14,000, which is the gift tax exclusion amount, require the filing of a gift tax return. However that does not mean the gift will be taxable. It can remain tax exempt under the lifetime exclusion for estate taxes, currently at $5.49 million per individual for federal tax purposes. The maximum lifetime 529 plan contribution limit is $300,000

If your child doesn’t attend school, the money can continue to grow tax free in case they change their mind later. The money can remain in the plan as long as there is a living beneficiary, and you can change the beneficiary if school isn’t in the cards for the first one.

If the money is not used for educational purposes, you will pay income tax and a 10 percent penalty on the earnings. While that sounds terrible, if you’ve had the money invested for a while, chances are your earnings will have grown, and you will still come out ahead.

Instead of your parents buying gifts that won’t last or will be set aside to gather dust, have them invest in your child’s future. Toys wear out. Clothes are outgrown. Electronics become obsolete in no time. Most kids can only take so much unwrapping on Christmas. A College 529 plan contribution is a gift that will have a lasting impact, and have your child remembering Grandma and Grandpa’s gift all their life.

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Tips for Dealing With the High Cost of Healthcare

Healthcare plans are changing. As insurers seek to limit the increases in their premiums and employers seek to lower their costs for providing this important benefit, those who need healthcare are left holding more of the bag. There are a few things you can do to prepare and limit your costs.

Thanks to the Affordable Care Act, many typical medical expenses are required to be covered by both individual and group healthcare plans. And the summary of benefits has been standardized so you can more easily understand your coverage, copayments, deductibles and out-of-pocket maximum costs.

Unfortunately these seem to be on an unending march upward. Regardless of the plan, your share of the cost of healthcare, on top of your premiums, is growing. The increasing use of Consumer Driven Healthcare Plans (CDHPs), also known as high deductible plans, and the elimination of out-of-network coverage in many cases are two developments that can lower your premium but still drive up what you pay for healthcare.


The number of companies offering CDHPs, or high deductible plans, has grown sharply in the last ten years. An annual survey by the National Business Group on Health found that 90 percent of large employers are offering at least one CDHP, and 40 percent will offer only a CDHP in 2018. Almost one third of all covered employees are now enrolled in a CDHP according to a Mercer study.

While wellness exams are fully covered under all healthcare plans now, in CDHPs you must pay for services beyond wellness exams out of your pocket until the high deductible is met. Often the savings on the premium can at least partially offset the expenses, making the lower coverage worthwhile. But there are a couple of things you can do to further limit your costs.

Take advantage of the Health Savings Account (HSA). The HSA is a tax advantaged way to save for your out-of-pocket medical expenses. Your contributions to the HSA are pre-tax, saving you the equivalent of your tax rate on medical expenses paid out of the account. Your contributions to your HSA are yours to keep, with no requirement to spend them by the end of the year. Your goal should be to accumulate at least enough to cover your deductible in the HSA.

Shop around for your prescription medications. Before you spend your deductible you will pay the cash price for your medications. There can be a shocking difference among the cash prices charged by different pharmacies. So it pays to shop around.

Try to see where your prescriptions are cheapest. One prescription I checked ranged in price from $38 at Costco to $341 at Rite Aid.

There can be substantial savings for name brand, non-narcotic drugs purchased through Canadian pharmacies. One name brand prescription can be bought for $78 for a three months supply vs $497 at the lowest cost U.S. pharmacy.  Check out to find the lowest prices for your medications. If the pharmacy is certified, you can be assured they get the medications from the same manufacturers as U.S. pharmacies.

These pharmacies will be out-of-network, so the cost of your medication may not apply to your deductible or out of pocket maximum, but the savings can make that sacrifice well worth while.

Finally, many pharmaceutical companies offer coupons on your name brand medications to make them more affordable. Check your medication’s manufacturer’s web site for offers.

Loss of Out-of-Network Coverage

Whether your plan is a CDHP or not, increasingly, health insurers are cutting out-of-network coverage. Out-of-network coverage pays providers even if they haven’t negotiated pricing with the insurer. Your share of the cost is higher, but your out-of-pocket costs are still limited by the plan maximums. If there is no out-of-network coverage, you will fully pay for services, and the expenses will not go toward your annual maximum out-of-pocket expenses.

This is a big issue with emergency room services. The ACA requires insurers to cover “reasonable” expenses for emergency care regardless of the hospital you use. However the hospital and the service providers working there, are free to bill you for their fees above what the insurer pays them if they are out-of-network.

Even if you seek care at an in-network hospital, the doctor who attends you may not be an in-network doctor. Hospitals often contract their emergency room physicians from outside doctor groups. If you are attended by an out-of-network doctor in the ER, you could be billed for their service separately, and your insurance would not cover the cost. The practice is called balance billing.

The Commonwealth Fund, a private foundation funding healthcare research, reported that 14 percent of those who had visited the ER received an unexpected bill from an out-of-network doctor. Of those who were subsequently admitted to the hospital, 20 percent received an unexpected balance bill. Seven in ten who had unaffordable healthcare bills did not know their provider was out-of-network, according to the Kaiser Family Foundation.

Consumer Reports offers some advice to help you protect yourself. If a family member or friend accompanies you to the hospital, during registration, they should request you be treated only by an in-network doctor if you arrive at an in-network hospital. At discharge, your companion should request a print-out of all charges in case you must fight the bill later.

Carefully validate your bills against the list of charges. If you receive an out-of-network balance bill, check with your insurer to see if you can get them to pay it as part of the emergency coverage. If not, negotiate with the doctor. If that doesn’t get your bill within reach, file an appeal with your insurer. The Patient Advocate Foundation can provide advice on filing an appeal for free. If all else fails, file an appeal with your state insurance commissioner.

Healthcare has become a consumer nightmare. To avoid bills beyond what you can afford make sure you have savings to cover your share of the costs. Take charge of your medical bills by shopping around for the best prices on medications, and be willing to go to bat for yourself if necessary.

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4 Things To Review on Your Retirement Plan During Open Enrollment

Every year after Halloween, time begins to accelerate as the year hurtles through the holidays and to its eventual end. But before you brace yourself for the feasts and family, you have some business of your own to take care of. For most employers, November 1st marks the beginning of open enrollment for company benefits.

While the centerpiece of open enrollment is healthcare benefits, its also a good time to pay some attention to your retirement account. You should revisit your contributions and your investments, consider switching your contributions to a Roth option and update your beneficiaries.


Your minimum contribution should be enough to get your company’s match. Most employers require you to contribute 6.0 percent to get the full company match. If you are contributing the minimum, you aren’t saving enough for retirement. Make an effort to increase your contributions this year, and each year from here on out, until you hit the maximum.

The 2018 contribution limits for employer sponsored retirement accounts, such as 401(k)s, has gone up. It is now $18,500 and if you are over 50, you can contribute up to $24,500. If your goal is to contribute the maximum to your account, you may need to adjust your contributions.


With the stock market up, you may find that you have more money in mutual funds investing in stocks than you intend. Now is a good time to sell some of your stock market investments and buy more conservative investments to rebalance your account to its target allocation. If your company’s plan offers an auto rebalancing feature, where your account could be automatically rebalanced to its target allocation, now would be a good time to turn it on.

Not sure what your allocation should be? Most plans offer help with figuring this out, whether its through planning tools available on the web site or some form of professionally managed investment option.

In the professionally managed category, target date retirement funds are now widely available. You can tell which ones these are, because they have a year in the name of the fund, such as target retirement 2045.

Target date funds are fully diversified investment options. The fund’s manager gradually reduces the fund’s allocation to risky stock market investments as the target date approaches. All you have to do is select this investment option, and your retirement account will be managed in a reasonable way for your age and the time remaining before you stop working.

If your company’s plan doesn’t offer target date retirement funds, they may offer a managed account option. With a managed account option, your investments will be managed for you by an investment adviser based on information you provide, usually through an on-line questionnaire.

If none of these are available to you, one easy rule of thumb is to subtract your age from 120 and invest that percentage in stock mutual funds. Then invest the rest in bond funds.Asset Allocation

Roth Accounts

Now is also a good time to check whether your company offers a Roth retirement account option. Both accounts allow your investments to grow tax free while you are saving for retirement, but they differ in the tax treatment on both the front and back ends.

With a Roth option, your contributions are after tax, whereas with a traditional account, your contributions are before tax. While the before tax contributions make the traditional accounts appealing on the front end, Roth accounts have more advantages on the back end, when you are withdrawing your money.

When you want to spend your money in retirement, withdrawals from a traditional account will be fully taxable, while withdrawals from a Roth account will be fully tax-exempt. The following table shows the advantage of the Roth account over a traditional account with a single year’s contribution.

roth example

Because the growth in your investments will be far greater than your contributions, your tax bill on withdrawal from a traditional account will be higher than the tax advantage you gained on deposit. That makes the Roth option, with no tax obligations on withdrawal, more attractive.

Roth accounts have other advantages. You can withdraw your contributions, though not your earnings, at any time without paying taxes. This comes in handy if you plan to retire before you are 59 ½. You also won’t be required to take a minimum distribution when you turn 70. Finally, withdrawals from a Roth account are not included in your income calculation for determining whether your social security benefits are taxable.

Anyone can contribute to a Roth retirement account through work. There are no income limitations as there are with Roth IRAs. If your employer matches your contribution, they will match your Roth contribution by making a contribution to a traditional account. So you will wind up with two retirement accounts through work.

If you move your balance in your traditional account to the Roth account you will be taxed on the amount transferred, so don’t do that unless you’ve checked with a tax professional and know what you’re in for. However, your future contributions can go toward a Roth account.


Review your beneficiaries. Regardless of any other documents you may have, such as a will, financial institutions rely solely on your beneficiary designations to distribute your account in the event of your untimely demise.

If your spouse has changed, make sure your prior partner is not still your beneficiary. Do not make minor children beneficiaries, because financial institutions cannot distribute money directly to them until they turn 18. Consider establishing a family trust, and making it your beneficiary, to allow your children’s guardians easier access to the money needed to raise your kids.

There is no time like open enrollment to focus your attention on financial matters. Before things get hectic with the holidays, take advantage of this annual checkpoint to make sure you are on the right track with your retirement benefits. Your work related retirement plan may well make up the bulk of your retirement savings, so take advantage of what is available to you.

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The Stock Market is at Record Highs. Should You Get Out?

Both the Dow Jones Industrial Average and the S&P 500, the venerable U.S. stock market indices, closed near record highs on Friday, October 13th. Both indices have been steadily climbing all year. The Dow, including dividends, is up 17.92 percent and the S&P, also including dividends, is up 15.86 percent just this year.

The run up has investors waiting for the other shoe to drop. Surely the next move can only be down. Every week there are articles discussing whether we are on the verge of another stock market bubble bursting. You’ve worked hard for your savings, and nothing is worse than seeing a big hole in the value of your nest egg. So should you sell your stock market investments to avoid that?

To see how it might turn out, look at what happened following the last stock market peak, in September of 2007, just before the financial crisis. If you had perfect foresight you would have sold then, and avoided the following drop in value of 51 percent. Then you would have bought back your investment at the low in February of 2009. By now your investment would have more than tripled.

But let’s be realistic. We only have perfect hindsight. We know nothing about the future. We can’t tell whether we are at a peak or just a nice view point along the way. And we certainly won’t be able to tell when the market has hit bottom.

To get a sense of what most investors did following the stock market peak in 2007, we can look at investor net buys or sales of mutual funds and exchange traded funds investing in the stock market during the time period. In the following chart, fund net buys (actually sales because they are negative) are in blue and the S&P 500 Total Return Index is in orange.

Funds flows and performance

Yes, investors began taking money out of the stock market as it began to decline from it’s highs. But they continued to take money out even as it rebounded. As the market surpassed it’s previous peak investors were still withdrawing money. It wasn’t until the end of 2012 that stock funds began to see steady net buys.

The biggest monthly net sale was in October of 2008 and the biggest monthly net buy following that was January of 2013. If you had sold and bought back in those months your return from September of 2007 through October 13, 2017 would have been just 11.89 percent, or about 1.3 percent per year.

Even being off by a few months would have cost your returns. If you didn’t sell until December 2007 and didn’t buy until May 2009, your money would have only doubled instead of tripled. If you had waited another six months on both ends, your money would be only 1.5 times more than at the 2007 peak.

What if you had done nothing? If you had not touched your stock market investments, by now your money would have more than doubled. Doing nothing is certainly easier than picking both the top and bottom of the stock market. Steadily adding to your investments, as you would in your retirement account, would have been even better.

Where stock market declines become devastating is when you have to withdraw your money during the decline to meet expenses.  To avoid that, don’t invest any money you will need to spend in the next ten years there. Anything that you won’t need for more than ten years can stay invested in the stock market. Historically, the S&P 500 has finished higher than it started in 26 out of every 27 ten-year periods.

Of course there will be another market down-turn. But no one knows when or how severe it will be. In the mean time you need your savings to grow for your long term goals, like retirement. So no, don’t get out of your stock market investments now and in fact keep adding to them. If you have more than ten years before you need to spend your money, you have plenty of time for your savings to recover from the next down-turn, whenever that is.

Sources: Yahoo Finance S&P 500 Total Return Index and Data Hub US Investor Flow of Funds

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There are Only Three Investment Categories

Investing your hard earned savings can be daunting. There are so many options it can be hard to figure out what to do. You likely have several investment options in your 401(k). And what about all the other options? Are IRAs or ETFs right for you?

You can untangle the mess of terminology and options if you understand that at the root of things, there are only three types of investments. Everything else is simply a container to hold those investments. The three categories are:

  1. Stocks: Also known as equities. When you invest in stock you own a small piece of a company. As an owner you share in the company’s earnings with other owners. Your earnings may be sent to you in the form of a dividend, or the company might reinvest them in the business. Growth in earnings and dividends drives the long-term value of the shares you own, though many things influence the daily prices of stock in a publicly traded company. Because the future earnings are uncertain, stocks are risky investments.
  2. Bonds: Also known as fixed income. When you invest in a bond, you own a piece of a loan made to a company or government entity. There are even bonds that bundle together mortgage loans to individuals known as mortgage backed securities.  As the owner of a bond you are entitled to interest and the return of principal (your piece of the amount loaned). The daily value of a bond is driven by changes in interest rates and the time remaining until the loan must be paid back, but if you hold the bond to maturity you will simply get the interest and principal. Because the interest and principal payments are contractual obligations, bonds are less risky than stocks.
  3. Hard Assets: Hard assets are things you can touch, like precious metals, agricultural products, oil and gas or real estate. The value of most hard assets is driven by supply and demand. Real estate is the exception. Real estate can also generate income through rent. Supply and demand is unpredictable, so hard assets are also risky investments.

Within each of these broad categories is a host of sub-categories. They include US and international stocks in large, mid or small sizes, US and international corporate and government bonds and many more. There are thousands of companies and bond issues, and you can hold any of them directly. All other investments are indirect ways, or containers, for holding one or more of these three investment categories. Here are a few of the common forms of holding investments indirectly.

  1. Mutual Funds: Mutual funds can hold any or all of the three investment categories. There are single category mutual funds that invest in only one of the three, and there are multi-category funds that invest in two or more categories.
  2. Exchange Traded Funds (ETFs): ETFs are a special type of mutual fund. Mutual funds are valued at the end of each day and sold through the fund company that manages them. ETFs are sold on the stock market like a company stock. The value fluctuates throughout the day. Because the ETF must have a value at any given moment, most invest to mimic an index, which is a fixed group of investments, like the S&P 500.
  3. Target Date Mutual Funds: Target date funds are also a special form of mutual fund. They were designed for retirement savings investments and invest in at least stocks and bonds, if not hard assets too. They usually have a year in their name, like 2035 or 2050. When the target date is far in the future, these funds invest most of their holdings in stocks, and as the target date approaches their holding of bonds become larger.

There are many other vehicles that allow you to indirectly invest in the three main categories. Whether you are investing directly or indirectly to get a truly diversified portfolio, you should spread your investment money among different categories. Diversification reduces the risk of your holdings, because their values aren’t influenced by the same drivers, and therefore they will perform differently in any given circumstance.  The biggest reduction in risk comes from adding investments in the lower risk bond category to your other holdings. Different investments in the same category offer some diversification, but not as much as investments across categories.

The next container up is the account. The different forms of accounts are merely ways of titling your holdings, similar to the way you would title an account in both you and your spouse’s name or the name of a business. The different titles designate how the account is to be used. Theoretically an account can hold any kind of investment, but the institution or the provider may limit what they offer you.

  1. 401(k): You may have a 401(k) or its cousin the 403(b) account through work. Your employer has picked a list of several mutual funds for you to choose from and will include some in both the stock and bond categories as well as at least one or two investing in multiple categories.
  2. IRA: IRA accounts are available through most financial institutions. Common places to open an IRA are through a full service brokerage firm, like Merrill Lynch, through a discount brokerage firm, like Charles Schwab or directly through a mutual fund company, like Vanguard. There are many more investment options available in an IRA. You can hold stocks, bonds and hard assets¹ directly, or you can hold any of hundreds of mutual funds and ETFs.
  3. 529 Plan: 529 plans are college savings plans offered through your state of residence. The state will offer a limited line-up of investment options that will usually include a fund paying guaranteed interest, funds investing in single categories and age based funds, that like target date funds are designed to become less risky as the date of college attendance approaches.
  4. Taxable Account: Taxable accounts are simply titled in your name or jointly in you and your spouses name or the name of a business. They don’t have any tax advantages, and the title simply designates who has the authority to use the account. You can use the money in the account for any purpose including retirement and college. Like with IRAs, the investments you can hold in a taxable account are wide open.

401(k)s, IRAs and 529 plans have tax advantages. If you use them as intended your investments can grow tax free. It is still your money, and you can use it however you like. But the government will want the taxes that you didn’t pay along the way if the money isn’t used as intended, and in some cases there may be a penalty in the form of additional taxes.

Investing is a process of matching the account type with the intention you have for the money, deciding whether to invest indirectly through mutual funds, ETFs, and other vehicles or directly depending on what is available to you and how much work you want to put into managing your money, and diversifying your investments among the different categories according to the amount of risk you are willing to take. What the money is for may be the only straight forward decision here, but understanding this framework will help you know what questions to ask.

  1. Hard assets are held through futures and forward contracts to buy or sell the product, or in the case of real estate, through real estate investment trusts. There are a few specialty institutions that can hold title to real property.

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How Much Mortgage Loan Can You Afford?

When my husband, Jeff, and I were in the market for our current home, we took the steps you usually do to make sure we could jump on our dream home should we find it. The biggest part of that was getting pre-approved for a mortgage loan. After submitting all our information to the bank, we got back an approved loan amount that was frankly shocking. There was no way we could afford a mortgage payment that high. What were they thinking?

The amount of loan that you qualify for and the amount of loan you can afford are two different things. In expensive housing markets, like Portland, Seattle, San Francisco and others it’s tempting to spend as much on a home as the bank is willing to lend you, because your dollar just doesn’t go very far in these cities. But that can take away all your financial flexibility and ultimately your financial security.

You may be thinking if a bank is willing to lend you the money, you must be able to afford it. But the bank doesn’t really care about your other goals or even your financial security. They only care that you can make the payment, and they have a formula that gives them confidence you can. The formula is the debt to income ratio, and it is the biggest factor in determining how much money the bank is willing to lend you.

The debt to income ratio is your monthly debt payments divided by your gross monthly income (your income before taxes). Banks generally cap your debt to income ratio including the mortgage payment at 43 percent. Other factors like your credit score and down payment will influence whether they will lend the full 43 percent. But if you have a good credit score and can put at least 10 percent down, you will likely be eligible for the maximum loan amount.

Suppose that you and your partner make $108,000 per year between the two of you. You also pay $1,000 per month in student and car loans. Here is what your current debt to income ratio would be:

Debt to Income

How much mortgage will your bank lend you? Your current debt to income ratio is 11 percent. Assuming that you have good credit and a 10 percent down payment, your debt to income ratio could increase by 32 percent.  That allows for a total monthly mortgage payment, including taxes and insurance, of about $2,850. The bank will likely lend you around $450,000, using today’s interest rates on a thirty year mortgage of 3.63 percent and average property taxes and insurance rates in Portland, Oregon.  The value of the home would be $500,000.

Can you afford that? Let’s see. The following table estimates your monthly take home pay and how much you’ll have left to live on after all your debt payments.

mortgage paymentYour total debt payments take up almost 70 percent of your take home pay. The money remaining after just making your debt payments is less than $2,000. That puts you in a precarious position. If either you or your partner loses your job, you won’t be able to cover all your payments.

The size of your debt payments drive the size of the emergency savings you need to set aside. You won’t be able to reduce your expenses if you lose one of your incomes with payments like these. If both you and your partner make about the same amount of money, you will need to have at least $8,500 in emergency savings. You’ll need even more, if one of you makes more than the other. You should also have enough additional savings to cover your health care plan deductible.

But even if you have emergency savings, the payment is more than you can afford. You will inevitably have maintenance and repair expenses on the home you just bought. The more expensive the home, the larger those bills will be. Some of your remaining income will need to be set aside for that.

A good rule of thumb for maintenance and repair is $1 per square foot. In Portland, a house in this price range will be about 2,500 square feet, so you would want to set aside $2,500 per year or $208 per month and hope nothing needs fixing right away.

This example assumes you are saving 5 percent of your pay for retirement, which isn’t nearly enough. The longer you wait to save more the greater the portion of your income that will need to go to savings. If you’re still in your twenties, you can get away with saving 10 to 15 percent of your pay (around $1,000 per month). But if you are in your thirties, and don’t have current retirement savings, you should be saving 20 to 30 percent of your pay (more than you have left).

And what about your other financial goals? There is no room for them, whatever they may be. With this mortgage, about all you’ll be able to do is make the payments.

Instead of letting your bank tell you how much you can borrow, you need to figure out how much you can afford while still working toward your other financial goals. To keep your monthly obligations at a more comfortable level, your total debt payments should be no higher than 25 percent of your income.

With the income in the example, that allows for total debt payments of $2,250, and a mortgage payment (including taxes and insurance) of $1,250. That translates to a mortgage of $206,000 and a home value of $229,000 with 10 percent down. That’s just a bit more than half what the mortgage company was willing to lend you.

To estimate how much loan you can get away with given the payment you can afford, try this loan calculator. This calculator only provides the loan amount, and doesn’t include taxes and insurance, so you’ll want to leave room for those. However, it’s a good place to start.

Houses are expensive. Their true cost is much more than the monthly mortgage payment, and you have other goals beyond owning a home. Controlling your housing costs is one of the best ways to ensure you can meet those other goals. Base the house you buy on what you can afford, not what your bank is willing to lend you.

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How to Figure Out How Much You Spend

Try this. Figure out how much you spend in a year off the top of your head. Some things will be easy. You know your mortgage or rent payment. You probably have a good idea about what your utilities and other monthly bills run. Groceries might be more of guess. Eating out, gas, car/home repairs, vet bills and other things all also might be harder to come up with, but stick a number on them. Go ahead. I’ll wait.


Now, let’s see what you actually spend. Use the following worksheet to calculate your spending from your paycheck.

spending worksheet

This is your spending, because it must be. If you didn’t save it or pay it out in taxes, you must have spent it.

Now this might not take into account all your spending. For example, if you usually get a tax refund, and you spend it rather than save it, you can add that to your spending. If you get a bonus that isn’t reflected in your most recent pay, and spend that instead of save it, add that as well.

Are you surprised by how much you spend? Most people that I’ve done this with are. In my small sample of experience, the difference between how much people think they spend and how much they actually spend can be as much as 30 to 40 percent.

Several years ago, my husband, Jeff, and I did this exercise. He couldn’t believe how much we were spending. He was so surprised he committed to tracking all our expenses transaction by transaction for six months. Guess what? Yes, we were spending that much.

Why should you do this? Well to understand how much you will need to save for retirement, you need to know how much you will be spending every year. Therefore it’s important that you have a good estimate. If your estimate is 30 to 40 percent off, you could be in for a surprise. Even if you don’t have a specific plan for how you want to live when you stop working, chances are you don’t want to give up a lot of how you live now, other than the work part, that is.

You can legitimately expect to spend less than you do now in some areas. For example, if you have mortgage or other debt you’ll pay off before you stop working, you can subtract that from your annual spending. If you’re currently paying for college for your children, you can subtract that as well.

But before you go shaving off expenses, you should consider that some of your current costs could be higher when you stop working. You might spend more on travel or hobbies. You could also wind up spending more on health care.

One way to assure that you spend less in retirement is to spend less now, by saving more. If you’re actually spending a surprising amount more than you thought you were, there is a good chance that you are spending your money in ways that aren’t making you happier. The only way to figure that out is by tracking every expense to see where your money is going.

Just gaining the awareness of where you’re spending your money can motivate you to change it. Any expense where you find yourself thinking “I can’t believe I spend that much on…” is a good candidate for a spending cut. You can also force an expense reduction by having more savings automatically contributed to your retirement account. You’re paycheck will get smaller, forcing you to spend less.

Being aware of how much you spend now will help you prepare for your future. Gaining that awareness will also help get your spending under your own control and put you on a path to meeting your financial goals.

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