College Connect: An Expert Answers Five Questions about Planning for the Long-Term

Posted By David Wilhite

By Rachel Hinkle

Taylor Liszewski, an advertising major at the University of Georgia, had more questions for a personal finance expert as she thought about her long goals for owning a home and planning a family. College Connect once again turned to Matt Goren, an assistant professor at UGA who teaches Introduction to Personal Finance, for the answers.

Q: I want to own my own home one day. What are 3 keys to reaching this goal?

A: Save for the down payment (generally, 20 percent of purchase price), get good credit (with responsible credit card use and paying down all debts), and settle down on a location to live for at least 5 years. If you want to live in a $250,000 house, you need a $50,000 down payment. Better start saving – if you drop $5,000 a year toward this goal, it will still take you about 8 years to reach it, assuming typical market returns. Credit is pretty easy to get, particularly with a credit card and no debt. The toughest “key” may be deciding on where you’ll live for a while. Buying a house comes with lots of fees – if you buy and then move within 5 years, you’re usually worse off than renting.

Q: How do I prepare to transition my budgeting for myself to an entire family?

A: Communication is key. Be open with your partner and/or children about what money is coming in and going out. Couples who don’t communicate well or at all about money tend to have more stressful relationships. If you know what to expect, it’s easier to handle budgeting.

Another issue to consider, particularly with kids, is the need for greater savings. Generally, a kid will require almost as much money to live on as an adult. If you have been saving up, say, $5,000 for your own emergency fund, you may want to tag on an additional $5,000 for each kid. You’ll also need to look into funding their healthcare, education, and so on.

Q: Life does not always go as planned (a refrigerator goes out, you get in a wreck, or get sick.) What are the best ways to be prepared for these situations financially?

A: An emergency fund, having decent insurance policies, and generally having low fixed expenses. Small emergencies you can just pull from the fund. Bigger emergencies can wipe you out financially if you don’t have, say, medical or auto insurance (depending on the nature of the emergency). And in any event, you can recover from the emergencies faster if you can quickly “shut off” your expenses. If you are spending $1,500 a month on housing, for example, it is a lot harder to adjust than if you’re only spending $500 on housing and $1,000 on saving up for a vacation.

Q: If I want to be able to have a life in which I can take at least one vacation a year, are travel credit card reward programs worth it?

A: With just one vacation a year, keeping a travel credit card with an annual fee is probably not going to pay for itself. Even if there is no annual fee, I’d only keep the card to help my credit score. The real benefit from these cards comes from their introductory sign-up bonuses. Every year, I take out one of these cards, spend a few hundred bucks, and then get a free plane ticket, hotel room, whatever. The intro bonuses usually have rewards rates of around 25 percent to 40 percent, whereas the typical reward rates are only 1 percent to 2 percent. So, next year, just go get a new card to get the much better intro rewards.

Q: What are the best ways to start preparing a retirement fund if I want to start early?

A: After you’ve got an emergency fund set up (and I think $5,000 is plenty for most people), the next best thing is to utilize an IRA (Individual Retirement Account) and, if you’ve got one, a 401k (or similar) at work. My boilerplate advice is to open up a Roth IRA with Vanguard, max out your contribution (currently, $5,500/year), and put everything into either a total world stock index fund or a target date retirement fund. These funds are “good enough” for the vast majority of young people. And, a Roth boosts return by cutting down on taxation. Unlike a 401k or Traditional IRA, a Roth also allows you to take out your own contributions tax and penalty free.

Rachel Hinkle is majoring in journalism at the University of Georgia’s Grady College of Journalism and Mass Communication.


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