A lot of the financial advice out there focuses on the little things, like the money you'll save by cutting out your daily caffeine fix. Of course, there are times when the little things do matter--those coffees add up when you are trying to stick to a tight budget. But when it comes down to it, making smart financial decisions is not really about the coffee. It's about making sure that you get the BIG financial decisions in your life right.
By the "big things," I mean the financial milestones that we all encounter, from getting a mortgage to having a baby. I also mean anything that has the potential to really wreck your personal finances--life is full of financial pot holes and there are steps you can take to avoid them. At LearnVest, we often have users come to us who have made wrong turns along the way and are looking to get back on track financially. The best advice that I can offer is that being proactive and a careful planner is key. Think about the major things that could shake up your financial life, and I'll bet there are some great ways to protect yourself. I've defined four of life's big financial milestones and what you can do to get those right:
1. If you're renting a home, get renter's insurance. What if your place is robbed and your most valuable possessions disappear? What if you accidentally start a fire? What if your apartment is infested with bugs? Could you afford another place to stay while an exterminator comes in? What about while they rebuild your home? Investing in renter's insurance is hugely worthwhile. It protects you from a whole load of financial pitfalls around your home. Your home should be the center of your sense of security--not the cause of you losing financial security.
2. If you're getting married, there are some crucial conversations you need to have with your significant other. What if you open up a joint credit card with your spouse, and he or she proceeds to rack up thousands of dollars of debt on it? That ultimately affects your credit history. You need to be open about your numbers (credit score, income, etc.) and make sure you're on the same page for your shared future. We're all starting to talk more openly about money and that starts at home.
3. What if you suddenly lose your job? You should save a good chunk of your income (LearnVest recommends at least 10 percent yearly) and part of that should go towards an emergency fund. A great emergency fund has six to nine months of your living expenses, so you can hang in there until you find a new job. Losing your job is terrifying, but being prepared makes it so much easier.
4. If you're thinking about having a baby, make sure you have a sound savings plan in place. At LearnVest, we recently wrote a piece about how to plan ahead financially for having a baby.
Personal finance is of course extremely personal. Everyone is different (and numbers vary!), so the best way to use financial resources is to consult them for inspiration to help you think critically about your money. It's always important to remember that these sources provide general guidelines, rather than steadfast rules. Everyone's lifestyle and goals are different, so it's best to use general recommendations as a baseline but to evaluate them within the context of your own personal situation.
The most important thing is that you consider the financial impact of a particular milestone and carefully plan how you will cover those expenses, by saving, reallocating your budget, or cutting costs in other aspects of your life. For example, while LearnVest ideally wants everyone to max out their IRA contributions each year, if that is truly out of reach for you right now, then figure out how much you can afford to contribute to your IRA each month and commit to that amount.
If you take the time to plan for your financial future, then you'll find it easy to make smart, educated decisions about the big things in your financial life. So go ahead, enjoy that latte.