All animals are goal directed: find food, find a burrow, find a mate. The human animal is no exception. Use these innate tendencies to help your budget. The basic necessities of life (rent or mortgage payment, food, transportation) scream at us to be paid every month, so it does not take much to keep them at the forefront of our minds. Getting to savings is the hard part. To do this, we have to set (and write down) financial goals, utilizing one of the key techniques of behavioral economics: making a commitment. You can write your goals down anywhere, but I recommend you write them at the bottom of your budget, ensuring that you will see them regularly.
The priority for your savings account is to keep a stash of money for unforeseen expenses, like car repairs or medical expenses. Try to save six months of your basic expenses, not including entertainment. Six months of basic expenses helps protect against job layoffs, as in normal economic times, 90% of workers find a new job within six months (though this gets skewed during recessions). The goal is to give yourself a safety net in addition to unemployment compensation because unemployment compensation varies from state to state and pays an average of a little over $300.00 per week for an average of 26 weeks. Six months of base expenses is an extremely difficult savings goal at the beginning of your career. However, it is a goal you need to work towards. Having these savings will give you great peace of mind.
A second financial goal is to save for future purchases, such as a new car, a down payment on a house, or even just new furniture for your apartment. For example, a house down payment typically equals 5% of the purchase price. Since the median sales price of houses in the United States in 2020 is $320,000.00, a 5% down payment would be $15,000.00. Do not be discouraged, though; in a lot of cases, banks will accept a 3% down payment on a house, especially for a first-time home buyer.
The third thing to save for are what are typically the three big purchases in your life.
- The down payment on a house
- College tuition for your children
- Your retirement
We discuss buying a house and saving for retirement in upcoming chapters, but as to education, we can look at the 2019-2020 average cost of tuition to gain perspective. Among national colleges and universities, the College Board (2022) reported the following average cost of tuition and fees for the 2021–2022 school year:
In 2021-22, the average published (sticker) tuition and fees for full-time students are:
- Public four-year in-state: $10,740
- $170 higher than in 2020-21 (+1.6% before adjusting for inflation)
- Public four-year out-of-state: $27,560
- $410 higher than in 2020-21 (+1.5% before adjusting for inflation)
- Public two-year in-district: $3,800
- $50 higher than in 2020-21 (+1.3% before adjusting for inflation)
- Private nonprofit four-year: $38,070
- $800 higher than in 2020-21 (+2.1% before adjusting for inflation)
Add to this anywhere from $5,000 to $10,000 per year for room and board, and a state resident at a four-year public college could pay up to $85,000.
The good news is that with financial aid, very few students pay the full cost of tuition. However, according to the College Board, the average amount borrowed by 2017-2018 bachelor’s degree recipients was $29,000 ($26,900 for public colleges and $32,600 for private colleges).