How-To: Plan for Your Financial Future When You’re Single

May 9, 2013

This week’s Molly’s Money post goes out to the SINGLE ladies and gents out there. I’ve had a lot of posts recently geared towards the engaged or married couple dealing with finances… but I’ve done a disservice and neglected the single people. And for that, I am sorry, y’all!

I got this awesome question from a reader:

“So I鈥檓 single and so ready to mingle. 馃檪 What鈥檚 your thoughts on saving? (i.e. do you think it’s best to save for a new car rather than a house? Do you think it would be wiser to purchase a smaller house/unit while I鈥檓 single or to wait it out, keep saving and keep paying rent so that the money I鈥檝e saved can just be there for the day future husband and I decide to go house hunting?) I鈥檝e managed to get my expenses down a lot this year, which has been awesome living pretty much debt free and finally having the ability to save!”

Great question! There are a couple issues at hand here. And ALL of this is under the guise that you are essentially DEBT FREE.聽

  • First, the car situation. If you are in desperate need of a new car, then I would say saving for a new car is priority. But, if you have another 50K-100K+ miles left on the car you have, then what’s the rush in getting a new vehicle? I am a HUGE advocate of NOT leasing or financing a car. Save up and pay cash. I have done that for ALL of the cars I have owned and it is the BEST decision ever. Not having a car payment saves you SO much time, hassle, money, etc.

And remember, you don’t need a brand new car. There are PLENTY of awesome, certified pre-owned cars out there that will last you a long time. So, I say save up and pay cash for the car that will last you.

BUT, that’s all to say that a car is a priority need. If it’s not a priority need, then hold off.

  • Now, the housing situation. Now, I, personally, have never bought a house. I was lucky enough to meet and marry a man who had already saved and purchased a home. But, I made sure that I got educated on what exactly the mortgage situation was, how he bought it, etc. when we got married.

I wanted to know EVERYTHING about where we stood with our house.

So, before answering your question, I actually talked with my financial expert of a husband and we both agree in this area.

Do not buy a house until you can save enough money to put a 20% down payment on it. I REPEAT: DO NOT buy a house until you can save enough money to put a 20% down payment on it.

Putting 20% down on a house will benefit you for many reasons. Including, but not limited to:

1. Avoiding PMI. PMI (Private Mortgage Insurance) is basically insurance that the lender takes out on YOU in case you were to ever default on the loan. Essentially, if you stopped paying for whatever reason or were at risk of foreclosure, the lender (bank) that gave you the money for your house initially, has that insurance so that they don’t lose out on the money they lent you.

HOWEVER, instead of the BANK paying for that insurance, you end up having to pay for that insurance until you have at least 20% down on your house. So, that PMI is just an added expense that you just don’t need or want when you’re buying and paying for a house.

2. You have enough equity in the house that you have a money buffer. Putting 20% down is basically giving YOURSELF that insurance that the bank would take out on you if you were to NOT put 20% down. Meaning, if, for example, the market were to crash again, you would have enough equity in the house that you wouldn’t owe more than your house was worth. You could sell the house and not lose any money.

Remember the mortgage crisis and housing crisis of 2008? Well, that happened, in part, because so many people didn’t have nearly enough down on their house. So, when the market crashed, suddenly all these people owed way more than their house was worth. Thus, the housing / market problems.

  • Now, there are a few other things you should be thinking about and planning for when you’re single. Like, saving and planning for retirement. Yes, retirement.

First and foremost, if the company that you are working for offers a 401K plan, be sure to participate and contribute as much as you can up to the amount that the company will MATCH. So, for example, the first company I worked for that offered a 401K plan matched 100% of what I put in up to 6% of my salary.

So, right there, that was basically FREE money that doubled my investment in the time I worked there. If your company will match your contribution, that’s free money you don’t want to leave on the table, so take advantage of it.

  • Once you’ve got your 401K plan narrowed down, consider investing in an IRA. You will need to decide whether or not you want to invest in a TRADITIONAL IRA or a ROTH IRA.

Basically, a traditional IRA, is not taxed until you take the money out in retirement. A ROTH IRA is taxed NOW, but not when you take it out in retirement after the age of 59.

It’s like an immediate gratification versus a delayed gratification type of thing. There are certainly pros and cons to both. While it’s nice to not have to pay the taxes on the traditional IRA now, it’s basically a tax time-bomb. Who knows how much taxes will be when you retire?

Here’s a fun game. Let’s say you are:

  • 25 years old
  • You invest $5,000 a year to your ROTH IRA for the 40 years of your working life
  • Your IRA grows at an average rate of 7%

Considering all of that… if you were to retire at age 65, your ROTH IRA would have $1,068,048 in it.

roth-ira-calculator-screenshot

Yeah, that’s over ONE MILLION DOLLARS that you would then have… TAX FREE.

So, I’d say I’m a fan of the ROTH IRA, but it totally depends on your situation.

Now, I know this is all somewhat complex stuff that can be super confusing (trust me, it is for me, too).聽 Which is why I’ve tried to learn as much as I can about it so I can explain it all in way that is hopefully easy to understand and makes sense,

And, there’s definitely WAY more to all of this than I’m going over in a few paragraphs, but hopefully this is a good start.

What do you think? What other questions do you have?

And for others of you reading this: what advice would YOU have for my reader? Have any of you done any of the things I’ve suggested? Share your experiences below!