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6 things you should be saving for — but aren’t


Aug. 25, 2017 CNN Money

1. Emergencies

We all hope that our job is secure and our roof will survive another winter, but life’s emergencies don’t cooperate with a master plan. Three in five people grappled with a major surprise expense in 2016, according to a Bankrate survey, and only 41% were equipped to pay for them.

If this sounds familiar, take comfort in knowing that you aren’t the only one living on the edge of financial risk. The average American household has around $5,700 in credit card debt according to a 2016 analysis by Value Penguin. Relying on credit to make ends meet isn’t a sustainable strategy, and thanks to outrageous variable interest, that $5,700 balance can easily double if you make only minimum payments.

Avoid the expensive mess by funneling a portion of your cash into savings before you need it. For example, if your monthly budget allows for $500 in “fun money,” cut $100 (i.e., a single date night) and redirect it to your savings account. You might even consider opening a money market account, which is still highly liquid and generally provides better returns than a traditional savings account.

2. A home loan

We all need shelter and security, but when in comes to buying a home, few people plan far enough in advance. According to a 2016 National Association of Realtors survey, the overall average down payment on a mortgage was 11%, and 8% for borrowers under age 35. A small up-front investment comes with inevitable downsides, including a higher monthly payment, private mortgage insurance (PMI) if your equity is less than 20%, and more money paid in interest over time.

Supercharge your saving efforts by trimming even more cash from your “fun money” budget and putting it into a separate savings account. If you already own a home, consider renting out a room through a site like Airbnb to save even more cash. And finally, think about your space needs and downsize as much as possible. Choosing a more affordable home makes saving for a down payment that much easier.

3. Child care

You might view child care as just another monthly expense, but there are a couple ways to reduce the cost. If your employer offers a flexible spending account (FSA) that includes dependent care, set aside as much as possible to take advantage of the tax breaks. For example, suppose you pay $800 a month (or $9,600 a year) in day care expenses, $5,000 of which can be saved through your FSA. By avoiding income, Social Security, and Medicare taxes, you’ll save $1,400 a year.

Even if you don’t have access to an FSA, you’ll still qualify for a federal tax credit for child-related expenses. Based on your income level, you can deduct 20% to 35% from up to $3,000 in expenses for one child, and up to $6,000 for two or more. Parents using an FSA may also use this credit for any expenses not covered by their employer. Get ahead of the game by learning which options are available to you. The result will lessen the tension on your monthly budget and make it easier to build up tax-free funds over time.

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