Costly Life Events And How To Pay For Them

The new year is here - which means it's a great time to build your 2022 financial plan and to consider all the demands on your wallet the year will bring.

Whether they’re anticipated costs or ones that come up out of nowhere, being prepared and knowing what your options are when it comes to paying for all the things that life throws your way is a vital part of maintaining your overall financial wellness. Here’s everything you need to know to help ensure your big ticket life events are covered.

For most of us, there are two main sources that can be tapped to pay for big life events: savings or credit.

Savings are obviously a great way to pay for things, because it’s money you already have that you don’t have to borrow. But you have to be able to, well, save. For those who have tight budgets or those who have recently used their savings for other big expenses, that’s not always feasible. Borrowing money, either with a credit card or some type of loan, can be helpful to cover expenses that you can’t pay for all in one lump sum out of pocket.

Different situations often call for different types of credit. If you’re buying a house, you’ll most likely use a mortgage to do so. For smaller, sudden expenses that pop up, a credit card might make more sense, since they’re quick and easy to use. If you need to purchase a new car, you’ll likely use an auto loan to do that. And personal loans are a great option for people in need of more general financing, as they aren’t geared toward any specific type of expense and can be used to cover a lot of different things.

So, which type of funding makes the most sense for some of our most costly life events? Let’s take a look.

Debt Consolidation

If you’ve got a lot of high-interest debt with multiple creditors, consolidating that debt into a lower interest loan might help you. To do that, you’ll need:

• A debt consolidation loan

With a debt consolidation loan, you take out a personal loan and use the funds to pay off high-interest debt, like credit card debt. The idea is that you’re consolidating your debts into a single loan with a lower interest rate to make paying off your debt more manageable and less costly in terms of interest costs.

If you have a lot of high-interest credit card debt, paying it off with a debt consolidation loan can help you get your finances back on track, potentially saving you thousands of dollars in interest and helping you pay off your debt faster than you otherwise might. You also get the benefit of knowing exactly how and when your debt will be paid off.

Home Renovations

Depending on the extent of the renovations, you might use:

• Your savings
• A cash-out refinance
• A home equity loan or home equity line of credit (HELOC)
• A personal loan

Tapping into your home’s existing equity is a popular way to cover costly renovations. Homeowners can do this in a few different ways: a cash-out refinance, a home equity loan or a HELOC.

A cash-out refinance allows you to refinance your current mortgage loan and receive in cash some of the equity you’ve built up. As a consequence, you’ll have less equity in your home than before you refinanced, but you’ll be able to use that cash to make improvements or repairs to your home. Home equity loans or HELOCs are second mortgages that allow you to borrow against your home’s equity. Home equity loans are disbursed in one lump sum, while with HELOCs you borrow against a credit line, much like you would with a credit card.

These options can be useful for homeowners looking to make value-adding improvements to their homes, but it’s important to understand the risks of borrowing from your home’s equity or adding a second loan to your home. If you default on your loan, you could lose your home through the foreclosure process.

Personal loans can be a good option for home renovations because these loans are unsecured, meaning you won’t be using your home as collateral for the loan. Additionally, Rocket Loans^SM personal loans offer same day funding, enabling you to start lining up contractors or purchasing materials right away.*

However, you may find that personal loans have somewhat higher interest rates than loans that utilize your home’s equity, since they aren’t secured by an asset.

Emergencies

From surprise car issues to job losses to unexpected hospital stays, there are a lot of costly life events that you can’t always anticipate. When it comes to sudden events like these, here’s how you can cover them:

• Emergency savings fund
• Emergency personal loans
• Credit card

Financial experts often recommend that people keep between 3 – 6 months’ worth of living expenses tucked away in savings. This can not only help you cover sudden, one-time expenses like a broken-down car or a leaking roof, but it can also help you ride out an unexpected job loss while you search for a new source of income.

Of course, it’s not always easy or even possible to save this much, which is why many individuals turn to credit or loans when these expenses pop up. A credit card can be useful in a pinch for smaller expenses, while personal loans might be more helpful for larger expenses where you have time to secure financing, like with a medical bill. However, before you take on debt to pay a big hospital bill, first talk to the hospital and see if the bill can be negotiated down, if you qualify for financial assistance or if they can work with you to create a payment plan.

Buying A House

When it comes to paying for a home, the options are pretty straightforward:

• Pay in cash
• Get a mortgage

Not everyone can afford to simply pay for a home in cash – especially considering that the median home sales price recently topped $400,000. However, if you have the funds available or could net enough profit from the sale of your current home, paying in cash can help make your offer more attractive to sellers and save you lots of money over the long term in interest.

In terms of financing, a mortgage can be a good option for those who can’t afford to pay in cash or prefer not to have all their funds tied up in their home. Mortgages are longer-term secured loans use specifically to purchase a house. They’re typically paid off over 15- or 30-year periods.

There are a variety of mortgage options available to home buyers, so be sure to do your research to find the one that’s best for you. If you’re looking to pay off your loan quickly and save money on interest, for example, a shorter loan term, such as a 10-year or 15-year term, might make more sense for you. Or, if you’re a first-time home buyer or your credit score isn’t great, a mortgage like an FHA loan might be a good option.

Retirement

Throughout a large portion of our lives, retirement feels like a far-off blip on the horizon. But then suddenly, it’s not so far off anymore. That’s why it’s so important to start saving for retirement as soon as you can, ideally as soon as you enter the workforce. Here’s how people typically pay for their golden years:

• Retirement savings, such as a 401(k), an IRA or a pension
• Other investment accounts
• Social Security

Retirement savings shouldn’t just go into any old savings account. Investing your savings in a tax-advantaged retirement account like an employer-sponsored 401(k) or your own IRA allows your money to grow and keep up with inflation, meaning your dollars don’t lose their buying power over the years. And because these accounts are tax-advantaged, you can often fund them with pretax dollars (unless it’s a Roth account) and avoid capital gains taxes.

Many retirees also rely heavily on Social Security retirement benefits. Social Security works thanks to the taxes you pay during your working years. When you retire, you’ll receive monthly payments based on how much you earned throughout your life.

Vacation

Planning a big trip? Travel is fun, but it can be expensive. How can you pay for your globetrotter dreams? Here are some of the most common ways people pay for their vacations or other travel:

• Credit card
• Savings
• Personal loan

Travel is one of those situations where it’s often better to use a credit card than other forms of payment. This is because credit cards tend to be a little safer to use, since they have better consumer protections than debit cards when it comes to stolen cards and fraudulent charges. In fact, even if you only plan on only using your savings to fund your trip, you’ll likely still need to use your credit card to make certain purchases, such as booking your hotel or buying plane tickets.

However, credit cards should still be used with caution, as it can be easy to quickly rack up charges beyond what you’re able to pay off in a timely manner. It’s a good idea to plan ahead and try to keep your spending to an amount you can afford to repay right away, to avoid incurring interest on those charges.

For really big, once-in-a-lifetime trips, some people will take out a personal loan to cover their costs. While it’s generally not a great idea to make a habit of paying for travel with a loan, if the alternative is using a credit card you won’t be able to pay off for a while, this might be a better option, interest rate-wise.

Buying A Car

When buying a car, your options will typically be:

• Paying in cash
• Taking out an auto loan
• Getting a personal loan

With the average new car price now over $45,000, it’s often difficult for most people to buy a car outright in cash. Because of this, many have to turn to financing to purchase their vehicles.

Auto loans are the most popular option when it comes to financing a car purchase. These are secured loans, meaning that the car you purchase is used as collateral for the loan. If you don’t pay your auto loan, your car can be repossessed. When you take out an auto loan, you’ll typically need to put some money down on the car to snag a lower interest rate and keep your monthly payments manageable. It’s often recommended that you put down at least 20% if you’re buying a new car.

Some individuals may also turn to personal loans when buying a car. Though auto loans generally have lower interest rates because they’re secured loans, there are some situations where using a personal loan for a car purchase can make sense. For example, you might choose a personal loan over an auto loan if you want to buy a car that an auto lender won’t finance, such as an old car you intend to restore or a car you’re buying from an individual seller, as opposed to a dealer.

Getting Married

Weddings are expensive. In 2020, the average wedding cost was $19,000, according to the Knot – and that number was the result of wedding prices trending down temporarily due to the pandemic. The Knot estimates that this number is already headed back up, with an average of $22,500 in 2021.

There are a variety of ways a couple can pay for their wedding. Often, they’ll use a combination of a few different sources, which can include:

• Savings
• Assistance from family
• Personal loans
• Credit cards

Many couples will opt to use credit cards for the menagerie of different costs that pop up throughout the wedding-planning process. Credit cards make paying for things quick and convenient, and if you have a rewards card, you can use your wedding purchases to take advantage of the card’s offerings.

But if you don’t pay off your purchases in a timely manner, this can get expensive. Plus, having a high balance on your credit card raises your credit utilization ratio, which can negatively impact your credit score. For big ticket items, a personal loan might be a better option, since you can generally get lower rates on a personal loan than you can on a credit card.

If you’re thinking about turning to credit cards or loans for your big day, it’s important to sit down as a soon-to-be-married couple and consider the implications of going into debt for your wedding. Ultimately, how you decide to pay will depend on what makes the most sense for you both as you begin your shared financial journey together.

College

To pay for your or your child’s college education, you might utilize:

• Federal or private student loans
• Scholarships and grants
• A 529 plan
• A home equity loan

Most people can’t afford college tuition out of pocket, so they turn to loans, scholarships or other sources to cover the ever-increasing cost of higher education. Obviously, it’s best to first look into what kind of financial assistance you can get that doesn’t need to be paid back, like a scholarship or grant. Then, prospective students typically turn to federal or private student loans. Of these two options, federal loans are more advantageous, as they often come with lower rates and more options if you have difficulty paying back your loans (such as income-driven repayment).

Sometimes, people will take out a second mortgage to pay for college. This isn’t always a good idea, though, since you’re putting your house at risk of being foreclosed upon if you can’t repay the loan.

If you have a younger child and you’d like to start saving for their future education, you might consider starting a 529 plan for them. These are tax-advantaged investment accounts that work similarly to how retirement accounts like IRAs work, allowing you to grow your money as you save.

For many, a new year means a fresh start. As you map out your financial goals for 2022 and think about what you want to accomplish, it’s vital to think about how you’re going to get there. If you’ve got big, lofty goals with big, lofty price tags, Rocket Loans can help you get to the finish line and achieve those goals.

Looking to manage your debt in the new year? The consistency of having a single, fixed monthly payment, with no prepayment penalties or hidden fees, makes budgeting for your debt consolidation plan nice and simple – which means no surprises. Or, if you’ve got a big home improvement project coming up, same-day funding means you don’t have to delay on hiring your contractor and getting started on your project, giving you a jump start before the busy season kicks off when the weather starts to warm.*

The completely online application process with Rocket Loans makes it simple to apply for loans up to $45,000, and you can see prequalified offers within seconds. Ready to fund your next big project? Get started online today. To learn more about how personal loans can help you, check out the Rocket Loans Learning Center.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.