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In chemistry, a catalyst is something that triggers a reaction — but the nature of the reaction itself depends on having the right elements in place to respond to the catalyst.

What brought to mind that tattered remnant of high school chemistry was thinking back on buying my first house.

I’ll explain how I got from home-buying to chemistry — and, in the process, hopefully share some pointers about what elements should be in place when you buy a home and what catalysts might trigger you to react to those elements.

The chemistry of home-buying

The reason I’m talking about home-buying in terms of chemistry is that there is more to buying a home than pure dollars and cents. Don’t get me wrong. The financials are important, and I’ve written a fair amount about some of the financial aspects of home-buying. However, what is equally important is your personal outlook.

Generally, the elements of your personal situation fall into place bit by bit over time, and you might not really notice how they are developing. It can take a catalyst to set everything in motion.

In my case, the catalyst was simple: Our landlord tried to raise our rent by $50. That doesn’t sound like much today; but at the time, it was 12.5 percent of the rent we were paying previously. More than that, it was a catalyst to us. We realized that renting meant being subject to that unpredictability every year when the lease term ended.

Once that catalyst sparked the idea of buying a home, all the right elements were in place for us to follow through on our decision. My career was progressing well, I had gotten married and we planned to have kids, and we had family roots in the area. If it hadn’t been for that catalyst, though, I’m not sure how long it would have taken for it to occur to us to buy a house. So, we have our landlord to thank.

Here’s how the chemistry of home-buying might come together for you.

How to know if it is time to buy a house

Here are some of the right elements for buying a home:

  • Career stability. This does not necessarily mean that you plan on staying in the same job, but that you have in-demand skills and that there is a healthy job market for those skills within commuting distance of the house you plan to buy.
  • Commitment to your area. It could come down to the weather, family and friends, arts and entertainment, or all of the above, but you need to figure out where you want to be for the long haul. It’s okay to be restless when you are young, but it is better if you aren’t that way after you buy a house.
  • Clarity about your household. It might take several years before you start to have clarity on what your household will look like in the future: Will you marry? Do you expect to have kids? Will elderly parents come live with you at some point? The more clarity you have about the size of your household in the years ahead, the easier it is to know what kind of home to buy, though it is always wise to make choices that build in a little flexibility as well.
  • Knowing yourself. Life plans and personal tastes take a while to evolve. Don’t rush into home-buying unless you have a good handle on what you want for the long term.
  • Affordability. This is an entirely different area of discussion; but if the dollars and cents don’t add up, not all the elements for buying a home are in place.

Catalysts can help you decide

Given the right elements, what can trigger you to act on them? Here are some possibilities:

  • A jump in rents. As I mentioned, that did it for us. It changes the current comparison between renting and owning costs, and makes you think about stabilizing your housing expense for the future.
  • Low mortgage rates. You should look at today’s mortgage rates as an opportunity that might not always be there. If home-buying is in your future, you might want to accelerate the timing to take advantage.
  • A change in household. Getting married or having a baby might mean you have to find a bigger place anyway, so you might think about doing that by buying.
  • A strong raise in pay. A meaningful bump-up — beyond the standard annual cost-of-living type of adjustment — could not only give you the financial means to buy a home, but it might also be a sign that your career is well enough on track for you to make that kind of commitment.

In short, besides the math of affordability, buying a home comes down to the chemistry of your personal situation. Perhaps if we had known so much was riding on math and chemistry, we all would have paid more attention in high school.

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New baby? No doubt this new arrival has turned every aspect of your life upside down in the best possible way. Now is the time to make sure your financial house is in order. Here’s a 10-step account and financial checklist to lay the groundwork for your little one’s successful future.

New account checklist for new babies

1. Apply for a Social Security number for the baby: An SSI number is the linchpin to open a bank account in your child’s name, purchase savings bonds, obtain medical coverage and access government benefits.

2. Review your life insurance: If you don’t have life insurance, you should get coverage as soon as possible. If you already have a life insurance policy, check to make sure it’s adequate to cover the needs of the new addition to the family.

3. Pick a guardian: Choose a family member or close friend who is willing and financially able to care for your child, should you or the other parent pass away or become incapacitated before your child turns 18.

4. Set up powers of attorney: Put in writing your legal power of attorney, which sets out who will be responsible for your financial and personal affairs should you be unable to make those decisions for yourself. You also should set up a health care power of attorney that makes your wishes known in the event you become seriously ill and are unable to participate in decisions about your care.

5. Write your will: It’s not just wealthy people who need a will. Every parent should create a document spelling out how his or her estate should be handled. The will may also include or reference legal guardianship and powers of attorney.

6. Open a savings account in the baby’s name: Choose a no-fee, no-minimum balance, online savings account. You can link the savings account to your checking for automatic withdrawals.

7. Set up an emergency fund: You should put aside money from each paycheck into a savings account with the goal of having sufficient funds to cover living expenses for six months.

8. Review your work benefits: Confirm how much paid (and unpaid) maternity leave is offered through the birth mom’s employer, and whether paid leave is available for the other parent. Determine how you will obtain health benefits for the baby, either through an employer or government plan. Consult with your human resources office on flexible spending accounts and other benefits that may apply to your situation as a new parent.

9. Check in with Uncle Sam: You can claim a tax credit of $1,000 for your new baby and take an annual tax deduction of $3,950 for each dependent child. You can also receive tax credits if you adopt a child and/or if you pay for child care. You should review your withholding status, which could mean that more take-home money is available to increase your emergency fund every month, for instance. Single parents may be able to claim head-of-household status.

10. Start saving for college: Set up a 529 savings account, which generally is not subject to federal and state taxes if used to pay for college tuition. (If the funds are used for other purposes, earnings may be subject to a 10 percent federal tax penalty.) Details on fees and other aspects of the 529 plans vary by state, so do your research.

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Retirement does not always go the way people expect. While no two experiences are exactly the same, over time it seems that people’s financial situations in retirement tend to fall into one of a few distinct categories.

As you think ahead to how you want your retirement to go, keep the following categories in mind. They offer useful examples of what to avoid and what you might want to emulate.

1. Keeping up appearances.

Even though people tend to think of their finances as personal business, their wealth is often presented to the outside world in a variety of ways. While you probably won’t walk around sharing the latest information on your savings account balance with everyone, the car you drive, the house you live in, and the clothes you wear all provide clues as to your financial well-being, even if you don’t think of yourself as particularly status conscious.

Unfortunately, the public face of wealth can create a form of pressure that leads to poor financial decisions. One reason people sometimes spend beyond their means is to keep up public appearances — whether that entails trying to compete with friends and neighbors or trying to maintain a prior standard that you can no longer afford.

Another example of how trying to keep up appearances can be a distorting influence is that breadwinners often want to spare their spouses and children from any financial anxiety. Thus, they may hide any financial setbacks or be reluctant to admit the true limitations of their incomes. As a result, family members conduct themselves on the assumption that they can afford more than is actually the case, when they could be playing important roles in trying to economize if they knew the truth.

People can be particularly vulnerable to these behaviors in retirement, when not having wage income makes a financial reversal more difficult to overcome. Taking pride in your financial well-being is understandable; but remember that the longer you maintain an inflated illusion of your wealth, the worse the blow to your pride will be when the truth finally does come out.

2. Gambling and losing.

People in retirement are heavily dependent on the success of their investments, and this leads some people to take dangerous risks in order to try to improve their financial status.

Especially now, with savings account and CD rates so low, people are resorting to riskier investments to try to earn a decent rate of return. Earning next to nothing in a deposit account may be frustrating, but it’s not as frustrating as suffering damaging losses.

Some element of investment risk is necessary to earn the growth necessary to stay ahead of inflation, but don’t make investments without being fully cognizant of their downsides. Risk management is critical in retirement because drawing money out of your accounts to live on can amplify the impact of downturns, and your near-term spending needs mean that you don’t have as much time to recover from losses as when you were still working.

3. Downsizing.

Some people are able to afford retirement because they downsize many aspects of their lifestyle — smaller house, fewer dependents, less entertainment, etc. This need not be a matter of financial necessity. Often, a simpler lifestyle can be appealing to people in their later years.

One caution about planning on downsizing in retirement is to make sure you properly account for what your specific expenses will be, rather than just blindly assuming you’ll be able to live on a fraction of the money you needed when you were working. Also, remember that health care can grow to be a huge expense in retirement, especially if you have to move into a managed care facility.

4. Second careers.

Another way of affording retirement is to keep some income coming in via a second career. Some people do this out of necessity because they do not have enough money for retirement, but in many cases people like to keep working because it occupies their time and makes them feel useful.

Semi-retirement can be a perfect way to take things a little easier without completely withdrawing from the working world. As a retirement funding strategy though, don’t assume you will be able to keep working for as long as you want. Health issues or dated skill sets can make it harder to continue working as you grow older.

5. Conservation.

Ultimately, retirement is about conservation of your financial resources — making sure that what you have can be stretched to last over the remainder of your life. The problem is, no matter how carefully you plan ahead, there are some things you just cannot know in advance. Unexpected expenses, substandard investment returns, and your longevity can all make it more difficult to make your money last.

The answer is that conservation of financial resources requires frequent adjustments. Rather than being a course you can set and forget, managing your finances requires regularly refreshing your plan to see how the latest information on your financial status affects how much you can afford.

Planning for retirement

Retirement is not defined solely by finances. How you choose to occupy your time and whom you spend that time with are critical factors in post-career happiness. However, it cannot be denied that money is also a big influence on that happiness. For one thing, it dictates your level of comfort and the number of options you have. More than that, though, there is the psychological impact of having to live with the consequences of decisions you made throughout your career and beyond.

A lot goes into this. As you think back in retirement, you may be able to trace your financial condition all the way back to decisions you made about your education, and then to the effort you put into your career, how sensible your spending was, and how wise an investor you were. You might not always have made the right choices, but psychologically the important thing is to be able to look back on those decisions without regret. Being able to do that begins today, by putting care and discipline into decisions you make about your finances.

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It may have been over a year since I last put together a podcast episode, but I’m back today to talk with Consumerism Commentary Podcast guest Carl Richards. Carl is here to talk about his new book, The One-Page Financial Plan: A Simple Way to Be Smart About Your Money. The author will also be the keynote speaker at the upcoming FinCon Expo.

In today’s podcast, Carl and I discuss why reducing a complex financial plan to one page can be key for living the fulfilled life you envision and how certain emotions can stand in the way. We talk about avoiding financial mistakes, and what a financial adviser’s (or a friend’s) role might be.

Because Carl is “The Sketch Guy” for The New York Times, we talk about the origins of Carl’s sketches, and how these sketches and Carl’s other art have been received in the art scene.

Finally, Carl and I discuss the process of publishing, and listeners will get an early listen to what might be the focus of his FinCon keynote address.

Consumerism Commentary is offering five free copies of The One-Page Financial Plan to five Consumerism Commentary readers. To be considered for receiving one copy of the book, which is also available at retailers, leave a comment below the transcript.

Continue reading this article to listen to or download the podcast. You can also subscribe to the podcast in iTunes.

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