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Tackling your debts

Do you know how much things cost?

Posted 30 July 2015 by Christine Walsh

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Most people underestimate the cost of the big life events – are you one of them?

We all know that understanding your finances can make a massive difference to your quality of life, and the decisions that you make, but it seems that some of us are underestimating exactly how expensive some things are. According to research from, On the Money? Misconceptions and personal finance, two of the main life expenses people underestimate are the cost of raising children and how much they should put into their pensions.

Raising children

So what is the average cost of raising a child? £20,000? £30,000? £50,000? Actually, the average cost of raising a child from birth to the age of 21 is £229,000! That’s much higher than the average guess from the people surveyed in the study which was only £50,000!

Retirement

People were also asked how much they thought they would need in a private pension so that they could live off £25,000 a year in their retirement (assuming that they were also receiving state pension). People tended to think that they needed to save around £124,000 but, the correct answer is closer to £315,000 - that’s more than double!

 

Big Life Events

Now these are very important financial issues, which will have an impact in the long term. This got us thinking: why do we seem to underestimate the big costs in life? The answer seems to be that it’s a bit easier to calculate the cost of the small things that we do regularly, rather than the big life events that will cost us the most. And of course it’s easy to see why. You might buy a pint of milk all the time, but how often do you think about how much you’re going to need to raise a child over 21 years or how much you’ll need to save to your pension? Not to mention that big numbers over time are just harder to deal with mentally.

What it means for you

The point here is that while we might know what the little things are costing us, we are underestimating the costs that are going to have the biggest impact on our finances over our lifetimes. And, if we’re doing that, it might lead us to make poor financial decisions.

This study confirms what we’ve always suspected at the Debt Advisory Centre – that better knowledge leads to better decisions and a better quality of life. The more you look into the reality of the big costs in life and factor these into your decision making, the more likely you are to be successful in meeting them. It’s so important to regularly look ahead and predict the expenses that you’ll face as much as you can.

The good news is that there is lots of help out there for people wanting to increase their financial knowledge and prepare for the future. Have a look at the research and take the test to see how well you understand how much things cost. If you want to look at how much you’ll need to save for retirement have a look at a handy calculator like this one. If you’re thinking of starting a family or have just had a baby then this guide could help you maximise your income and prepare for the costs involved.

 

At the Debt Advisory Centre we’re dedicated to helping people solve their money problems by providing advice and information. Remember, even if you’re going through a difficult financial patch, it’s never too late to get to grips with your finances. Keep an eye out for our posts in the future as you’ll find lots of tips for managing your finances big and small. If you think that debt is stopping you from financially preparing for the future, get in contact with one of our debt advisors using the contact option on the left of the page. 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.