Happy new year dear reader. I hope you have enjoyed some quality downtime with friends and family.
finding the balance between saving and spending
One of the biggest challenges in personal finance is deciding on the best amount to save and spend.
Save too much and you will be miserable. Spend too much and future you will be miserable.
When I first discovered the importance of using money to buy time freedom, I went a bit too hard in the direction of saving. Over time though, I have recalibrated to a level that we are much happier with. A level that ensures we enjoy today AND tomorrow. It’s a level I don’t feel like we are compromising or sacrificing anything. It’s a level that is always changing too. With two young kids, we are at an expensive stage in our lives building a larger house, getting larger vehicles, daycare, and so on. Our spending level is way up on where it was five years ago. And it’s likely we will be in this season of spending for the next 20 years until the kids can financially stand on their own feet. Then we will likely see a significant drop in our spending required.
Life isn’t static, and neither should your spending be. Don’t try and stick to old ways that aren’t working.
most savings are made from early changes to savings rates
With saving too, it is the initial changes that make the biggest difference.
We will illustrate with Mr Money Mustache’s savings grid. Just note that I am not a fan of using the 4% rule for a retirement planning tool, but as a general guide it will be fine for illustrative purposes.
Source: Mr Money Mustache
If you can increase your savings rate from 10% to 15%, you will cut down your years to retirement by 8 years.
But if you increase your savings from 45% to 50%, you will cut down your years to retirement by just 2 years.
is saving more worth it?
If that extra 5% savings at the higher end of savings rates is making you miserable, is it worth the minimal difference in results?
Just take note of the difference each increase of 5% savings makes and decide if that is worth it to you.
The key to finding your balance is to make sure you are not holding back spending on things that bring you the greatest satisfaction. And no, we are not talking about quick hit satisfaction here, but deeper, more enduring satisfaction, such as hobbies or travel. But also making sure you are cutting back spending on things that bring you minimal value.
As an example, as a family we will be spending a lot of time in the house and with family so we value things like a large dry home, and social activities that bring us closer together. We are willing to pay for these things. But we aren’t too interested in things like expensive clothing or lots of toys. These are things we spend very little on.
It’s too easy to unconsciously spend for the sake of spending without consideration of one’s priorities. But stepping back and thinking about what is most (and least) important to you is a great first step in finding the ideal level of spending for you. After all, the more you save at the higher end of savings rates, the less of an impact any changes will make.
If you need help with your personal retirement planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here