Conventional wisdom around money tends to be a bunch of blanket guidelines about how much to save and spend without necessarily taking personal goals and lifestyle into consideration. To say that there are specific reasonable and unreasonable amounts to spend and save for certain things just doesn’t make sense to me because there are so many different factors that should come into play that vary greatly from person to person.
Not everyone wants to retire at 65 cold turkey with 80% of their pre-retirement income. Not everyone wants a retirement traveling the world. Why is 10% of your income such a magical number for retirement savings? It just doesn’t make sense to me.
The problem is, it seems many people don’t feel like they actually have control over their lifestyle. Often, income and appetite for debt dictate spending habits rather than an individual’s goals and desires. Somewhere along the way, money became a taboo subject and judgement about how other people save and spend and guilt over how we save and spend became more common.
In reality, money is about choices and your income is the starting place. If you make $50,000 per year, living in a million dollar penthouse is probably not on the table, but a really nice apartment in the city might be. The question is really whether or not living in a luxury apartment is worth not having the cash ﬂow to meet friends for dinner every Friday, go on vacation, or help your kids with college. Everyone has basic needs, and how you meet those needs and how your income is allocated shouldn’t be up to anyone but you. That being said, if you’re not clear on your financial wants and priorities and where they rank- you’re likely to get into trouble.
This might seem irrelevant, but I can’t tell you how many times I’ve taken on a client who tells me that no matter what they’ve tried they can’t save money. They say their expenses seem reasonable, but for some reason they’re tight. Every time we go through the exercise of talking about desired lifestyle and then looking at their budget (which usually doesn’t exist before the conversation), we’re able to ﬁnd money without much effort. Why? Because people tend to spend on autopilot. We don’t consciously evaluate whether we want daily Starbucks versus regular stops at Whole Foods during the week. Those aren’t the big decisions. Many people who aren’t saving as much as they’d like to or who feel like there’s never money for the luxuries they’d love to be able to indulge in (like a Caribbean vacation) aren’t able to identify the problems with their spending because their money isn’t going to a Ferrari payment or a huge mortgage- their money is hiding under a veil of "necessities". It’s going to the little things that often they don’t even care about (this ties into my article on Cash Flow).
Taking the time to ﬁgure out what your values are and what really brings you joy allows you to decide whether to take on the bigger mortgage or to get something smaller in order to leave money for multiple ski passes for your family each year. It puts you in the drivers seat and in control of your money instead of letting your money control you.
The best part about taking the time to ﬁgure this stuff out is that it stops the cycle of deprivation. Instead of Starbucks being cut out of your budget because you “can’t afford it” or it’s “too expensive”, it gets cut out because when you look at what you really want to spend money on you decide its date night at a fancy restaurant or a weekend away. It reduces the guilt about buying a $500 pair of shoes when you realize you were drinking that $500 anyway and didn’t really enjoy the americano that much more than the Keurig coffee that’s free at your ofﬁce.
This works the other way around too. I’ve seen super savers who barely spend on lifestyle now because they’re afraid of not having enough later. Deﬁning what their ideal retirement lifestyle is can be helpful in freeing up more money to enjoy today and provide other options. This is because if we look at the numbers and realize that based on current savings and lifestyle you could actually retire at 50, you can either make the decision to stay the course, make the decision to pull back a bit and shoot for 55, or change things around because you’re ﬁne with retiring at 65. Without lifestyle as a guideline in any situation, it’s impossible to know if you’re actually on track for savings or whether your spending is in line with your goals unless your goal is to have an arbitrary big pile of money.
Money Basics Series
Although there are certain basic financial rules of thumb that many people can agree make sense at face value (like “a house is always good investment”, “you should try to save as much money as you can for retirement”, and “you should always spend less than you make”), making financial decisions solely based on these rules of thumb is probably not going to help you maximize your money and can actually cost you big time long term if this advice isn’t in line with your personal goals and values.
That being said, after working with hundreds of clients, we realize that there are certain beliefs and fundamental principles we operate off of at Peterkin Financial that color the way we look at planning and consequently the way we advise our clients. Client goals and values followed by data and numbers always trump general rules of thumb, but we feel it is important to share them just the same. So we've decided to create a blog post series of what we’ve coined “Money Basics” so you can better understand our perspective as a planning team.
Content on this website is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.